Tuesday, January 31, 2012

2012 Market Forecast

As many of you know, I write a regular column for WomanAroundTown.com, a site that addresses women in NYC and Washington DC. Here is a piece WAT published on the outlook for 2012.

Bull or Bear? The 2012 Market Forecast

We are hard pressed to find anyone who isn’t a bit more optimistic about the state of affairs this year than last. There are positive signs that the economy is beginning to pull out of the mud: corporate purchasing agents are buying slightly more products and services, so manufacturing is creeping up. The consumer seems more confident, or at least says so, since consumer sentiment just notched its highest level in a year. Even housing is beginning to move out of its mud hole. While it is much too soon to say we’re out of danger, at least we can peek out from the mud and begin to see some signs of life.

With better news comes a panoply of outlooks, ranging from dire, to muddling through to, in a few cases, daringly optimistic.

This year’s 2012 Market Forecast, sponsored by the New York Society of Security Analysts (NYSSA) an event I attend annually, was another sell out, as investors and those who work with them gathered to glean the wisdom of the sage. Vinny Catalano, who heads Blue Marble Research, put together an impressive panel of analysts, strategists and prognosticators, all of whom shared their wisdom, thoughts and, yes, a few fears, on what lies in store in this all-important election year.

Before embarking on it, however, let’s see how well a similar panel did for 2011. Readers of this column may remember some of the forecasts from last year:

2011 Forecast vs. 2011 Actual

Corporate Profits: $95 (forecast) vs. $98 (actual)

Real unemployment rate: 15% (forecast) vs. Still 15% (actual)

Commodity prices: higher (forecast) vs. most prices lower (actual)

Wikileaks: will be defanged (forecast) vs. appears to be (actual)

S & P Index: 1400 (forecast) vs. 1258 – didn’t move at all (actual)

The S&P index was a huge disappointment in 2011. Corporate earnings performed, but the price/earnings multiple did not – rather than a projected 15, it was below 13. (Remember, the multiple reflects investors’ optimism regarding future earnings growth. A lower multiple suggests that investors are not very optimistic, and last year’s market close confirmed it).

Even though the tone of this year’s conference was cautiously optimistic, there are different concerns, mainly, the Euro zone debt crisis and its spillover effects on us. And, for that matter, on China. Remember last year, when China was all the rage? This year, China presents cause for concern. According to Peter Bookvar, equity strategist at Miller Tabak 7 Co., LLC, “China’s cooling growth is compounded by the slowdown in Europe, since Europe is China’s biggest trading partner.” That’s as good a reason as any to be cautious – China is the largest holder of US debt, so we want them to continue to do well, at least while we are running such huge deficits.

Will Europe default? While the Euro zone fall apart? “No”, said Mujtaba Rahman, an analyst with Eurasia Group’s Europe practice. “But there are big issues between Germany and the rest of Europe. If you look at Europe’s history, the current situation is unprecedented. If there is no resolution on policy, it will continue to ‘muddle through’”.

Glen Reynolds, who runs CreditSights, Inc., commented that both banks and consumer balance sheets are stronger now, and that while corporations have the ability to spend, banks still are not lending, despite their capacity to do so. Why? “There is little corporate demand. Much of the lending we saw early in 2011 was for refinancing, rather than origination. At current capacity utilization levels, there is not yet a need for expansion”. He also commented that if Europe weakens further, US banks, as counterparties, could too. Let’s hope not.

The best news appears to be the inflation outlook – in the range of 2%-3%, according to Phil Orlando, Equity Market Strategist for Federated. He also predicts $102 for corporate earnings, and while higher than last year, the multiple is lower. (The corporate earnings figure derives from adding all earnings for all 500 companies in the index and then applying a divisor to the equation.)

By way of explanation, in previous years, the S&P index could be estimated by applying perhaps a 14 multiple to the earnings, or a 1428 year-end level, in this example (102 x 14 = 1428). Now, however, he suggests that 13 may be a more realistic multiple for 2012, or a 1326 level for the S&P by year-end (102 x 13 = 1326). The lower multiple again suggests that investors are less optimistic about future earnings. So, from today’s 1292, that represents a mere 2% gain. Not exactly robust, but in this economy, we’ll take it.

Nearly all panelists agreed that utilities, consumer staples and health care will be strong performers as we move forward in 2012.

The panelists also commented that 2012 has some unpredictable outcomes: the Supreme Court will hear the health care arguments, and there will be uncertainty in the markets. Also, while the panelists all agree that stocks are cheap, based on their fundamentals (earnings, cash position, debt levels), the 2012 election outcome is critical for fiscal policy and regulatory reform.

And, to paraphrase Pepys, so to the election. Dan Clifton, who heads up the Washington office of Strategas Research Partners, LLC, noted why the South Carolina Republican race is so important. “South Carolina has picked the Republican nominee in every election since 1976”. As we go to press, the election results may be prescient.

No matter who wins, the election’s outcome will give us certainty as to the regulatory landscape and taxes. There is ample debate on both sides of the aisle. Whoever wins, at least we all will know the rules. Then things can move forward. Nearly everyone agrees that the ongoing uncertainty is anathema to a robust economy.

Sam Stovall, Equity Strategist at S&P, weighed in with some election thoughts. He tracked the historical stock performance during election years from 1948 onward, and had these comments:

1) During an election year, the stock market offers an attractive intra-year entry point that is about 8% below the prior year’s closing level (READ: sometime this year, the market will probably drop 8% from the 2011 year-end close of 1258, to somewhere around 1157. That level should be considered a buying opportunity).

2) In all elections since 1948, the January Barometer was accurate in forecasting positive calendar-year performance. As the saw goes, “As goes January, so goes the year.”

3) 85% of the time since 1948, the market has accurately predicted whether the party in power remains. The critical period to watch is from July 31, 2012 through October 31, 2012. If the market is up during that 3-month period, the Democrats are in. If not, look for a change.

This year, we won’t need to wait until January 2013 to know how the year will fare. November is only a little over 9 months away.

Wednesday, January 25, 2012

Here's a Novel Idea - Making Banks Pay

Everyone who listened to President Obama's SUTU speech on Tuesday evening has something to say, as new programs were outlined and the expected backlash articulated. And, from the tenor of the early news shows, some did not appear to listen. Not all the programs involve increasing the deficit.

One novel idea may have merit: making some of the largest financial institutions pay a small fee to help homeowners take advantage of record low interest rates and lower their payments. Heretofore, refi qualifications are so stringent that many applicants cannot qualify.

The President stated, and rightly so, that "A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.”

It strikes me as equitable - we all know that banks made a bundle from packaging mortgages with dubious credit ratings that then were sold to institutions and individuals. A housing crisis ensued, with disastrous ramifications. People who then lost their jobs in the downturn could not sell their houses in this real estate market. Not all of these people bit off more than they could chew in terms of houses beyond their means. Many put down the requisite 20% or more, made payments regularly, have FICO scores of 800 or better, but cannot refinance. Those without a job are especially hard hit, and reducing their payments, just until they land, would be a welcome respite. Asking banks, who did much to create the current problem, to help homeowners get back on their feet seems appropriate.

However, the bill has to pass Congress, so don't hold your breath. But, you may want to contact your Congressman.

Bloomberg Business Week has an article that explains the proposal in greater detail. Here's the link:


Tuesday, January 24, 2012

Fat Cat Payday

Yesterday's Marketwatch.com has a piece on huge comp packages for executives at some of the largest companies receiving the bailout dollars. Gee, what a surprise. And what an outrage.

The rationale, and I use the term loosely, is that executives who were not paid well would not stay at the institutions to shepherd them through the payback phase. So, it seems that Patricia Geoghegan, who represented the Office of the Special Master (of the Special Inspector General for the Troubled Asset Relief Program), was pressured by the US Treasury, no less, into granting these fat cats' wishes.

49 different individuals received pay packages of $5 Million or more. During the worst economic downturn since the Great Depression, when real rates of unemployment are from 15% to 19%, depending upon whom you believe, it is astounding that the fear that top executives would quit drove such an egregious decision. Who are they kidding? Where would they go? Even now, most people with jobs are terrified of losing them. And a myriad others would be happy to work for a fraction of what these guys got.

It's easy to understand the OWS movement - who's watching out for the little guys?

Thursday, January 12, 2012

The Book of Jobs

I can't take credit for this catchy title - it is a direct quote from a piece in the January 2012 edition of Vanity Fair written by the eminent Columbia University's Economics guru, Joseph E. Stiglitz. I was so impressed with the piece that I want to share some salient points as well as the link: http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201

While I'm not a Keynesian, i.e., proponent of government spending to cure recessions, Dr. Stiglitz appears to be as makes some important comparisons between our current Great Recession the Great Depression. He discusses a primary cause of the Depression as centered around the structural changes in an agricultural-based economy at the time. An agricultural revolution (improvements in farming techniques, better seeds, fertilizer and equipment) increased output, drove down prices and required fewer farmers. We all know the disaster that ensued in terms of declining incomes and jobs--our parents who lived through it never let us forget it. Nor should we.

Today's economy has similarities in principal, as we move from a manufacturing to a service economy. About 1/10th of our workforce today is employed in manufacturing, versus 1/3 60 years ago, because of greater productivity (for example the Internet reduced the need for some employees) and globalization (sending lower-paying jobs oversees where labor is cheaper).

World War II got us out of the Depression, which, in fact, was a massive example of government spending. According to Dr. Stiglitz, while we don't need another war, we now need something equivalent to that significant level of government spending because monetary policy is not working. Nor did bailing out the banks, because most of them stopped lending and many used that money for bonuses. The piece also suggests changes in tax policy and suggestions for a productive economy that focus on increasing living standards, rather than creating greater risk and inequality.

Well worth the read, so don't be fooled by Lady Gaga on the cover.