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What's New, 1/10/12

The following was posted yesterday under "Summary" on my LinkedIn profile.

What’s new 1/10/12: This week Merkozy, Italy/Spain debt, ECB, France rating?, China RRR?, CES. 4Q earnings est +6%, slowest since 9/09. Last week better than expected US employ, ISM, China/global PMIs. German orders weak. WLI agr declines. Global earnings revisions remain negative but flattening, Europe worst.

Indexes: SPX 1292 +2.7% ytd (see 1/11/12 chart below), at Oct high, bulls upper hand above ~1260. Rotation from 2011 lead, staples, util, to lag, matl, fncl. Will underperforming pm's chase rally in seasonal strong Nov-Jan aided by ECB Dec LTRO lowering bank funding concerns? Better US econ, low val vs Euro debt, EM growth; 4Q earn may decide. Rs trending pos SPY, KRE, XHB; neg ACWX, EEM, BKF. Shanghai +4% ytd.

Consensus forecast: 2012 year-end SPX around 1350, up 7% from 2011 at 1258, with eps $105, p/e 12.9x. 2012 global economic growth will slow to around 3%, narrowly missing global recession (below 3%), with US 2.1%, Europe -0.5%(or worse), China 8.6%. U.S. econ forecasts increasing, surprise indexes near peaks. Intl forecasts decreasing.

Consensus assumptions: Europe muddles thru. Second big ECB LTRO bank refi, more SMP country debt. Euro drifts lower. Greece defaults (NYSE:PSI). French/Greek April elections don't undo 12/9 treaty deal. US decoupling. Margins won't decline in 2012. Consumer resilient. Housing bottomed. QE3 50+%. Romney candidate. AAPL uptrend, Facebook IPO. China soft lands, further RRR cuts, leader change okay. EM risks contained. Oil not >> $100 on Iran. Metals remain weak.

Asset allocation issues: Falling VIX chance to hedge against downside tail risk from Merkozy "game of chicken" with Italy debt, Greece default, deleveraging? Are low global valuations underestimating upside tail risk as monetary policy further eases? Will slow global economy be good for corporate credit risk? Will correlations between/within asset classes retreat from highs (starting to decline)?