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Riding the Wave
New York: January 03, 2011
By John Stephenson

Stocks powered to their best December close since 1991, as investors reasoned that central banks around the world would keep interest rates low—a bullish signal for the global economy. Low interest rates help spur borrowing and spending, allowing companies to post robust profits and helping to power share prices higher. Over the past year, the benchmark Standard & Poor\\\\\\\\\\\\\\\'s 500 soared higher by 12.78%, with almost a seven percent gain in December alone. Solid corporate earnings and the Federal Reserve\\\\\\\\\\\\\\\'s controversial plan to bolster the U.S. economy by buying $600 billion of bonds helped reassure investors that long-term rates would remain low and economic growth would continue. And while investors rode on a wave of optimism through most of 2010, the focus is solidly on the investment prospects for 2011.

Outpacing stocks, bonds and the U.S. dollar in 2010 were commodities, which gained more than 15 percent over the year, as China , the biggest source of commodity demand, led the global economic recovery. Over the year, global bonds returned just 4.7 percent and the U.S. Dollar Index increased by a meager 2.1 percent.

The best performing commodity was cotton, which rallied more than 89 percent as investors speculated that supply would fail to keep up with strong Chinese demand. Following closely on cotton\\\\\\\\\\\\\\\'s heels was silver, which increased by 81 percent. Agricultural commodities also finished sharply higher with corn up nearly 49 percent and coffee climbed to a 13-year high as weather worries and slumping inventory levels helped spur prices higher. Of the 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index of raw materials, natural gas and cocoa were the only commodities that fell in 2010.

Peru\\\\\\\\\\\\\\\'s Lima General Index rallied more than 65 percent in 2010, posting the best performance of any developing nation tracked by the MSCI Emerging Markets Index. Copper, Peru\\\\\\\\\\\\\\\'s largest export, was up more than 30 percent in 2010, as strong demand for copper and virtually every other commodity continued unabated.

So what\\\\\\\\\\\\\\\'s in store for 2011? More of the same, but with lots more volatility in the year to come. After the solid run-up in 2010, stock market gains in 2011 will come from a narrower suite of fast-growing companies or through dividend yields. Emerging market performance, particularly in South America, will continue to be a dominant theme in 2011, while developed markets in America and Europe will continue to post weak performances.

A two-speed economic recovery will dominate the economic landscape in 2011, with many of the world\\\\\\\\\\\\\\\'s developing nations raising interest rates to prevent their economies from overheating, while advanced nations are preoccupied with austerity measures, high rates of unemployment and sluggish growth. And commodities will once again outperform.

As I mentioned on a recent appearance on CNBC\\\\\\\\\\\\\\\'s Fast Money, the three best performing commodities in 2011 are likely to be oil, copper and silver. Oil is a miracle fuel that has no substitutes and costs less than orange juice on a volumetric basis. The new frontiers for oil exploration are offshore Sudan, the Falkland Islands and Greenland—places that at least so far, show no hint whatsoever of a major oil find. Oil demand is currently centered on America, but rapidly shifting to China, the largest car market on the planet. What\\\\\\\\\\\\\\\'s more, oil has lagged the other commodities in 2010 and is poised for a breakout to the upside in 2011.

Copper, is the most important industrial metal there is and the fundamentals for copper are the best of any of the metals. There are only seven days of copper supply on the London Metals Exchange (LME), the largest metals market on the planet, and China is in the midst of a massive infrastructure build out in the interior of the country, which will keep copper demand strong for years. New mine supply is sluggish, and no visible growth in mined copper supply is likely until early 2013.

Silver is the new gold. Both gold and silver are moving sharply higher because they are money. And as the U.S. and Europe warm up the printing presses to help monetize the staggering debts they\\\\\\\\\\\\\\\'ve rung up over the last 25 years, investors have flocked to these traditional safe havens. Silver\\\\\\\\\\\\\\\'s track record as a former currency has been a long one. Most notably, it\\\\\\\\\\\\\\\'s been used by the United Kingdom, whose pound (£) originally represented the value of one troy pound of sterling silver.

But unlike gold, silver is trading 40 percent off its all-time high, whereas gold is trading 60 percent above its all-time high. With the Euro zone becoming the poster boy for sovereign risk and the U.S. mired in slow growth and a lackluster job market, gold and silver have become must-haves for any well-diversified investment portfolio.

Leading the markets higher in 2011, will be commodities and the shares of commodity producing companies. While it may be tempting to buy into the argument that the S&P500 looks cheap and should be bought at any cost, these forecasts are assuming a U.S. growth rate that is unlikely to materialize. Portfolio returns will come from the sectors of the market experiencing rapid growth, rather than areas which are stumbling.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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