How to Invest in 2011

The economic environment in 2011 is riddled with conflicting market indicators that point to the necessity for a well thought out and developed investment plan for 2011. Around the spring of 2011, the U.S. national debt not including state and municipal debt is expected to reach its $14.3 trillion debt ceiling that was legislatively raised in 2010. This is an amount similar to the annual national gross domestic product implying the U.S. national debt is near 100 percent of GDP.  Federal revenue was expected to increase from near a 60 year low in 2011 according to the Congressional Budget Office, but the CBO’s forecasted expiration of tax provisions that kept tax revenue low did not occur.

Despite high national debt, and worry about the financial fundamentals of the U.S. economy, companies reported strong profits in 2010. These profits came at the expense of cost cutting and improving operational competitiveness both nationally and abroad. Companies like General Motors (GM) and Ford (F) have emerged anew and fiscally leaner. Yet revenue remains a problem for some large companies despite increased earnings. For example, large Dow Jones component companies like General Electric (GE), Bank of America (BAC), Verizon (VZ) and Merck & Co, Inc. (MRK) experienced declines in the first three quarters of  2010.  Several of the companies that did not have consecutive quarterly losses didn’t have steep rises in year over year revenue metrics either.

The housing industry and employment continue to be thorns in the side of a slow moving economic recovery as evident in the long-term Case Schiller Index and the Bureau of Labor Statistics unemployment data.  Monetary liquidity fueled by the Federal Reserve Bank provides the financial grease to help an economic engine that has mechanical problems. The grease is no good without a functional engine. At the least, an investment plan for 2011 will consider the risks of investing in such volatility where high frequency automated trading can cause market price movement patterns unpredicted by even by the best technical analysts.

So what’s bullish, or a good investment for 2011? Many financial experts such as Jim Cramer of ‘Mad Money’ tout domestic equities are part of what is fueling the U.S. economic recovery. Still more claim emerging markets have more room to run. If this is the case finding the right financial instruments can mean the difference between benefiting from rising valuations and sitting on the sidelines with a bag of misdirected investment capital. Either way, researching these investments and arriving at 100 percent confidence in them seems unfounded given the considerable amount of things that can go wrong. For example, there are several under funded or heavily in debt state and municipal governments; the potential for bond defaults or higher servicing costs, more employment cuts, and higher taxes are all real possibilities.

With international markets expanding, U.S. companies have opportunities to increase market share and revenue. As with all investments simply having an opportunity is not always enough, the investment prospect must also have solid market forecasts, economic suitability, brand equity, and effective management. If revenue is reinvested domestically it has the potential to stimulate economic growth in some industries and economic sectors within the U.S., but will it be enough? The companies that have adaptable business models and products that have a proven record of successfully changing with the times may be worth a second look.

With the risk of inflation on the horizon, adjustable inflation protected securities might be just the thing to hedge for this future potential risk. Whether or not this risk will occur depends on a number of factors i.e. will prices of goods and services rise despite a weak economy indicating stagflation, or will a lake of flaccid financial liquidity be drained in time to prevent a high inflation accompanied by new economic prosperity? These are things to consider when investing in 2011.