I have divided this article into 2 sections. The first is for investors with a long term horizon of 3 years or more, and the second is for traders with a shorter term horizon of under a year. I have made 3 suggestions for each.
Investors (3 year time horizon)
My top 3 investment ideas for 2012 in order are:
1. Cash (60% of portfolio): I expect the overall stock market to be slightly down in 2012, but the really bad years for the markets will be 2013-14. My expectation is for the market (as represented by the S&P500) to decline to approximately 1150 by year end 2012. My lows for the year will come in the region around 950-975, with a chance that 1000 holds and we do not see anything in the 900s. Less fiscal stimulus will be countered in the markets by more QE, and this will keep the markets from falling far. However, the real economy is little affected by QE, so earnings will be topping out in 2012.
The present 8.9% net profit margin for the 3rd quarter of 2011 is unlikely to be improved, so any increase in earnings will need to come from improved sales. Increasing sales in a very slow growth economy is going to be difficult. Housing will not bottom in 2012, but will start to stabilize at a level 10% below existing prices at the end of 2012. Housing will cease to become a drag on the economy from late 2012 onwards. However, it will be some time before housing really aids the economy.
Overall real growth for the U.S. economy will be under 1.0% for 2012. At present, growth as measured by the income method for estimating GDP has been 0.2% for the last 2 quarters. This is likely to be much nearer the actual rate of the economy. In future years the government will revise the official figures down to close to these levels. I cannot see much change for 2012, hence the under 1% call. Please note that the first headline figures will probably be over double this, but will be revised down later. At present, the private sector is not able to fill any gap left by reduced government spending (the CBO estimate of the 2012 budget deficit is presently $1101bln, a reduction of $198bln from 2011). With reduced spending from the government, growth will weaken from the 1.7-2% estimated level of 2011.
I do not see a crisis in Europe in 2012, just an open sore that will not go away. Greece will be forced or decide to leave the Euro, but will be the only country to leave. However, this will be managed, and produce the lows in the S&P500 for the year. The Euro will continue to fall throughout the year helping the continent to offset internal devaluation.
I would expect world growth to fall in 2012 to around 2.5-3%, with China slowing to around 7%. China will not stimulate its economy on a large scale, but will ease monetary policy. Latin America and Asia has seen the worst of the monetary tightening and growth rates and inflation will be stable going forward. Slow growth in all Western economies will cap world growth at levels lower than 2011.
All of this means that if you have a longer investing horizon, I would recommend staying in cash for the whole year. I do not think that 2012 will see the ultimate lows for this bear market in equities, and I will not be using lows as a long term buying opportunity. I anticipate long term buying opportunities are at least 2 years away.
2. Gold (20% of portfolio): Gold has likely not bottomed yet but I would use any periods below $1500 to start accumulating gold to be approximately 20% of any portfolio. If you are presently in gold, I would stay in. It is possible gold can fall as far as $1313, and I would accumulate in 5% lots to get to 20%. It's then Gold 'n' hold (thanks to Rex for coining this phrase) for a trade to $2,000. I do not think physical gold is required and I would be happy to purchase ETFs. I would suggest researching which ETF has the best price in relation to its physical holdings of gold when you are ready to buy. I would not want to buy an ETF with a premium to asset value. QE has been a boon for gold and that is likely to be the case going forward. That's my reasoning, nothing more, nothing less.
3. Corporate bonds (20% of portfolio): I would have this allocation now and would not change it during the year. I would purchase duration of under 10 years in single A to BB with yields in the region of 6-7% in non banking firms. If the 10 year treasury goes to 1-1.25%, I would advise shorting the 10 year to protect the capital value of any holdings using either single leverage ETFs or the futures market.
For all long term investors, I repeat-- STAY OUT OF STOCKS IN 2012. Do not be tempted back in by the low valuations. The P/E compression is being delayed by central bank intervention. In most post war recessions TTM p/e's have fallen below 10. They have not done that yet in this period, but they will. This will be the time to be a long term buyer.
The only risks I see to these central prediction are:
1. QE gets out of hand. In the short term this would be more positive for stocks. Out of hand for me would mean the economy still growing and QE in the year of $2 Trillion. Just can't see this but you never know!
2. The economy goes into a recession brought on by a world growth problem. QE will not be enough to offset this and the market will fall and not recover in the year. Again, this seems unlikely in 2012, as world growth looks to be slowing but not falling off a cliff.
3. JGBs collapse in 2012. This looks to me to be a 2013 trade but it is possible. The market will go lower and stay down if this happens.
1. Stocks - This rally looks like it will take the S&P500 above 1300. I will add to present shorts (I presently have half of the positions that I want) if it goes above 1300. I expect Greece to leave the Euro and will cover the shorts into any falls, if this happens in the first half of 2012. I expect the lows to be below 1000 S&P500. It is likely that a rally will then develop, which I will be a buyer of. However, if I am wrong and the market goes above its 2011 high in the 1360 region, I will exit the trade at a loss. I am using RWM as my option as it is acting like a leveraged S&P500. I have also been using the DAX as a shorting tool. It is very liquid, trades all day and is cheap to trade.
2. Gold - This is the same trade as highlighted above in the investing section. My selling area will be around $2,000 but I only expect to see that in 2013. I have not set a downside stop loss. Gold will be a 12 month trade if I can get the right entry point.
3. Euro - Sell the Euro into any strength. I have no position now, but will short any upside short squeeze of over 5%. In today's world, this is possible at any time. This waiting game has not proven successful so far as there have been no 5% rallies. However, there is a MACD bullish divergence on the daily charts of EUR/USD and we may soon get the rally I am waiting for. I am looking for a retest of 1.18 during the year and will exit at this point. It may go lower than this, but not with me on board! The dollar is not a long term buy, just a short term one. Just as an aside, the short Yen trade looks early to me. I would guess 2013 for that one.
Whatever you think of my predictions, I wish you a successful investing 2012.
Additional disclosure: Long RWM and a selection of UK corporate bonds. Long RIMM
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.