MARIA'S Investment Brief - Week of June 13, 2011

Second-Half Questions
As we approach the midpoint of 2011, it’s interesting how the first half of this year has followed a similar pattern to 2010. While nobody is predicting a repeat of last year’s performance — certainly nobody that I’ve talked to — the pros on Wall Street are looking ahead to the second half and how to reposition their portfolios.

One major similarity between this year and last is the number of important stories playing out that could have a significant impact on the economy and the market. Here are some of the most important that keep coming up in my conversations with investors everywhere:

The traders I talked with the other day said the financials are “uninvestable” right now and will be for some time because of the questions surrounding the regulatory environment, specifically new rules regarding required capital levels. There is talk that when the new Basel III global banking rules come out, they will require banks to hold Tier One capital reserves at 10%. A threshold that high would be very tough for many banks because they would have to hold more capital in various forms, which would mean they would lend even less than they're lending now, which in turn impacts future growth.

Then, of course, there’s China, which is trying to control growth, but now there are questions whether the economy may slow more than expected in the second half of the year.

Jim O'Neil, chairman of Goldman Sachs Asset Management, told me last week that he still believes in the emerging markets over the long term, but he's preparing for short-term ripple effects of a possible China slowdown. He expects China's GDP growth to drop to 7% at least, and he also believes commodities will get hit, primarily oil, iron ore and copper.

And then there is government debt, both in Europe and here in the U.S. Washington is still unable to agree on a plan to reduce the debt, and the debt ceiling still has not been raised. That’s a major concern. There is little doubt that the ceiling will be raised, but will it be before the government defaults on any payments? Until there is real decision-making and leadership out of Washington about how get the nation’s fiscal house in order, uncertainty will continue to dominate.

As always, the question investors are trying to answer is whether all of this negativity is priced into the market yet. From what I’m hearing, it would not be surprising to see some kind of market disruption around the end of the Fed’s current quantitative easing program (QE2) at the end of this month. But it’s important to remember that even with problems in the U.S., companies in the S&P 500 are still deriving much of their profitability and revenue from hot growth spots in the world like Brazil, India and China.

Bottom line: The market has some big issues to sort out in the next six months, and I will keep a close ear to the ground and let you know what I’m hearing on Wall Street.