This is the time of the year that every pundit and magazine makes its predictions for the New Year. Not wanting to be left out of the conversation, here are my five bold predictions for 2013:
Prediction #1 -The euro will end the year at under $1.20
EuroGroup President Juncker recently went on record stating the Euro is "Dangerously High". With German growth decelerating to less than 1% for all of 2012 and with further declines expected in 2013, the main growth engine in Europe is sputtering. In addition, unemployment has reached over 25% in Spain and Greece while France is becoming more uncompetitive by the day under its new socialist government. It's hard to see how the euro will be a strong store of value in this environment. In addition, I would look for the ECB to join its central banker brethren in the United States and Japan is initiating more Quantitative Easing after the German elections are concluded in late summer.
Investor action: Avoid multi-nationals with a large amount of sales in Europe. Short the euro through the futures or an euro-Index like (FXE).
Prediction #2 - Domestic job growth will remain anemic and will average less than 100K monthly jobs by the 4th QTR
With the administration again choosing and prioritizing efforts (e.g. Climate Change legislation, expansion of civil rights) outside focusing on job creation and the job killing aspects of Obamacare becoming quite apparent by the second half of 2013, job creation will slow to less than 100,000 a month by the end of the year. With the continued expansion of government benefits (welfare, food stamps, jobless benefits, disability criteria …etc.), 2013 will be another year where more people drop out of the workforce than find jobs. This trend does not bode well for long term trend GDP growth or overall productivity.
Investor action: Avoid restaurant chain stocks (especially on the low end) that will be hit by both the mandate portion of the Affordable Care Act and by the recent expiration of the payroll tax holiday.
Prediction #3 - 2013 will see a marked increase in M&A activity
Corporations have done a highly effective job of taking costs and labor out of their processes over the last few years. In addition, thanks to the Fed's largesse they have been able to retire or refinance debt on very favorable terms and their balance sheets are in the best shape in decades. Unfortunately, will no growth in Europe or Japan and tepid job as well as GDP growth domestically; organically increasing sales and earnings will be a tough slog in 2013. Corporations with their pristine balance sheets will increasingly try to buy this growth through acquisitions. Private equity should also continue to be a major player in this space as the recent events at Dell (DELL) show.
Investor action: Increased M&A activity will be good for investment banks like Goldman Sachs (GS) and JPMorgan (JPM). This should also be a positive for the small cap index. One of my favorite small cap plays on a possible buyout as well as a robust dividend yield is Friedman Industries (FRD).
Prediction #4 - The Fed will start to ramp down QE efforts sooner than the market expects
It should be apparent to the Fed by the end of the year that their QE3/Infinity efforts are having limited impact and are leading to non-optimal outcomes by year end. A) The Fed's buying time for the politicians to get their act together will prove to be wasted and no "Grand Bargain" will be negotiated leading to continued trillion dollar deficits. B) Housing and other core sectors (e.g. food) will start to show signs of increasing inflation as we get further into 2013. C) This will have unexpected negative consequences (See prediction #5).
Investor action - This will be the year that interest rates start to rise and the forces of stagflation gain a toehold. Lessen exposure to bonds. Aggressive investors can short government bonds through an Index like (TBT).
Prediction #5 - Turmoil in the Middle East and North Africa will increase significantly in 2013.
Iran will either be stopped or pass the point of no return on building an atomic bomb in the coming twelve months. Syria will continue to unwind into an even bloodier civil war. The outcome in Egypt is murky at best. In addition, the huge increases in local food and energy prices caused partly by the monetary easing efforts across the developed world should have unpredictable impacts, much like they were a contributing factor to the start of Arab Spring in Tunisia in the early 2011.
Investor action: Buy protection on your portfolio in times volatility is low like now. Avoid multi-nationals with significant assets in these regions.
Bottom Line: 2013 will be a true stock picker's market. Despite many causes for concern, I expect the indexes to end the year within five percent up or down from where they began the year with large spikes in volatility. Be careful out there and happy hunting.