Hennion & Walsh Trending

As part of our annual portfolio reconstitution process at Hennion & Walsh, we strive to build forward looking, asset allocation-oriented portfolios based on our internal views of where we believe both the markets and economy are heading for the next year. For your benefit, as we did last year, we have provided our four potential scenarios for 2011, based upon information available to our research team at this point in time, with an internal probability assigned to each, below:

Scenario 1:

The Recovery Gains Traction

Probability Assigned:
55%

Scenario Description:

We contend that this scenario has the highest probability of occurrence.  Following this scenario, the current economic recovery continues to gradually improve, with:

1) Moderately increasing employment

2) Some clarity and improvement in fiscal and tax policies providing momentum to U.S. businesses

3) Some momentum in personal consumption expenditures and capital expenditures here and abroad

While we believe that the duration of this “great recession” and the shallowness of current economic recovery efforts make this a durable recovery, weakness in “old Europe,” real estate, and confidence still hold back a more traditional V-shaped recovery.   We also hold the possibility that the economy might rise faster than our initial expectations if GDP accelerates by end of the 1st Quarter to an annualized rate of 4% or better.

Likely Scenario Benefitting Areas:

• Small & Mid-Cap Domestic Equities
• Emerging Market Equities
• U.S. suppliers and buyers such as Brazil and China
• Commodities such as Copper, Platinum and Oil

Likely Scenario Detrimental Areas:

• Most areas do well but less adaptable societies or high debt/GDP nations do not do as well

Scenario 2:

The Recovery Take a Pause (i.e. Starts & Stumbles)

Probability Assigned:

20%

Scenario Description:

Similar to last year’s “2010 transition scenario”, the economy has some starts but then sputters on EAFE / Sovereign Debt contagion issues, a weak consumer, a struggling real estate market, and fears of potential municipal debt defaults. Additionally, split Congress might foster perception of political deadlock, which could prevent us from moving markedly forward.

Likely Scenario Benefitting Areas:

• Large Cap Domestic Equities
• Value oriented Equities with attractive dividends
• Low debt/GDP countries Debt and Equities

Likely Scenario Detrimental Areas:

• Micro Cap Equities
• Frontier Market (i.e. “Emerging” Emerging Markets) Economies
• High debt/GDP countries as found in EMU countries such as Spain, Portugal and Italy
• High Yield Bonds (due to credit concerns)

Scenario 3:

Inflation Kicks into High Gear

Probability Assigned:

20%

Scenario Description:

The combination of a recovering economy and aggressive Federal Reserve operations inadvertently lets the inflation genie out of the bottle.  We do not see a strong possibility of stagflation under this scenario but rather a more classic “loose money inflation” instead.

Likely Scenario Benefitting Areas:

• Gold and other metal based Commodities
• Real Estate Investment Trusts (REITs)
• Domestic Equities (to a lesser extent)

Likely Scenario Detrimental Areas:

• Long term Bonds

Scenario 4:

Bear Market Surprise/Double-Dip Recession

Probability Assigned:

5%

Scenario Description:

This scenario encompasses setbacks such as currency and / or trade tensions or even austerity measures that cut too deep.  This scenario would also capture an exogenous macro-shock that reduces economic activity, trading and velocity of money which kicks us back to a near recessionary or recessionary / deflationary type environment.

Likely Scenario Benefitting Areas:

• Gold and other metal based Commodities
• Investment Grade Bonds (the “flight to quality” returns)
• Certain Foreign Currencies such as the Swiss Franc

Likely Scenario Detrimental Areas:

• High debt/GDP Sovereign Debt
• Equities