Since 2012 is rapidly coming to a close, I’m fielding questions about what the future holds for 2013. My hope? That my answers will be both informative and instructive, and ultimately profitable, of course. Words: 1588; Charts: 2
So writes Louis Basenese (www.wallstreetdaily.com) in edited excerpts from his two original articles* entitled The 10 Most Important Questions – And Predictions – for 2013.
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Basenese goes on to say, in part: [For the sake of brevity I have reduced the number of questions down slightly to 8. Those interested in all 10 questions can read the original articles*.]
Is the financial sector on the verge of another collapse?
Not even close….The easiest way to track the threat of another financial meltdown is by monitoring credit default swap (CDS) prices. They represent the cost of insurance against a default and, despite increasing worries and chatter about another collapse, CDS prices aren’t signaling any trouble at all. In fact, prices continue to drop – recently hitting a new 52-week low, according to the Bespoke Investment Group chart below.
Do you really think higher taxes will force people to relocate to lower-tax states or countries?
Idle threats only apply to political contests. When it comes to money, though, people are dead serious. They vote with their feet…so expect tax-heavy states like California and New York – where some Americans could conceivably be taxed at more than 50% – to witness a mass exodus of citizens.
From an investment standpoint, I’d be wary of municipal bonds in tax-heavy states, as any exodus only promises to exacerbate already-troubled state finances. Instead, it might not be a bad idea to focus on bonds from Texas, Nevada and Tennessee – which are waiting with open (and untaxed) arms for new residents. High-end real estate in any of those states might be a good bet, too.
Who’s right? Bob Prechter’s “deflation then depression,” or Peter Schiff’s “runaway global inflation” and Jim Rogers’ “hyperinflation” – to quote just three gurus.
In short, none of the above. At least that’s what my crystal ball says. Then again, I’m only a second-rate guru, so my fortune-telling skills probably aren’t the most accurate.
Look, in all seriousness, the only thing that’s certain is this: we’re destined for some type of inflation in the years ahead. There’s no way to avoid it given the non-stop money printing by the Federal Reserve. The problem is, all that funny money isn’t circulating widely yet. Heck, it’s barely circulating at all. The latest figures from the Fed confirm that the velocity of the money supply (M2) remains at record low levels. Take a look:
Inflation’s not going to rear its ugly head in earnest until the velocity picks up. (FYI, you can monitor velocity here.)
While we wait for the inevitable uptick – and even when it hits – stocks remain one of the best hedges, based on history. So is the old standby, gold and, as I shared last Friday, gold-mining stocks look particularly attractive right now, too. They’re like a double whammy of inflation protection. Thus, I expect them to rally mightily in the year ahead.
You’ve been mind-numbingly bullish on stocks for all of 2012…but you can’t possibly expect the bull market to last well into 2013 – or can you?
Oh, yes I can! I’ve never shied away from making a bold prediction. That is, as long as the data backs me up and I can point to countless reasons why this bull market’s destined to endure like:
- investors keep hoarding cash, which is bound to eventually flow back into the stock market,
- eight other bull markets lasted longer than the current one,
- institutional investors still remain ridiculously underweight to equities…
- valuations and
- insider buying.
Consider: Over the last two and a half years, the price-to-earnings (P/E) ratio for the S&P 500 has never topped 16 yet during all other bull markets since 1962, the average P/E ratio checked in at 17.4. Based on that average – and the current P/E ratio for the S&P 500 of 15.1 – stocks could rally another 15.2% in 2013. That’s a conservative estimate, though, [because] bull markets typically end on a high note, at a P/E ratio of 19.9, according to Bloomberg. As Michael Shaoul, Chairman of Marketfield Asset Management, says, “[Bull markets] normally finish with a real burst of hyper-enthusiasm. We haven’t seen the beginning of that yet.” Not even close. In fact, if earnings don’t increase a single penny more, this bull market’s got another 31.7% upside left before it runs out of steam.[Regarding #5 above,] the latest actions by corporate insiders also signal that there’s plenty more upside ahead for stocks.
In late November, as stocks hit a short-term bottom, the insider sell-to-buy ratio dropped to 1.6-to-1. That’s well below the 10-year average of 3.4-to-1 and an eternity away from the 6.9-to-1 ratio we witnessed in early fall, when stocks hit a short-term high.
As MarketWatch’s Mark Hulbert said, “Insiders are more than four times more optimistic about their companies’ shares now than two months ago. This much insider enthusiasm is a good sign.” Indeed. So, yes, I absolutely believe the bull market’s going to last well into 2013.
…[W]hat’s your outlook on IPO activity for 2013?
…The IPO market mirrors the broader stock market. So as long as the bull market continues, we can expect the IPO market to keep humming along – churning out about 125 to 150 new opportunities over the course of the year. There are already 149 active IPOs in the pipeline. In other words, we’re locked and loaded for a strong year.
…Do you really think the fledgling rally in the Nikkei 225 Index is anything more than another head fake?
…I can’t think of a cheaper, super-low risk, high-reward trade than Japan right now and I’m no longer alone. “With expectations so low and the market having underperformed, we would not be surprised to see the sun also rise in Japan,” says James Hunt, Portfolio Manager of Tocqueville’s International Value Fund.
Just remember that the biggest threat to Japanese stock gains is still a weakening yen and when I say “biggest threat,” I mean BIG. Jens Nordvig of Nomura Securities expects shorting the yen to be one of the best investments to make in 2013.
Bottom line: The momentum’s building for Japanese stocks. The Nikkei 225 Index broke above the 10,000 level this week for the first time since April. Don’t miss out. Just don’t forget to hedge your currency exposure.
Is the United States on the cusp of another recession or full-blown economic collapse?
Nope. Although the fear mongers are out in full force, claiming that the Fiscal Cliff is going to cause another recession, a compromise will be worked out and, once again, we’ll avert disaster and avoid the dire impact on the GDP…
Truth is, the biggest threat the Fiscal Cliff poses involves consumer spending. The longer it takes to work out a compromise, the longer it’s going to take the IRS to implement the changes. The end result? “More than 60 million taxpayers would have to wait until late March or later to file their returns and receive a refund,” according to Paul Cherecwich Jr., Chairman of the IRS Oversight Board, in a November 19 letter to the Senate Finance Committee.
In dollar terms, we’re talking about roughly $200 billion in tax refunds getting delayed until the second quarter. That’s a whole lot of consumer spending being put on hold. Of course, any dip promises to be a short-term anomaly. One that’s incapable of derailing the prevailing economic trends, which include year-over-year increases for a multitude of indicators. Like manufacturing, housing starts and automotive sales, to name a few.
For the record, our country’s largest bondholders don’t appear particularly fearful of another recession – or outright collapse, either. If they were, they wouldn’t be buying up our Treasury bonds. As it turns out, they can’t get enough. Foreign ownership of U.S. Treasury securities hit a record level in October. China, the largest holder, increased its stake to $1.16 trillion. The second-largest holder, Japan (who knew?), increased its holdings to $1.13 trillion.
Add it all up, and I have no reservations predicting that the U.S. economy will not slip back into a recession in 2013.
Are you bullish on any particular commodities heading into 2013?
I’m a contrarian at heart, so my answer shouldn’t be too shocking: Go long coal and uranium!
Coal has been brutalized in the wake of soaring natural gas supplies. Prices have been hovering near two-year lows for the last six months…However, as natural gas prices keep rising, it’s going to “improve the competitiveness of coal” for power generators, says Prakash Sharma of Wood Mackenzie. I couldn’t agree more. I’m convinced that an uptick in demand from China promises to provide another boost.
As for uranium, the investment case is equally straightforward. The media might be overrun with headlines calling for the end of nuclear power. While that’s a nice thought, the world can’t live without nuclear. Even after the Fukushima nuclear disaster, Japan understands this. In October, Japan Oil, Gas and Metals National Corporation announced a joint venture with Uzbekistan to find uranium deposits. Japan simply realizes that it can’t meet electricity demand without cheap nuclear power.
A shortage of supplies is setting the stage for another dramatic boom for uranium. Invest accordingly, if you’re brave enough to be a true contrarian!
Ahead of the tape, Louis Basenese
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* http://www.wallstreetdaily.com/2012/12/19/10-important-questions-for-2013-part-1/ and http://www.wallstreetdaily.com/2012/12/20/10-questions-for-2013-part-2/
Barron’s have just come out with the forecasts of 10 top analysts and ALL their forecasts are positive. There is not a single forecaster who expects the S&P 500 to fall in 2013 and there is only one forecaster who expects the 10 year bond yield to fall from its current level of 1.7% and he only sees a 10 bps decline to 1.6%. [Look at the average forecasts for each item at the end of the post.]
Goldman Sachs has been out with a number of reports in recent weeks highlighting their positioning for 2013. While it’s important to keep in mind that these kinds of reports are no holy grail… it is always good for brain storming and, after all, it’s not like Goldman Sachs is a bunch of dummies.
While Treasuries are said to have no default risk as the Federal Reserve can always print money to pay off the debt, hidden risks might be lurking. As oxymoronic as it may sound, the biggest risk to the economy and the U.S. dollar might be, well, economic growth! Let us explain. Words: 2065; Charts: 1
Saving rates continue to fall. As full-time employment remains elusive, the average American continues to resort to debt, and governmental support, to fill the gap between waning real incomes and their expected standard of living….[This] will continue to impede economic growth until such time as either debt returns to levels that are conducive for higher levels of personal savings or incomes rise. [Words: 1322; Charts: 7]
[As the New Year approaches it is becoming more and more imperative that we] find our internal inner joy…[and] maintain our positive perspective…while the external world around us deteriorates thanks (actually that should read “no thanks”) to all those…who caused or enabled the current financial and economic trauma. We must face up to the fact that the current financial path of the United States is unsustainable and will probably not result in a “Happy New Year” for most Americans in 2013. As such, we must do something utterly different. Words: 620
Until policymakers see the light, it’s very slow and steady as she goes, with a chance of higher inflation on the horizon. This is not necessarily bad for the stock market, however, since I continue to believe that both stocks and bonds are priced to the expectation that growth will be very weak or even negative in the years to come. Words: 696