2012 Forecast And 2011 Scorecard

by: Glenn Rogers

The Chinese have a well-known curse: "may you live in interesting times". Well, it has come to pass. The year just finished was about as interesting as they come. It began with the popular uprisings, now referred to as the Arab Spring, which started in Tunisia last January, spread to a number of Middle Eastern countries including Egypt and Libya where long-time dictators fell, and is now rocking Syria.

Then came the magnitude 9.0 earthquake and resulting tsunami which devastated Japan's northeastern coast, killing nearly 20,000 people and triggering the worst nuclear accident since Chernobyl.

We were just getting over that shock when news came of the assassination of Osama bin Laden. While all this was going on, the European debt crisis escalated and the U.S. Congress engaged in a game of chicken over the debt ceiling that contributed directly to the country's loss of its AAA credit rating. We saw American forces finally pull out of Iraq, leaving that country on the brink of a sectarian civil war. As the year wound down, the confrontation over Iran's nuclear ambitions escalated, raising fears of yet another Middle Eastern conflict. Interesting times indeed!

All that geopolitical activity led to astonishing volatility in the stock markets. The major indexes experienced wild daily and weekly swings, testing, investors' courage and resolve. At the end, major indexes in the U.S. were basically flat, a performance which was only bested by the Philippines, Indonesia, and Venezuela. So the U.S. came in fourth in the ugly girl contest, which compared well to the emerging markets of Brazil, Russia, and China, all of which were all down more than 20% for the year. India, the other initial in the BRIC acronym, lost nearly 30%. Europeans fared no better. Germany was down 17.5% and France lost 17%. In Canada, the market was down 8.7%, which looks relatively good compared to all the previous numbers.

The biggest loser? Why Greece, of course - no surprise there. The Greek market, which is very thin, plunged more than 58%.

So much for 2011. What does it mean for 2012?

I just finished reading the Barron's Roundtable forecast issue and the participants were extraordinarily gloomy about the economic prospects for this year. One panelist even raised the spectre of a global world war coming in the next three to five years!

Most of the panelists focused on the huge public debt that nations around the globe have piled up. They predicted massive money printing by global central bankers, which could either result in deflation as economies slow or bring on massive inflation if the money supply keeps expanding and growth accelerates. So pick your poison.

Overseas, the European debt crisis is not resolved and there are signs that growth in China is slowing. Then there is the ever-present threat out of Iran. All this could give us lots of reasons to be pessimistic for 2012. However, as one of the panelists noted, the world doesn't end often so don't lose all hope.

Here's my best guess for this coming year. The U.S. will be the safe haven again. Treasury markets will still be active, driven by fear and uncertainty. Equity markets will exhibit less drama in terms of wild daily swings but overall performance will be tepid until after the elections next November.

Speaking of the elections, my prediction is that the Republicans will take control of the Senate by a narrow margin and retain the House with a smaller margin. Obama should get a second term in a squeaker. This will be good for stocks in that a divided government tends not to get much done and therefore tends to do less harm. That may be a negative point of view but history shows it's usually right.

At some point, if Europe doesn't implode (and that's a big if), the macro environment for equities will begin to improve. Money will start to flow to risky assets like emerging markets and commodities. But we need to see how Europe plays out before we can make that call.

So keep at least 25% of your assets in cash, 15% in gold, and the rest in high quality, dividend-paying securities for the first half of the year until we see how all this plays out. If the pessimists are right, you should be okay and ditto if things continue to gradually improve. Those of you who are optimists should keep your eye on financials, homebuilders, and companies related to construction since we appear to have hit bottom in the housing markets.

A look at past picks

Gordon asked me to review a few of the stocks that I recommended last year and to tell you whether I still advise holding them in 2012.

Let's begin with three large restaurant chains that I picked late in the year: Yum Brands (NYSE:YUM), Starbucks (NASDAQ:SBUX), and McDonalds (NYSE:MCD). The premise was that people have to eat and drink no matter what the economic conditions may be. All these companies provide food services very effectively and at a reasonable cost to the consumer. All are U.S.-based but have a global footprint with a growth story in emerging markets including China. They are all financially strong and pay dividends. I still like them all although McDonalds is looking fairly valued here so I might take some profits and add to Starbucks and Yum. But if you'd rather just stick with MCD, it's no problem: it's a safe place for your money to hang out while we see where the world is going.

MCD was recommended in September at US$88.29 and closed on Friday at US$101.74 for a gain to date of 15.2%. SBUX was picked at the same time at US$39.20 and is now at US$48.15, up 22.8%. The YUM recommendation was made in October at US$53.74 and the stock finished on Friday at US$62.48 for a profit to date of 16.3%. So far, all three are performing as expected.

Action now: Hold all three.

Earlier in the year I recommended two China-based internet stocks: Baidu.com (NASDAQ:BIDU) and Youku Inc. (NYSE:YOKU). Baidu is the Google of China and finished the year about where we recommended it. That means it outperformed the Chinese markets by 20% but wasn't a home run by any means. I still like this stock and continue to believe that it gives you good exposure to China and provides a great opportunity for growth with a reasonable level of risk.

Youku is the Chinese equivalent of YouTube but its performance has been grim. I recommended it at US$34.50 after it had dropped nearly 50% from its high, thinking it had bottomed out. As it turned out, it wasn't even close to the bottom. The stock dropped another 60% to a low of US$13.76. Since then it has risen 52% off its lows and seems to be basing at these levels. If you are still in this issue I would suggest selling into any rally and moving the money into Baidu which is still off its highs by 23%.

Action now: Buy Baidu, which closed on Friday at US$122.80. Sell Yoku which finished the week at US$20.97.

Staying on the U.S./China story, I also recommended Las Vegas Sands Corp. (NYSE:LVS) at US$44.13 last April. The stock has had a wild ride, ending up this week at US$46.46. The volatility seems to be settling down and I still like this stock despite the fact that Sid Adelson, the chairman and CEO of the company, just gave $5 million to support Newt Gingrich's run for the Republican nomination. He can afford it since Adelson is the eighth wealthiest American and the 16th wealthiest person in the world. The company has great exposure to Asia both in Macau and Singapore along with the Las Vegas properties which will continue to improve with the economy.

Action now: Buy with a target of US$55.

Finally, I recommended The Walt Disney Company (NYSE:DIS) late last year at US$36.56 and it closed on Friday at US$39.31. I still like the stock other than its Euro Disney Park which doesn't account for much of the earnings. The parks were busy over the holidays in the U.S.; in fact they were turning people away. The television group should be very strong this year with all the political advertising coming up.

Action now: Buy with a target of US$45.

Disclosure: I am long YUM, DIS.