On January 3, 2012 I proposed my Gut Feeling for 2012 right here on Wall Street All-Stars. Now it is time to revisit those expectations and grade myself:
- The SPX will increase earnings by 8% to between $102 and $103. The SPX earnings multiple of 13.24 is one of the lowest in decades. I would assign a 30% chance that the multiple will remain unchanged, yielding a 1,357 price target. There is a 20% likelihood that the multiple could contract further to 12.5, corresponding to a price target of 1,281 for the index. There is a 50% probability that the earnings multiple will expand to 14, resulting in a year end price target of 1,435. So, the range of my year end expectations is 1,281 to 1,435 with a probability weighted target of 1,381, nearly a 10% rise. RESULT – the S&P 500 is set to close above $1,400. The index’ earnings are too early to calculate but I am in the neighborhood of expectations with earnings for the S&P 500 likely to come in around 100, coming up shy of my estimates by a slight amount because of the strength of the US Dollar. My bullish thesis was correct but missed the upper boundary of my target range. On the other hand, I might have been too conservative with my probability weightings.
- This year is a Presidential Election year. On average, since 1950 the SPX has increased by 6.10% in a Presidential Election year. The last presidential election year yielded a worst ever decline of 38.49%. I do not expect a repeat of 2008. The first and third quarters in this year of the election cycle gain less than 1% on average while the second and fourth quarters gain a little of 2% on average. There is no doubt that the election will be front and center in the media. The election will be close and a record amount of money will be spent which will help the bottom lines of both traditional media and internet advertising companies. The swing votes will come from the Jewish vote in Florida, New Jersey and New York along with the Hispanic votes in Florida, Arizona, New York and Texas. Gov. Chris Christie plays a big role in the election as does Mayor Mike Bloomberg who turns down Romney’s offer as a running mate but unlike 2008 will support a candidate for President. That support will fall to Romney. I believe that President Obama faced with poor polls will shake up his ticket and replace Joe Biden with Hillary Clinton as his Vice Presidential running mate. This is a rumor that has been making the rounds for well over a year now. However, the Republican nominee, Mitt Romney will see this move by Obama coming and will select a Latino running mate. It could be Marco Rubio (Florida) but do not rule out Susana Martinez (New Mexico), either of the Diaz-Balart Brothers (Florida), or Bill Flores (Texas) as Rubio might be seen as too young. The Romney ticket receives 292 Electoral College votes in a close election. RESULT – swing and a miss
- The mess in Europe will be resolved and the European bourses will have a 2009-like reversal as did the US markets. This will not occur until midyear. RESULT – After nearly six months of a repeat of the prior two years’ European crisis worries, stabilization in the region began to materialize after the new ECB President, Mario Draghi lowered interest rates and a solution to the soverign debt problems was agreed upon. The Euro STOXX 50 Index bottomed on June 1 at 2,068.66 and has risen nearly 27% since that date. See the index’ exchange traded fund, SPDR Euro STOXX 50 (FEZ) which did not perform as well (up about 15%) because it is US Dollar denominated and the greenback was strong versus the Euro this year. In 2009 the S&P 500 (SPX) bottomed at 666.79 (“the Devil’s Bottom) on March 6, 2009 then rose 67% from that low till the end of the year. I would say I was spot on here.
- American companies with rich balance sheets and appreciated US dollars will go on a buying spree in Europe. It will start with the more staid sectors such as: food, personal care, staples and consumer products companies. From there it will expand to tech and industrials. There will be so sacred cows as the European Commission on Competition will act from a position of prudence rather than one of parochialism. RESULT – US companies continued to accumulate cash and the US Dollar did appreciate. However, no buying spree of the magnitude I expected managed to materialize. That is in 2012. I would say this gets a grade of incomplete as that buying spree might happen after all in the future.
- After adding about 1.6 million non-farm payrolls in the United States in 2011, another 2.5 million jobs will be added in 2012. Domestic employers will no longer be able to squeeze additional productivity gains and end user demand will require inventory builds. The jobless rate moves toward 8% all year but does not get close to that figure until after the election. GDP expands more than economists believe. RESULT – According to the Bureau of Labor Statistics (BLS), 1.66 million non-farm jobs were added to payrolls for the year through November. If you add in the 150k jobs that analysts expect for December, the total additions to payrolls for 2012 are estimated at 1.81 million, short of my higher expectations. When it comes to the jobless rate, the figure drifted toward 8% all year and then finally fell below that level in September. So, I would say that I pretty much had this correct with the prognostication coming true two months early.
- Cloud Computing will be all the rage but will deliver the same disappointments as did prior promising technologies such as solar energy, Nano tech and VOIP. These cloud computing stocks will surge and then crater, although some have already begun to do so such as Saleforce.com (CRM). The cloud companies won’t be alone. A Facebook IPO will be the death knell for the entire social networking stock complex, Facebook included. RESULT – Swing and a miss on cloud computing. When it came to the Facebook and social networking IPOs, I would say I knocked it out of the park.
- The Summer Olympics in London will reestablish the United Kingdom’s economic supremacy in Europe. Think about investing British in 2012 and look at the iShares UK (EWU). The AT&T (T) deal for T-Mobile might be dead but Vodafone (VOD) has deep pockets and could make a play for the carrier. RESULT – The London Olympics was a huge success. The iShares UK rose about 10%, less than the Euro STOXX 50 Index and its related ETF. T-Mobile was left at the altar and is still single.
- The exchange traded fund marketplace succumbs to overcrowding and contraction will take place, albeit in an orderly fashion. A major hedge fund closes, most likely Paulson & Co. Mutual funds voluntarily and publically cut back on 12b-1 fees to attract assets from ETFs. Turnkey Asset Management Programs or TAMPS go mainstream. I have begun to explore a TAMP strategy myself for LakeView Asset Management, LLC and will research forming a potential TAMP product for WSAS. Imagine if you can invest along with your favorite All-Stars individually or in the aggregate for what you pay a mutual fund? RESULT – The exchange traded fund sector is beginning to contract as the losers are getting crowded out by the winners and are closing down. Paulson & Co. did not shut down but is fast heading in that direction between massive losses and redemptions. As for those pesky 12b-1 fees, there is not enough hard data to confirm or deny my expectations. I have started a TAMP relationship with Covestor and the industry is growing but is still off many investors radar screens.
- Natural gas and the Keystone Pipeline become major election issues as a shovel ready jobs project. I own Canadian Oil Sands (COSWF) and will add to my positions given an opportunity. RESULT – The Keystone Pipeline was an early election issue but seemed to have dissipated down the home stretch. COSWF was off this year even after factoring in the dividend cash flow. I still hold my positions and did add two tranches during the year.
- One or more of the following do not survive 2012 as an independent public company: Research in Motion (RIMM), Nokia (NOK), Sprint Nextel (S), and/or Cablevision (CVC). However, the stocks may fall first before getting saved by a suitor. RESULT – SoftBank thinks enough about Sprint Nextel that the Japanese telecom company invested $20.1 billion to acquire 70% of Sprint Nextel. Research in Motion survived the year but is on the ropes.
On Wednesday I will present My Gut Feeling For 2013 which will be available only to Wall Street All-Star subscribers.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long COWSF stock — although positions can change at any time.
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. You can subscribe at www.restaurantstox.com
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