First Mr. Saut of Raymond James weighs in:
http://www.raymondjames.com/inv_strat.htm
Year-end letters are always difficult to write because there is a tendency to either discuss the year gone by; or worse, try to precisely predict what is in store for the new year. Nevertheless, 2012 has arrived, and as the Year of the Dragon, I thought I would share these thoughts with you from California Psychics, written by Psychic Verbena (as paraphrased by me):
However, that is not true for Barronâs requisite curmudgeon Alan Abelson, who writes in this weekâs edition, âItâs so darn tough, try as we might, to dig up genuine cheerful news.â Barronâs Bellyacher goes on to lament, âScouring the economic and financial landscape for bright spots can also be something of an exercise in futility.â To which I reply, âHow can we all eat at the same table and then disagree about whatâs been served?!â Indeed, of the 45 economic indicators I track only three are not showing stronger growth readings. Those three are Michigan Consumer Confidence, The Case Shiller Home Price Index, and The Average Work Week. More specifically, railcar loadings tagged new all-time highs recently, credit card delinquencies have plunged to a record low, regional PMIs (Purchasing Managers Index) are stronger, pending home sales are improving, job surveys are better, real retail sales are on track for a +7% rise quarter over quarter (annualized rate), and unemployment claims are falling. So I ask it again, âHow can we all eat at the same table and then disagree about whatâs been served?!â
Continuing on the fundamental tack, itâs worth noting there is a global interest rate easing cycle underway and that crude oil is back below $100 per barrel. These are not unimportant observations because every stock market rally since last summer has been thwarted when oil traveled above $100 per barrel. Moreover, with the extension of the existing tax and unemployment benefits, real GDP is more likely to approach 3% in 2012. Speaking to earnings, while fourth quarter earnings have yet to be reported, based on current estimates the SPX is on track to earn a record $97. Surprisingly, for the past 11 months my estimate for the SPX has been $96, yet many of Wall Streetâs finest scoffed at such an optimistic number. My estimate for 2012 has been $106 for nearly a year, and I still feel comfortable with that estimate provided we donât talk ourselves into a recession.
As for the technicals, by my work we experienced another Dow Theory âbuy signalâ last week when both the DJIA (INDU/12217.56) and the DJTA (TRAN/5019.69) bettered their October 2011 closing reaction âhighs.â This week we may see another positive occurrence called a âgolden cross,â that is if the DJIAâs 50-day moving average (@11934.29) crosses above its 200-DMA (@11946.57). That said, the NYSE McClellan Oscillator is short-term overbought and the stock marketâs internal energy has not yet been fully recharged. Accordingly, after the equity markets pop their collective âcorksâ with an early January upside blow off, it would not surprise me to see a pullback attempt. One thing is for sure, the volatility remains legion, for as the eagle-eyed folks at the Bespoke Investment Group write:
The call for this week: Since the day after Thanksgiving I have stuck with the strategy that the Santa Claus rally had begun. On November 25th the SPX was changing hands around 1158. We are now 100 points higher. Consequently, I would not chase the dragon right here since I anticipate that an upside blow off is due ...
And then Mr. Doll:
Bob Doll Weekly Investment Commentary - 2012- A Look Ahead
And to make it a hat trick here is Mobius and colleagues on emerging markets:
While emerging markets were considered a niche or âexoticâ investment when I started investing in the late 1980s, many investors are now familiar with them and Iâm seeing more and more investors turning to emerging markets as a way to diversify their portfolios. Yet, emerging markets themselves are not a homogeneous zone. Within the emerging markets universe, we believe frontier markets as a whole have begun to take an impressive lead in terms of growth.
Frontier markets, as their name suggests, could be described as ânew or younger emergingâ markets. Located throughout Asia, Africa, Europe and South America, they are often in a much earlier stage of economic development than larger emerging markets and many have only recently opened to foreign investing. This helps explain their high growth potential. Newer markets typically have more room to grow and the search for growth potential amid acute global volatility is encouraging many investors to expand their horizons.
We believe the advance of many frontier market countries toward emerging market status gives them and their investors economic opportunity, although itâs important to keep in mind that the risks of investing in emerging markets are magnified in frontier markets. Access to capital markets is a key ingredient to high and sustainable private sectorâled growth. Political uncertainty has meant this access has long seemed out of reach for many of these countries until recently. As these countries move ahead, their governments are taking the steps necessary in an effort to help support sustained, steady growth, making them intriguing long-term investment opportunities with attractive potential, in my opinion.
In this weekâs blog, I asked my colleagues Johan Meyer, Senior Vice President of Equity Analysis in sub-Saharan Africa, and Claus Born, Senior Vice President of Emerging Markets in Latin America to share some of their thoughts on the frontier market regions of Africa and Latin America respectively.
Johan Meyer on Africa
Several African countries with developing markets appear to be potential candidates to join a second generation of emerging markets. The same crucial developments that presaged the arrival of investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today. Private sector growth has been increasing and financial markets have been opening up.
Frontier markets overall are an area that we firmly believe are now where emerging markets used to be 20 or so years ago.
Africa is a very interesting continent that unfortunately very few people know much about. You have a billion people on the continent and you have big countries like Nigeria, for example, with a population of over 150 million. This is a country that has been growing over the past 10 years at about 7 or 8% per year on average, in terms of GDP, and itâs one of the top 10 fastest growing economies in the world.[1]
This is a country that generates very little electricity on its own, so most of the electricity is provided by diesel generators. You can imagine the burden that this places on consumers, on companies and on industries in this market, and what potential, what opportunity this holds if this infrastructure constraint is lifted, how this can improve the functioning of this economy. Itâs amazing the economy has managed to grow so fast with this type of issue.
Some markets like Kenya are particularly interesting. Kenya is very attractive to us because itâs on the east coast of the continent, an attractive position as a center for Indiaâs and Chinaâs investments and interests in Africa. We see many companies setting up their operations in Nairobi, the capital city. The United Nations has a massive base there that it uses for its operations on the rest of the continent.
Unfortunately there are countries that still suffer, like Zimbabwe. Even though we have seen massive improvements in that economy, there still needs to be some political change before we can really start to get excited about those types of markets.
Claus Born on Latin America
Across the Atlantic, many Latin American frontier nations are also attracting attention as their economies progress. These markets may not be as big as Brazil, the âBâ in the BRIC (Brazil, Russia, India and China) nations, but they have been demonstrating the growth and rising wealth typically associated with more advanced emerging market economies. Many have been weathering the credit crisis currently sweeping developed markets relatively unscathed, thanks to prudent financial policies. And they have the potential to benefit from continued demand for their natural resources.
If you look across the continent starting with Brazil, the biggest country on the continent, we have seen dramatic growth with a huge discovery of oil reserves, which is driving investment opportunities. But itâs not the only country where we see change.
Look at Peru. We have had a stable economic environment for nearly two decades now and this country has huge mining resources, especially in copper and in gold. We have seen a lot of investment in this sector during the past years. Also the consumer has benefited a lot, so you really see that the country is growing if you go there year after year.
Another interesting case is Panama. Currently the enlargement of the Panama Canal is underway. The country has a unique strategic location within the Americas. Itâs a nice hub to connect within the Americas and between South America and North America. So youâve seen some companies benefit from the location, not only with the canal, but also in airline connectivity. So we see very exciting developments also in Panama.
We believe frontier markets can be attractive opportunities for three reasons:
1) Growth Potential: Weâve seen growth in many of these markets. If you look at a list of the 10 fastest growing economies during the last decade, one is China, but the other nine are frontier markets.[2]
2) Valuations: We very much like what we consider to be the attractive valuations that weâve found in many frontier markets during the past year.
3) Correlation: If you look at the historical correlation of frontier markets with emerging markets and with developed markets, itâs actually very low. And also the historical correlation in between the different markets is very low. If you look at what is happening in Argentina, it appears to have no impact on what is happening in Nigeria or what is happening in Vietnam. So itâs really an asset class where we think there is diversification potential.
http://www.raymondjames.com/inv_strat.htm
Year-end letters are always difficult to write because there is a tendency to either discuss the year gone by; or worse, try to precisely predict what is in store for the new year. Nevertheless, 2012 has arrived, and as the Year of the Dragon, I thought I would share these thoughts with you from California Psychics, written by Psychic Verbena (as paraphrased by me):
âThe last Year of the Dragon, which occurred in 2000, was fraught with fear. There was a lot of hand wringing about the collapse of our technological world, the Y2K bug and other millennial prophecies that turned out to be more hype than bite. The Year of the Dragon is [here] and fear and trepidation are once more an issue. This time itâs the Mayan Calendar and the alleged 2012 Armageddon prophecy. Is the Chinese Year of the Dragon, which comes around every 12 years, truly something to be feared?From Verbenaâs lips to Godâs ears because I am really pulling for a year steeped with âharmony, virtue, riches, fulfillment, longevity,â and âadding even more weight to the growing belief that 2012 will be about breakthroughs, not disasters.â As stated in last weekâs letter, I remain steadfast in the belief there will be no recession, nor will Euroquake pull us into one. I also embrace the theme that the nation is moving in the direction of energy self-sufficiency and that an American manufacturing renaissance is taking place. Moreover, there appears to be the hint of a housing recovery, as well as a technology revolution. Combine these beliefs with the demographics of a baby boom echo, which should foster a new cadre of investors, and I think the S&P 500 (SPX/1257.60) will have a mid- to high-single-digit return in 2012. If you layer in a 3-4% dividend yield on top of said return, the allure of equities becomes pretty compelling.
Unlike the wicked, fire-breathing dragons of Western mythology, Chinaâs celestial dragon symbolizes potent and benevolent power. Dragons are ancient, majestic, wise, and intelligent, and Dragon years are considered particularly auspicious for new businesses, marriage and children. Dragon years also tend to boost individual fortunes and the world economy. Itâs also true, however, that all five of the Chinese Dragon years â Wood, Fire, Earth, Metal and Water â tend to magnify both success and failure.
What influence might the Water Dragon, which rules from January 23, 2012 to February 9, 2013, have on the powerful energies already anticipated at that time? Like all Dragons, the Water Dragon is an innovative, fearless leader. But the Water Dragon is also far more sensitive to othersâ needs, and is more likely to be progressive and diplomatic, as well as socially and environmentally conscious. Because Water bestows a more peaceful disposition, this Dragon will act wisely and intelligently, and unlike his fellow Dragons, is willing to set aside his ego for the good of all.
This Dragon is a successful negotiator, and while he is adept at marketing, he also knows how to apply force skillfully when necessary. ... If you subscribe to the dawn-of-a-new-era theory of 2012, then itâs easy to see how the influence of the Water Dragon will increase the likelihood of success for progressive movements gaining momentum all across the globe. ... But of all the Dragon years, the 2012 Water Dragon is most likely to bestow the Chinese Five Blessings of harmony, virtue, riches, and fulfillment and longevity, adding even more weight to the growing belief that 2012 will be about breakthroughs, not disasters.â
However, that is not true for Barronâs requisite curmudgeon Alan Abelson, who writes in this weekâs edition, âItâs so darn tough, try as we might, to dig up genuine cheerful news.â Barronâs Bellyacher goes on to lament, âScouring the economic and financial landscape for bright spots can also be something of an exercise in futility.â To which I reply, âHow can we all eat at the same table and then disagree about whatâs been served?!â Indeed, of the 45 economic indicators I track only three are not showing stronger growth readings. Those three are Michigan Consumer Confidence, The Case Shiller Home Price Index, and The Average Work Week. More specifically, railcar loadings tagged new all-time highs recently, credit card delinquencies have plunged to a record low, regional PMIs (Purchasing Managers Index) are stronger, pending home sales are improving, job surveys are better, real retail sales are on track for a +7% rise quarter over quarter (annualized rate), and unemployment claims are falling. So I ask it again, âHow can we all eat at the same table and then disagree about whatâs been served?!â
Continuing on the fundamental tack, itâs worth noting there is a global interest rate easing cycle underway and that crude oil is back below $100 per barrel. These are not unimportant observations because every stock market rally since last summer has been thwarted when oil traveled above $100 per barrel. Moreover, with the extension of the existing tax and unemployment benefits, real GDP is more likely to approach 3% in 2012. Speaking to earnings, while fourth quarter earnings have yet to be reported, based on current estimates the SPX is on track to earn a record $97. Surprisingly, for the past 11 months my estimate for the SPX has been $96, yet many of Wall Streetâs finest scoffed at such an optimistic number. My estimate for 2012 has been $106 for nearly a year, and I still feel comfortable with that estimate provided we donât talk ourselves into a recession.
As for the technicals, by my work we experienced another Dow Theory âbuy signalâ last week when both the DJIA (INDU/12217.56) and the DJTA (TRAN/5019.69) bettered their October 2011 closing reaction âhighs.â This week we may see another positive occurrence called a âgolden cross,â that is if the DJIAâs 50-day moving average (@11934.29) crosses above its 200-DMA (@11946.57). That said, the NYSE McClellan Oscillator is short-term overbought and the stock marketâs internal energy has not yet been fully recharged. Accordingly, after the equity markets pop their collective âcorksâ with an early January upside blow off, it would not surprise me to see a pullback attempt. One thing is for sure, the volatility remains legion, for as the eagle-eyed folks at the Bespoke Investment Group write:
âThroughout 2011, we made numerous mentions of the record number of âall or nothingâ days in the stock market. We define an all or nothing day as one where the daily net Advance/Decline reading for the S&P 500 is greater than +/- 400. Up until recently, these types of days were relatively rare and there were some periods where more than a year went by without any all or nothing days. In the last few years, however, we have seen an explosion of occurrences, culminating with this yearâs record reading of 70 days! To put that number in perspective, from 1990 through 2004, there were only 67 all or nothing days!âSuch a volatile environment clearly calls for risk management and with these thoughts we wish you a healthy and prosperous new year.
The call for this week: Since the day after Thanksgiving I have stuck with the strategy that the Santa Claus rally had begun. On November 25th the SPX was changing hands around 1158. We are now 100 points higher. Consequently, I would not chase the dragon right here since I anticipate that an upside blow off is due ...
And then Mr. Doll:
Bob Doll Weekly Investment Commentary - 2012- A Look Ahead
And to make it a hat trick here is Mobius and colleagues on emerging markets:
While emerging markets were considered a niche or âexoticâ investment when I started investing in the late 1980s, many investors are now familiar with them and Iâm seeing more and more investors turning to emerging markets as a way to diversify their portfolios. Yet, emerging markets themselves are not a homogeneous zone. Within the emerging markets universe, we believe frontier markets as a whole have begun to take an impressive lead in terms of growth.
Frontier markets, as their name suggests, could be described as ânew or younger emergingâ markets. Located throughout Asia, Africa, Europe and South America, they are often in a much earlier stage of economic development than larger emerging markets and many have only recently opened to foreign investing. This helps explain their high growth potential. Newer markets typically have more room to grow and the search for growth potential amid acute global volatility is encouraging many investors to expand their horizons.
We believe the advance of many frontier market countries toward emerging market status gives them and their investors economic opportunity, although itâs important to keep in mind that the risks of investing in emerging markets are magnified in frontier markets. Access to capital markets is a key ingredient to high and sustainable private sectorâled growth. Political uncertainty has meant this access has long seemed out of reach for many of these countries until recently. As these countries move ahead, their governments are taking the steps necessary in an effort to help support sustained, steady growth, making them intriguing long-term investment opportunities with attractive potential, in my opinion.
In this weekâs blog, I asked my colleagues Johan Meyer, Senior Vice President of Equity Analysis in sub-Saharan Africa, and Claus Born, Senior Vice President of Emerging Markets in Latin America to share some of their thoughts on the frontier market regions of Africa and Latin America respectively.
Johan Meyer on Africa
Several African countries with developing markets appear to be potential candidates to join a second generation of emerging markets. The same crucial developments that presaged the arrival of investors in emerging markets in the 1980s are taking place in parts of sub-Saharan Africa today. Private sector growth has been increasing and financial markets have been opening up.
Frontier markets overall are an area that we firmly believe are now where emerging markets used to be 20 or so years ago.
Africa is a very interesting continent that unfortunately very few people know much about. You have a billion people on the continent and you have big countries like Nigeria, for example, with a population of over 150 million. This is a country that has been growing over the past 10 years at about 7 or 8% per year on average, in terms of GDP, and itâs one of the top 10 fastest growing economies in the world.[1]
This is a country that generates very little electricity on its own, so most of the electricity is provided by diesel generators. You can imagine the burden that this places on consumers, on companies and on industries in this market, and what potential, what opportunity this holds if this infrastructure constraint is lifted, how this can improve the functioning of this economy. Itâs amazing the economy has managed to grow so fast with this type of issue.
Some markets like Kenya are particularly interesting. Kenya is very attractive to us because itâs on the east coast of the continent, an attractive position as a center for Indiaâs and Chinaâs investments and interests in Africa. We see many companies setting up their operations in Nairobi, the capital city. The United Nations has a massive base there that it uses for its operations on the rest of the continent.
Unfortunately there are countries that still suffer, like Zimbabwe. Even though we have seen massive improvements in that economy, there still needs to be some political change before we can really start to get excited about those types of markets.
Claus Born on Latin America
Across the Atlantic, many Latin American frontier nations are also attracting attention as their economies progress. These markets may not be as big as Brazil, the âBâ in the BRIC (Brazil, Russia, India and China) nations, but they have been demonstrating the growth and rising wealth typically associated with more advanced emerging market economies. Many have been weathering the credit crisis currently sweeping developed markets relatively unscathed, thanks to prudent financial policies. And they have the potential to benefit from continued demand for their natural resources.
If you look across the continent starting with Brazil, the biggest country on the continent, we have seen dramatic growth with a huge discovery of oil reserves, which is driving investment opportunities. But itâs not the only country where we see change.
Look at Peru. We have had a stable economic environment for nearly two decades now and this country has huge mining resources, especially in copper and in gold. We have seen a lot of investment in this sector during the past years. Also the consumer has benefited a lot, so you really see that the country is growing if you go there year after year.
Another interesting case is Panama. Currently the enlargement of the Panama Canal is underway. The country has a unique strategic location within the Americas. Itâs a nice hub to connect within the Americas and between South America and North America. So youâve seen some companies benefit from the location, not only with the canal, but also in airline connectivity. So we see very exciting developments also in Panama.
We believe frontier markets can be attractive opportunities for three reasons:
1) Growth Potential: Weâve seen growth in many of these markets. If you look at a list of the 10 fastest growing economies during the last decade, one is China, but the other nine are frontier markets.[2]
2) Valuations: We very much like what we consider to be the attractive valuations that weâve found in many frontier markets during the past year.
3) Correlation: If you look at the historical correlation of frontier markets with emerging markets and with developed markets, itâs actually very low. And also the historical correlation in between the different markets is very low. If you look at what is happening in Argentina, it appears to have no impact on what is happening in Nigeria or what is happening in Vietnam. So itâs really an asset class where we think there is diversification potential.
