By Thomas Hughes
Signs of economic improvement are far from certain. There are still many hurdles, here at home and abroad. The eurozone remains a question among many traders. Despite record deposits at the European Central Bank overnight lending facility, eurozone banks are struggling to raise cash to comply with new regulations.
China is expecting to slow by at least a half percent in 2012. After growing at double-digit rates for the past three decades, many fear China is entering a period of economic contraction. Though China blames the slump in part on the US and Europe, it does take some of the blame. The Chinese say government efforts to curb inflation are also at fault. International slowing will affect the US in 2012. Global growth is being estimated at 1-1.5%, a decline from 2.5% in 2011.
Problems at home are impeding our own recovery. Total US growth will be less than 2% for all of 2011. In its December statement, the US Federal Reserve says it expects near term growth to remain the same, but has lowered outlook for later in the year. First quarter 2012 should be around 1.8%, with a decline in the second half. The job market is still a problem. The average unemployment rate fell in December to the lowest level in 3 years, 8.5%; however, the Federal Reserve Statement said “long term unemployment ...remained elevated.”
Global recession will continue to impact our own recovery in terms of jobs, consumer spending, revenues and profitability. Several Dow components are in a particularly bad position going into 2012, and I expect to see declines in their stock prices.
American Express (AXP) is number five on my list for worst expected performance for 2012. Last year, we predicted that American Express would be an outperformer. Although revenue was up 9% for the first three quarters of the year, outpacing expenses, share price hasn't responded favorably. Fourth quarter earnings will be reported January 23 with better 2012 guidance. Analysts' full-year estimates for 2012 are up. The current average estimate is for American Express to earn $4.18/share vs the $4.05 for 2011. In his statement at the third quarter conference call, CFO Daniel Henry attributed AXP's success to growth in billed business, increased membership and card usage.
However, American Express is exposed to the same danger as the other mega financial companies: slow and stagnant worldwide growth. This will hurt consumer and business spending, keeping the US recovery in check. Consumer spending has been down for more than two years and is not improving. Consumer-driven spending has been revised down for 2011 to 1.7%. Competitor Visa (V) has been performing much better over the past year. Visa's third quarter earnings grew despite a drop in total revenue over the previous year. Total year revenue is expected to have grown 9% in 2011.
American Express has been volatile for over two years, trading sideways since late in 2009, with little reason to advance. American Express is fairly valued, but the dividend rate is only 1.5%. Bull markets in the majority of the Dow Dogs last year prove dividends are a catalyst to buy. I expect to see American Express's share value to lose as much as 20% in 2012. It is currently trading around $48, with its next support at $42.50. Since there is no reason to expect earnings surprises, and a low-yielding dividend, investors and traders will look elsewhere for opportunities. Lack of interest will bring American Express down.
Caterpillar (CAT) had it pretty good this year, and is looking for more in 2012. Earnings this year will reach an all time record, but sales included earnings from recently acquired Bucyrus. Caterpillar made the acquisition in order to extend its line of mining equipment, meeting the demands of emerging economies. Growth is expected to continue into 2012 despite downward revisions of global growth. The expected one-year EPS growth rate for Caterpillar is over 60%, which leaves plenty of room for disappointment. I think expectations of future growth have already been factored into share price. Now Caterpillar must continue to perform in line with those expectations.
Caterpillar had been trending strongly, but corrected this year. At one time CAT reached all time highs over $110. This peak was a 600% gain over lows experienced following the US financial crisis. CAT is currently trading around $95, 5% below an important resistance level. The long-term indicators are bearish, and short interest has been growing. The short interest reached a low over the summer of about 12 million shares, but is currently near 1-year highs around 17 million shares. There may be a small short covering rally going into the new year, but expect to see a decline of about 20% for the year.
Alcoa (AA) has been disappointing investors as aluminum prices declined in the second half of last year. Third quarter earnings, while above the previous year, fell short of expectations. Alcoa is expected to meet full year estimates for 2011, but in 2012 will have to manage decreased demand as well as a rise in total aluminum availability. Aluminum production worldwide increased nearly 6%, even as prices declined. The price of aluminum has dropped 29% since reaching a high in May. Alcoa's exposure to commodity pricing and the global economy will make it extremely difficult to post impressive numbers. Alcoa has been trending down all year and is nearing its support zone. Bearish momentum and low global growth expectations will bring AA down around 47% to $5.
Bank of America (BAC) will decline 50% in 2012. Bank of America is still facing many challenges as it rebuilds itself. Damages stemming from the sub-prime mortgage crisis will persist into 2012. Bank of America paid $335 million to settle one suit in 2011 alleging discrimination against qualified buyers. Another $8.5 billion payment is being argued over right now. The settlement has been taken over by a federal judge, leaving Bank of America open to more charges. Bank of America has also failed to produce any real earnings. The $6.2 billion profit reported in October of 2011 was mostly creative accounting. New regulation and the growing popularity of small banks are another major obstacle for BAC. Higher cash reserves and limits on charges imposed by the Dodd-Frank Act will come out of the bottom line.
Bank of America is currently trading around $5.50, with negative earnings. Its meager dividend of .7%, high debt, weak earnings, lack of appeal and exposure to Europe will keep serious investment at bay. Regional banks such as Fifth Third Bancorp (FITB) are more attractive. They have limited risk and exposure and have been outperforming the Financial Spyder (XLF). FITB is currently valued at ten times earnings and yields 2.4%. Bank of America will decline in 2012 to its all time lows around $2.90.
My number one decliner for 2012 is Boeing (BA). The airline posted increases on revenue and earnings this year. The company had a 4% rise in third quarter revenue, resulting in a 30% rise in per share earnings. Gains are primarily attributed to an increase in demand from Asia. Boeing is projecting growth in line with an expected 3.3% average global expansion for the next twenty years. The bad news is that expected growth in 2012 is only half that. Over the long term, Boeing will probably meet expectations. Investment in aircraft is a long-term affair. In the near term, it must weather an impending recession in Europe and slowing growth in China. Officials in China are estimating growth in the country will slow to 8.5% as efforts to stem inflation take hold.
Boeing's ten year projection has been priced in by the market. Now profit taking and fear of global slowdown will trim it back down. I think we'll see BA decline by 60% over the next year. BA is weakly pushing up against its long-term resistance around $74. The activity on opening day 2012 does not encourage me. The momentum is waning and is indicative of a pullback. The first support zone is $55, a 26% decline, but a break from there will bring BA down to $30.