Market Finishes 2010 With Strong 12.8% Gain

It was like two years rolled into one. The first half of 2010 was not pretty as the market dropped 9%. Fears regarding overvaluation, European Debt crisis, Flash Crash, and the BP oil spill all contributed to the market malaise. However, in July the market began an incredible run rising 23% over the next six months to finish the year 12.8% higher. Corporate earnings growth, monetary stimulus, and low interest rates helped reverse the trend propelling the market higher. Corporate balance sheets are flush with cash which has fueled the return of M&A activity. Strong earnings growth makes market valuations reasonable, particularly in light of low rates. The final push higher came following the change to Republican House control and the extension of the Bush Tax cuts. We believe many of the key factors that drove the market higher in the second half of the year will remain in place for 2011. Most economists have raised their GDP estimates, corporate earnings are projecte d to increase over 2010 levels, monetary policy will support market growth, and the tax measures foster economic growth. We also expect M&A activity to gain momentum and expect investor and consumer confidence to improve with the growing economy. All of these factors make us bullish for 2011 and we expect the market to end the year higher between 10 and 15%, maybe more. Of course, the ride is not likely to be smooth as we suspect 2011 will be bumpy, much like 2010. That means we could see another correction to cool down a bullish sentiment that is showing some signs of overheating. There are also other headwinds that will test market resilience including continued concerns over the European debt crisis, restrained Asian growth due to inflation concerns, double dip or stagnant Housing Market, financial regulatory changes, and global unrest in places like Korea and the Middle East. Despite the headwinds, Volatility has fallen sharply over the past few months and that mak es it cheaper to buy portfolio protection through the options markets. We think this is an excellent time to be fully invested in stocks, but to mitigate some of that risk through option protection. We were more conservative in 2010 and for the new year plan to take on more risk by being fully invested in our equity portfolios, although at times will hedge with option protection. We also plan to be more aggressive with our options trading. We had a tough year trading options as we got caught on the wrong side of the market just before the summer correction last year. However, despite these losses, we have earned a 30% compounded annual growth rate in our options portfolio since January 1, 2007. That is a tremendous return that is worth the additional risk, a remarkable result given the difficult investing environment over this time period. Our two equity portfolios beat the market averages again this year, keeping our unblemished record intact. We earned 16% on both stock portfolios versus a market performance of 12.8%. We think we can do even better relative to the market in 2011, as we were only 75% invested during much of 2010. Our oldest stock fund (tracked since Jan 1, 2006) has earned a 22% annualized growth rate over the past five years (versus .1% S&P). That is an excellent return, a rate that ensures our portfolio will more grow more than 2.5 times every five years! All in all, our portfolios, along with the market, should do well in 2011 as net money inflows into stocks gains momentum signaling investor demand and propelling stock prices higher. Take action now and reduce bond allocations and move that money into stocks and commodities to benefit from the next anticipated leg up of what is likely a longer term bull market.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!
What Stock Tips do we have? Our complete list of watch list stocks is below along with our commentary. To our watch list, we added one new stock to buy. Walter Energy is a producer and exporter of coal for the global steel industry and power industries. The stock has already has strong 6 month run rising more than 100%. That might seem a bit overdone now that the PE has reached 21, but valuation seems reasonable given the company has grown EPS 63% and Sales 30% over the past twelve months. Short Interest is high at 9%, but we view that as a bullish sign as those investors have already sold and will rush to cover if the stock makes new highs. We expect industrial demand growth in 2011 and that should propel Walter Energy stock higher. However, given the already sharp rise, we think the better play is to buy options instead of the stock. With options we can manage risk better and reduce the downside risk if the stock moves sharply against us. For Walter, we like the J un 125 and 140 call spread as that provides plenty of time for the underlying stock to move. The options are expensive, but the net cost is sharply reduced by selling the higher call price and possibly even a put. We recently purchased watch list stocks ARW and TRW for our portfolios, so those two stocks were removed. We also closed our TCK call spread and earned a whopping 333% gain from this position in our Aggressive portfolio. Overall, we are now fully invested in both stock portfolios and we plan to sharply increase allocations in our options portfolio over the next few months. As we mentioned above, we are bullish for 2011 and think this will be another good year for stocks and commodities.

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