To be…Inflation, or not to be…Inflation?
That is the question. 

PMG Wealth Management’s
3rd Quarter 2009 Outlook.

By: Phil Guerrero, CFP®. PMG Wealth Management
July 1, 2009

Much of the news over the past few weeks has been about the future concern of inflation.  With the massive amounts of spending the government has made to fix our financial system, the economy, and state budgets, the headlines are finally catching up to the inflation story. 

Recently we’ve had Treasury auction after Treasury auction that have flooded the bond market forcing yields up with fewer buyers out there.  In the short term it has manipulated the gap between short and long-term bond rates leading to some pressure on the mighty greenback.  So is inflation right around the corner?  I don’t think so, however in the third quarter clients within our managed portfolios will see an increase in the portion of the portfolio to protect against it. 

So far inflation is under control for 2009.  As the government tries to help on the housing front interest rates will remain low for some time.  Bottom line, housing has to be fixed before we are officially out of this mess.  However, you and I know markets move ahead of reality and we can benefit from this trend by being out in front. 

Another theme for the third quarter is we could see a range bound market.  A market that battles each day over whether or not inflation is right around the corner, a couple of years off, or a no show to the party.  There are other issues as well; consumer debt, unemployment, housing, health care debates, etc.  These all force the governments hand into more spending.  More spending equals future inflation.  How far into the future is anyone’s guess, but the debate should lead to a range bound market.       

Do we need to panic? No, no and no!  There are a number of strategies investors can employ to participate and benefit from inflation.  Increasing positions into global equities is a start.  Don’t forget large multinational companies benefit from a weak dollar, and most international companies avoid our inflation issues.  Other areas to keep an eye on include high yield bonds, the energy sector, materials, treasury inflation protected securities, and funds that can benefit from a falling thirty year bond.  There are a lot of options out there. 

As I said last quarter, we are off life support.  We did see a nice lift last quarter as the markets recovered from cardiac arrest to life support to government support.  As we get back to dealing with traditional market and economic issues investor confidence should continue to return.  Investors with cash should enter this market in phases. We may see a pull back depending on how the news plays out this quarter.  I will be looking to add cash with any significant pullback.  Those already invested should look to allocate a portion of portfolios to participate with rising inflation. 

Other items of interest: Companies across the board continue to cut expenses and overall have done well with earnings this past season.  We’ve seen managers increase their selectivity within portfolios and move cash from the sidelines in the second quarter.  I would anticipate this to continue through the rest of the year despite any inflation issues.  Just expect to hear more about asset classes that are not your traditional buy and hold, blue chip stories.  By the way, did I mention buy and hold is dead…that’s another story. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.