12 Predictions for 2012

Here is what other market sage are saying
* Byran Wien
* Doug Kass


12 Predictions for 2012
1) Barack Obama will beat Mitt Romney with or without the entry of Ron Paul as a 3rd Party candidate.
2) Republican will take the Senate while the House falls to Democrats.
3) European crisis will persist through year-end but will not spill into the US because European policymakers will react to contain the problem whenever it arises. Greece/Italy stay in the Euro.
4) Iran vs the world drama continues and that'll add volatility to the oil market but there will be no attack against Iran.
5) China's 2012 GDP growth will surprise to the downside i.e. below 8%.
6) US 2012 GDP growth will surprise to the upside - current consensus is ~2.1%.
7) By December, US non-farm payroll growth will reach 250K and the unemployment rate will fall below 7.5%.
8) The Fed will not shrink its balance sheet.
9) Yield on 10-year will end the year above 3%.
10) S&P500 will finish the year above 1,400 i.e. +11%.
11) Financials will be the best performers followed by tech and consumer discretionary.
12) No, the world will not end on 12-12-12.

S&P500 - Fibonacci Levels

Mutual Fund Underperformance

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Swiss Franc & Singapore Dollar Swap Spread Turn Negative

Swiss 2-Year Yields Turn Negative, 10-Year Yield Down the Most Since 1994
Bloomberg, 18-Aug-11
By Keith Jenkins

Swiss two-year note yields stayed negative for a second day after central bankers announced more measures to weaken the franc, showing investors may sacrifice capital for the perceived safety of investment in the currency.

The Swiss two-year note yield fell five basis points to negative 0.06 percent at 4 p.m. in London as stock markets slid around the world. The yield yesterday slid 10 basis points into negative territory, indicating investors will receive less when the bonds mature than the sum they paid for them. Ten-year Swiss yields tumbled 19 basis points today, the most since Bloomberg began collecting the data, to 0.86 percent. (>>>)

Negative swap rate signals Singapore rethink on SGD rise
Reuters, 17-Aug-11
By Kevin Lim

Singapore is attracting an unwelcome flood of U.S. dollars that has caused a key interest rate to turn negative, complicating efforts to dampen inflation and prompting speculation the central bank will tweak its policy to slow the rapid rise in the country's currency.

While Singapore prides itself on having a highly globalised and open economy, the stream of investors seeking refuge from international market turmoil in recent weeks could fuel price pressures on the tiny island, adding to fears of a potential property bubble, even as the economy shows signs of slowing.

That could persuade the city's central bank to reconsider its policy on allowing further appreciation in the local currency. (>>>)

The Missing Link

The Missing Link
The Economist, 19-May-2011

Economic growth helps investors only if they are clairvoyant

IT MAY seem obvious that faster economic growth should translate into higher equity returns. So it was quite an upset when academics found some years ago that this had not been the case in advanced countries over the 20th century. A subsequent paper discovered that the story was similar for developing economies as well.

These findings are awkward for emerging-market enthusiasts, who usually cite the superior growth prospects of such countries as the reason to invest in them. The counter-attack has duly been led by Jim O’Neill of Goldman Sachs Asset Management, who as a strategist coined the wildly successful BRIC acronym for the big developing economies of Brazil, Russia, India and China. Yet the surprise is not only that the response has been so long in coming but that the case it makes is so limited.

The Goldman paper admits that there is no evidence that equity returns for any given year are correlated with GDP growth in that same year. But it says that “equity markets are a lead indicator of GDP growth and react strongly to expectations about the future.”

This conclusion is hardly new. Stockmarket movements are a standard component of economic lead indicators. But this link is of little use to investors, who are looking instead for a lead indicator for equity performance.

Goldman argues that investors can take advantage of upgrades in economic-growth forecasts, which signal better prospective returns especially in the developing world. But its evidence for this claim is quite limited (just ten years of data for Brazil and Mexico, for example). If one takes the American market over the past 40 years then there is a negative relationship between changes in growth forecasts and equity returns.

This raises another doubt about the Goldman analysis. It is rather dismissive of the long-term stockmarket returns compiled by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School (LBS), who published their findings in 2005. “Averaging over a century fails to account for potentially important structural breaks and changes in the way economies and markets operate,” the report says somewhat sniffily. But the data are the data; it is not scientific to leave out large chunks of evidence.

But what if superior GDP growth showed up in stockmarket returns not immediately but over a prolonged period? The LBS academics tackle this issue in their 2010 work, the “Credit Suisse Global Investment Returns Yearbook”. They take the records of 83 countries from 1972 to 2009 (the most comprehensive set available) and rank them by GDP growth over the previous five years. Investing each year in the countries with the highest economic growth over the preceding five years earned an annual return of 18.4%, but investing in the lowest-growth countries returned 25.1%.

The interesting question is why this phenomenon should occur. One explanation is that investors pile into the stockmarkets of high-growth countries until they become overvalued. That herd-like behaviour makes their subsequent returns disappointing.

Another possibility is that economic growth does not always get captured by the stockmarket. The fastest-growing companies are often unquoted: in emerging markets, for example, many businesses are family-owned or controlled by the state. Even when businesses are quoted, their growth may be financed by additional equity issuance that does not boost the returns of existing shareholders. One paper suggested that this effect could reduce returns by as much as two percentage points a year.

Although analysts often forecast annual profits growth of 10% or more, the LBS academics found that dividends failed to keep pace with GDP growth in every developed country (bar one) they studied between 1900 and 2009. Re-invested dividends are a vital component of long-term equity returns.

If investors could forecast future economic growth, then Goldman would be right: superior returns would be achieved. But there is precious little sign that such clairvoyance exists. And the evidence that past economic growth is of no help remains pretty compelling.