Absolute Return Portfolio Management LLC

Near-term there are indications of a correction in most risk assets. Short-term market internals are modestly weak with fewer 52 Week New Highs occurring with each successive push higher this month. Additionally, short-term investor sentiment has reached levels suggesting at least a pullback in this rally.

The intermediate-term picture is more encouraging. It is possible that International Equities saw their final bottoms in late November with a successful re-test of those lows again in mid/late December. However, there is a significant disparity in the strength of various regions with the Asian and LatAm markets showing considerably more strength than Europe.

The big potential trends in 2012 appear to be a major top in bond prices (lows in yields) and the resumption of the bull market advance in commodities, Gold Bullion and other hard assets. This suggests an increasing inflationary environment. Get your financing done now for any Real Estate purchases or refinancing.

Currencies will continue to be devalued as most central banks continue liquidity infusions to prop up the global economy. The Euro is likely to be among the weakest while the US Dollar among the strongest. The USD appears to be in a bull market advance and should regain some "safe harbor" credibility if only because it is the "least bad".

Intermediate-term market internals and sentiment suggest that the current rally can continue following a short-term correction. A slow to moderate increase in bond yields won't stop a rally but if bond yields and commodities prices get cooking rapidly to the upside it will be a different story for equities. Only time will tell.

However, among Equity Styles, the Value segments have it hands down with the Small-Cap and Mid-Cap Value segments being the best choices. The strength in the Value segment indicates a RISK ACQUISITION MODE by institutions. Growth stocks are used more as safe havens and institutions clamored into this area as the markets peaked last Spring. Accordingly, the strength of the Value segment coming off of last October's market lows suggests a continuation of the advance in the intermediate and long-term.

LatAm tops the ranks followed by Asia and then Emerging Markets. Japan and Euro equities should be avoided altogether or at least under-weighted.

Bond investors should carefully scrutinize the credit quality of their bond portfolios and significantly limit the duration (maturities) of any holdings. Long-term bond prices could drop 15-20%.

Once any short-term market weakness is out of the way this area can be revisited. The domestic high yield bonds seems to have the performance edge relatively speaking...

Commodities reacted strongly to the upside with all other risk assets in 2009 through early 2011 as a result of these liquidity infusions. However, a general aversion for any risk assets took hold as the Euro contagion spread last Spring and Summer. This took Commodity and Gold prices down along with equities.

However, after bottoming in October, commodities like equities, have been grinding out a long-term base from which they should rise over the coming months and quarters. What gives me greater confidence in higher commodity prices is that fact that the flip side of this outlook would require an increase in bond yields (a top in prices). I have previously noted that I think we are forming a major top in bond prices.

Given the global erosion in currency values as a result of unmitigated liquidity infusions, Gold Bullion is likely to resume its long-term uptrend. General commodity prices are also likely to do well under the expected outlook. REITS have a number of price drivers the largest being interest rates, equities prices and the general real estate market. I don't think interest rates are going to help but hurt in the coming months and quarters. So, this is my least favorite of the three.

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