At Indie Asset Partners, we will never start our major market reviews without at least some reminder of what we said the last time. Right or wrong. We continue to find it interesting how many advisors appear on the “prognostication circuit” and never refer back to their last guess. And how right or wrong they could have been.

You may see our full 2010 Year End Review in the Communication section of our web site. But to repeat one of its major themes, “There are still many risks in 2011. Equity values are reasonable, but not cheap…Even after the treasury yields have increased to 4.4% for the 30-year, there still seems to be more risk than return.” In hindsight, it could be argued this was not “rocket surgery.” However, this was not a pure consensus view; many thought that the U.S. and world economies would storm back in 2011. And, indeed, the equity markets reflected a strong recovery—until May. At IAP, we were a model of consistency. We did forego some early returns in 2011, clearly, but feel pretty good about that right about now.

Now with another six months of history under our belts, where does that leave us? As we stand at mid year 2011, the equity markets are up 3-4% for the year (with strong recovery late June), interest rates and debt yields continue at historic lows (even despite the sort of end to Quantitative Easing number whatever), Europe is troubling (not just Greece), the U.S. Government cannot make meaningful progress toward deficit reductions, credit quality for federal and state debt is at least a concern. Housing and employment have demonstrated little improvement. The world is not falling apart, but mid year 2011 continues to be a time of caution.

The U.S. economy appears to have no more than modest growth ahead. State and the Federal governments will likely continue to cut spending. Households will still be paying down debt and worrying about housing prices (not to mention continued concern about staying in their own homes). India and China have been trying to slow their economies for fear of inflation, and that is likely to continue. And despite the Federal government’s attempts to increase money supply and, therefore, lending, that does not appear to be finding its way into the economy. Even with these challenges, as investors we still need to try and earn money. What to do?

At IAP, we utilize the above noted macro economic factors, as well as technical and fundamental analysis to help determine asset allocations and specific investment vehicles. Valuations for equities are as divergent as you will find. Large caps vs. small caps are about as compelling a valuation as you can find historically. You are not being paid to assume the extra risk with smaller caps. As to fixed income, yields for U.S. government debt are too low and you will not be adequately paid to lengthen maturities. At IAP, we recommend managing these noted risks by buying only undervalued equities (many large cap, dividend paying common equities are out there). We do not recommend taking full positions in these equities, yet; buy now, but keep some dry powder for a pullback that we would expect to see. Including some higher income MLPs and utilities will cushion some of the downturn.

As to fixed incomes, we still suggest keeping a large portion of that class in instruments with shorter maturities. Total duration of over 5 years is getting too risky for the returns. There are several mutual funds that we like which include corporate and mortgage debt, not U.S. government, that we think provide reasonable risk adjusted returns. There are also a number of preferred equities that represent compelling relative returns.

From our pure technical perspective, we believe investors should view positive moves in the next several months as most likely bear market rallies. Perhaps take some of those moves to create more cash availability. As we stated in much of our late year 2010 guidance, we were looking for modest returns in 2011. If anything, the economy and technical factors look worse now. Since 2011 just does not appear to be a year to swing for the fences, use rallies to lessen risk by upgrading quality, raising cash or both. The time for “home run cuts” will come, most assuredly. We are very long term bulls on the capacity of world markets, ESPECIALLY the U.S., to create wealth. But timing matters.