Quarterly review and preview

When the first calendar quarter of 2011 draws to the end, it is time to take a look at what has been on play and what will be on play. Hot terms like inflation, housing prices, recovery, jobs, and geopolitics are inevitably the essentials for upcoming quarters in 2011.

So far, the US economy has recovered strongly from the 2008 crisis with GDP at 3.2%. Concrete recoveries from jobs report and corporation earnings boosted investing community confidence. We see merge and acquisition activities come back to a before-crisis level and keep counting. Mega deals such as AT&T/T-Mobile are the latest but certainly not the last. Another sign is companies are paying more dividends and buying back stocks. The most recent example is banks' announcement. Cheap debts are a factor that fuels these activities, thanks to QE2, besides overall economical recovery.

That is the part we can optimistic about 2011. But the story is yet concluding.

Because of job recovery, consumer spending is up, according to JP Morgan. Not as the same as before, savings are also up. What do people do with savings? One big ticket is housing, which has not kept lockstep as broad economy recovery. From continue sliding housing activities, the worst is yet to come. There are reasons to be conservative about savings.

First of all, the requirements for a down payment and the lending guidelines are much tighter today. So mortgage is still a terrible story. Banks resume foreclosure process after a halt in the end of 2010. So more properties are coming to market for a few months. House stabilization doesn't necessarily mean turn around. It is very likely prices will stay or skid further to some extent.

Secondly, inflation, leading by energy and caused by unstable geopolitics, is interfering into economy recovery. Because of that, food prices are immediate victim. Not only the US but seen internationally. However inflation could be an equalizer for diversified US economy. Agricultural states are riding rising prices very well. Exports are strong and eliminated national deficit.

So we are near to a preview of the rest of 2011: there will not be a lot of bad news through May and June. After that, as QE2 phases out, then some real challenges coming as monetary support shrinks. Investors who are looking for a strong second half may need to be well aware of uncertainties and cautious. And inflation will be in full throttle during summer season. It will be the right time to sit at sideline for a while. But energy is still the hot spot.