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Jimmy Jeong

Could 2011 be the year when stocks trounce bonds and investors are delighted by a return to frenzied merger, acquisition and IPO activity?

Shawn Matthews, the CEO of Cantor Fitzgerald & Co., certainly thinks so.

The head of the big New York-based investment firm that has a reputation for its fixed-income acumen believes the winning trade next year will be shifting out of safe, low-yielding Treasury bonds and loading up instead on U.S. stocks, particularly blue chips with good dividend yields.

In an interview, Mr. Matthews said he expects the stock market to return about 10 per cent from capital gains and dividends, compared with a paltry figure of less than 2 per cent on super-safe five-year U.S. Treasuries, making the switch from government bonds into equities a compelling trade, in his view.

His preferred stock investments are big cash-rich multinationals with dividends above the yields on five-year government bonds. Although he declined to identify specific companies, there are many household names, such as Johnson & Johnson or Procter & Gamble Co., with dividend yields of more than 3 per cent. Money-laden Microsoft Corp. is at 2.4 per cent.

"You're looking at some significant companies with massive amounts of cash on their balance sheets with dividends significantly" above the rates on Treasuries, Mr. Matthews observed.

He forecasts that many multinationals will be looking to put their cash to work by growing through acquisitions. Merger activity is "going to create a frenzy in the marketplace" and higher levels of initial public offerings are likely next year, he predicted.

Although Cantor Fitzgerald is a well-known Wall Street investment banker - one of the select 18 firms that act as primary dealers, or trading counterparties with the Federal Reserve Bank of New York - it is a relatively insignificant player on the Canadian market. It has a small Toronto office with only about 15 staff, but it could soon have more of a presence.

Mr. Matthews says Cantor is shopping for a Canadian broker dealer, although he declined to specify the market niche the firm was seeking or how large an acquisition it is contemplating.

But given Cantor's outlook for increased merger and IPO activity, it's possible the firm is preparing for an expanded role in natural resource deals, one of the hottest areas of the mergers and acquisition market.

"We're looking to grow pretty extensively" in the Canadian market, he said, adding that Canada is "a country with a tremendous amount of natural resources, an interesting play on a global basis."

In his investment outlook, Mr. Matthews said the odds of the U.S. slipping back into recession are remote, and he predicted the country will have an extended period of relatively subdued 2-per-cent to 3.5-per-cent growth "which is not the end of the world."

Mr. Matthews said yields on 10-year U.S. Treasuries, now around 3.25 per cent, could rise to about 3.75 per cent. Because bond prices move inversely to interest rates, his view implies these securities will fall in value.

Given his outlook for a modest rise in key interest rates and more stable economic conditions, he says high-yield corporate bonds will have better returns for investors than government securities and corporate bonds with high credit ratings.

The Federal Reserve Board's current $600-billion (U.S.) quantitative easing program isn't likely to be renewed when it expires at the end of next June because the recent deal between President Barack Obama and Congressional Republicans to extend tax cuts "adds a significant amount of stimulus into the economy."

Worries that the U.S., with its $1.2-trillion deficit, will experience a sovereign debt crisis similar to those in heavily indebted European nations, are overblown, according to Mr. Matthews.

He said countries like Greece and Ireland have total government debts that are larger in comparison to the size of their economies than the U.S.

The European countries have other problems as well. They don't have the ability to print their own money and have stagnating or shrinking economies, with fundamentals that are being worsened by their fiscal austerity programs. "They really don't have the tools to move their way out of their problems," he said.

The U.S., by contrast, can run monetary policy to benefit its economy, which is continuing to grow, making its debts more manageable.

On commodities, Mr. Matthews suggests a trade into agricultural products and out of metals like gold and silver that have recently been in the spotlight, hitting record highs for the yellow metal and 30-year highs for silver.

"I would be selling the precious metals and stores of value. I would be looking to food commodities on dips," he said.