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Ten Predictions for 2012



January 05, 2012 – Comments (0)

Board: Liquid Lounge


As we look forward into 2012, the consensus mood is one of cautious optimism in the markets for a more positive 2012. From my own perspective, I call this the “2 and 20 market” which is my theme for 2012. Much like a hedge fund that charges 2% fees running and 20% of profits, the current market gives you a 2% dividend yield with a P/E of 20 (OK, perhaps it’s 15 depending on what set of numbers you believe). Is this a good deal? Well, much like investing in a hedge fund, it depends on your perspective. If you can find the right manager with the right strategy, “2 and 20” hedge funds do make a lot of sense. Indeed, with this market, a 2% dividend yield and a 20 P/E may be a good deal for certain companies. However, in aggregate, 2 and 20 hedge funds do not make their investors a lot of money because their fees are so high and, similarly, equity investors in aggregate should not expect much from a “2 and 20 market” since, basically, there is no meaningful undervaluation and, absent significant growth in earnings, subpar returns are priced in.

As we enter 2012, we all would be well served to remember that.

And now, here are the 2012 fearless predictions:

1. Stocks Outperform Bonds

Yes, this is a dreaded “repeat” pick from last year but, unless you think stocks are likely to fall or go nowhere, this mathematically has to eventually come true. At current yields, it is hard to see how bonds could return much, if anything, beyond their coupon and even harder to imagine who finds them attractive (other than central banks, banks and income starved retirees).

Investing Thesis: Increase Stock Allocation in Favor of Bonds

2. Stock Pickers Outperform Indexes

This comes straight from the “every dog has its day” book. The current conditions for stock picking are pretty ideal. Active stock picking/management is certainly becoming a lost art and, while many would say good riddance, active managers can add value. And if active managers can not outperform in this type of environment of low growth, pervasive ETFs and little company differentiation by the market, perhaps they should hang it up forever.

Investing Thesis: Consider single stocks or actively managed mutual funds.

3. Financials and Industrials Outperform Technology
This is a classic “reversion to the mean” trade where I believe that last year’s losers (financials and industrial stocks) will out perform technology stocks. The financials have gotten incredibly cheap and technology looks expensive compared to its growth prospects.

Investing Thesis: Go log financials and industrials and short technology.

4. Commodities Move Higher

2011 was a strange year for commodities as many of them traded near all-time highs in the middle of the year, only to sell off and end lower by the end. However, supply/demand dynamics are still largely favorable and the improving economy plus quantitative easing will continue to support commodity prices.

Investing Thesis: Maintain long commodity positions.

5. US Stocks Outperform Emerging Market Stocks

The US equity market is relatively attractively priced compared to emerging markets and the “hot money” flows into the emerging markets have slowed. This is going to lead to another year of US equity outperformance versus the emerging markets.

Investing Thesis: Favor domestic over international equity exposure.

6. Yields at Long End of Curve Rise

The financing needs of Western governments (especially the US) are stupefying yet yields continue to grind downward. Needless to say, this is not a sustainable situation. Sooner or later, investors will realize that long-term government bonds are actually illiquid and risky and yields for such bonds will rise. My guess is that this starts in 2012 as the “safe-haven” appeal of US Treasuries subsides.

Investing Thesis: Short long-term Treasuries.

7. “American” Currencies Outperform

The troubles in Europe all well known and Asia seems to be suffering from the world slowdown. At the moment, the American economies appear to be the healthiest, yet their currencies are comparatively better priced.

Investing Thesis: Long Canadian dollar, Brazilian real and Mexican peso. Short Euro, UK pound and Japanese yen.

8. US Housing Prices Rise

Yup, in the tradition of “bottom calls” (which invariably seem to be wrong), I am calling one here. When you compare US real estate prices to prices in the rest of the world and other asset classes, it is hard to see how they are not a good value. With owning now making more financial sense than renting in most markets and an improving economy, the conditions for a rise in prices are in.

Investing Thesis: Consider investing in real estate.

9. Silver and Platinum Outperform Gold

I am not going to belittle gold which has moved higher for an amazing 11 straight years. However, for those who buy gold as a hedge against currency devaluation or disruption in the financial markets, you get the same diversification benefits with platinum and/or silver plus much better supply demand/fundamentals and upside to industrial markets. We are highly unlikely to have a repeat of the gold up, silver down, platinum down pattern seen in 2011.

Investing Thesis: Go long silver and platinum.

10. Major Bank “Fails”

I believe that a major bank will fail as a result of the ongoing issues in Europe and the financial markets. However, this failure will principally mean a wipeout of the value of the common equity of such bank and not necessarily an “insolvency” as such bank is likely to get governmental support for its debt/depositors.

Investing Thesis: Tread carefully in the financial sector.

As always, have a great year and happy investing!


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