Looking out to 2012
Larry Berman, Berman's Call
11:53 AM, E.T. | December 19, 2011
Canadian
As we approach 2012, most assets in the world are under some degree of stress. We expect that stress level to rise as 2012 progresses.
Typically, the fourth year of a presidential cycle is positive for equities, but that bias will likely be significantly challenged this year. In the short-term, we have positive seasonals, good earnings and potentially a big band-aid for European debt where the European Central Bank (ECB) provides swaps for up to three years so that European banks can buy an unlimited amount of 3-year sovereign debt. That will serve to keep the cost of refinancing Italian and Spanish debt reasonably low.
But with the austerity expected in 2012 and beyond, this is merely a band-aid, not a solution.
At some point in 2012, the bond vigilantes will again force the ECB's hand and European systemic risk will likely be a major factor for most of the year. This -- combined with a clear slowing in China, India, and other emerging markets -- will likely add headwinds to earnings.
We do not see any earnings growth in 2012 and the risk of a slight contraction in earnings is likely. In past recessions, earnings typically decline 20-25 percent. So if the fair multiple on the S&P 500 falls to 12 times, that suggests we might test below 1000 next year.
For the TSX, what gold and oil do will be a major determinant of the market outcome. Both are likely to be under some pressure in the first half of the year. We see crude oil falling back towards $70 US, while gold probably does not fall much more, but if a parallel 30 percent decline -- like we saw in 2008 -- plays out, the downside target is around $1350. We do not expect it to drop below $1500 and we do see a scenario where gold tests $2100 later in the year.
Much will depend on where the U.S. dollar trades relative to the euro. We see a low between 1.20 and 1.25 -- that is, if we do not see a default. It could fall significantly lower should an uncontrolled default develop.
Many of the global commodities priced in U.S. dollars could also be under some stress. The risk of an Iran conflict over their nuclear ambitions this year is probably 25 percent, or slightly more given recent rhetoric. This will be an ongoing issue for years, but we do not see an acceleration led by the U.S., given its focus on cutting back on military so that Obama can keep at least a few election promises -- unless they have concrete proof, as Americans will not buy another Weapons of Mass Destruction story.
Nevertheless, a supply spike in WTI cannot be ruled out and some of the risk seems to be priced in at present. Look for the S&P 500 to top out in the first few months of the year no higher than the 2011 high of 1370 and hit new lows than we saw in 2010 and 2011. The TSX, depending on how commodities play out, will also see lower lows in 2012. Any short-term bounce will likely be contained to the 12,700-13,000 resistance range.
Happy holidays and good trading in 2012 -- we'll need it! |
