2012: Off to a Good Start; More to Come

image008 2012: Off to a Good Start; More to ComeIn December, when my 2012 view became positive, I questioned whether I was misinterpreting the value of the LTRO and the Chinese reduction in their Bank Reserve Requirements, as I appeared to be alone in my assessment. Jim Cramer screamed the sky was falling and virtually no one, on any station, seemed to appreciate the two events. In my January 2nd newsletter I outlined the basis for my belief as we were significantly increasing our equity exposure. Since then, I am more convinced that this year will reward us.

I finally found support this weekend, from Jeremy Siegel (Wharton finance professor) who through his analysis of rolling 5-year periods and the market’s valuation, wrote that the Dow should end 2013 at 15,000 (2 out of 3 chance) or 17,000 (50/50 chance). Of course this was met on Monday be a barrage of talking heads who stated the kind of gibberish that one espouses when covering all possibilities, such as “I am long-term bullish, but the market seems overbought short-term”. Many others said that the 20% gain since the October lows is “too much, too fast”. These prognostications, though possible, are not based on anything but feelings. It brought back memories of 2009. In my March 2009 Forbes article I stated that it was time to get invested – we had TARP and a near $1Trillion stimulus being thrown around. As Professor Siegel has his naysayers, I had mine at the time. After just a few weeks the market had gained more than 20% off the March 9th bottom and the talking heads said the market had moved too fast and was setup for another test of the bottom. And then too, their statements were based on feelings rather than an intelligent assessment of the economics at hand.

As a point of illustration, look at the chart below. The red arrow shows you where the market was when it had realized the same gain from the March ’09 bottom as it has today from the October bottom. image009 300x218 2012: Off to a Good Start; More to ComeFeelings can leave a lot of money on the table. I am not saying the market will be a straight line up, but considering everything, I believe that Dow 17,000 by the end of 2013 may be the more likely of Professor Siegel’s scenarios.

Consider the following:

1. The S&P 500 was flat last year but average company earnings rose by 18%.
2. More than 70% of all S&P 500 companies have beaten earnings estimates for each of the last 10 quarters.
3. Based on expected 2012 earnings and a P/E of 14.6 (ten year average), the S&P would be 1560 at year end.
4. Ben Bernanke will do whatever he can to keep interest rates near zero for the next three years.
5. The ECB will add another €1 Trillion euros or more to the already €500 B in the LTRO at the end of this month – Europe’s QE.
6. China is on course to lower bank reserve requirements now that their inflation is within their parameters.
7. Greece will almost certainly receive their bailout once their austerity measures have become law.

The further infusion by the ECB, through its LTRO (Long-Term Refinancing Operation) will add a large measure of liquidity to the European banks, buffering the possibility of contagion (Italy’s 10-year Treasury yield is now below 5.6%), or even the removal of Greece from the euro.

Certainly, Central Banks of the G4 (USA, Great Britain, Europe, and Japan) have shown that it is now their dominant strategy to expand their balance sheets at any sign of trouble, so we can be fairly comfortable in knowing that we have a safety net should foreseen or unforeseen trouble arise. Great Britain has just this month, added another £50B to their quantitative easing program, taking its total to £325B while cutting their interest rate to 0.5%, the lowest in history.

With central banks everywhere adding to their money supplies, the sad reality is that the bankers who were enriched by the bad loans and the politicians with their billions each year in deficit spending (now for four years in excess of $1.3 Trillion/year here at home), will have citizens of the western world pay for their looting. The trillions of dollars, euros, pounds and other participating currencies will ultimately be paid through inflation. The decline in purchasing power and the increased cost of commodities will most adversely affect the poor, those on fixed incomes, and unsuspecting investors who rely on savings, CDs, and bond interest (especially those in bond funds). It is more important than ever to maintain a hard-asset bent to our portfolios. In addition to gold, copper, iron ore, oil, pipelines and companies with prime real estate holdings, we have been assessing a number of real estate limited partnerships which may be held in Fidelity accounts, to compliment our portfolios with assets with lower correlation to the stock market and offer excellent hedges to a devaluing dollar. More will follow on these shortly.

image011 2012: Off to a Good Start; More to ComeLast month I wrote about the benefits of a National Energy Policy based on natural gas. Natural gas emits 40% less CO2 than gasoline, and very little of any other pollutant. You might say it is so clean that you can burn it in your kitchen – try that with gasoline (No, not really). I did a little calculating and thought you might find this of interest. It takes 126 cubic feet of natural gas to equal the power of one gallon of gasoline or diesel. That means that one mcf of natural gas is equivalent to 8 gallons of gasoline. An mcf of natural gas cost about $4 delivered to your home and 8 gallons of gasoline costs $28 (assuming $3.50/gallon). If an mcf of nat. gas rose to $7.00 it would still cost you only 1/4 as much to drive each month.

If the typical driver is using $150/month of gasoline, he would save over $100. There are over 200 Million drivers in the U.S. If the average monthly savings is only $100, this would be a $20Billion/month stimulus to the economy. It would stimulate job growth and severely impact the ability of countries like Iran to wreak havoc since the price of oil would drop dramatically. The drop in the price of oil would also be a stimulus for those still using gasoline and other forms of oil, as well as all other countries who currently import oil. Natural gas vehicles are throughout the world – Austin and many other cities use them for their fleets, they are prevalent in Europe and Pakistan has almost 100% of its cars and trucks powered by natural gas. Pass it along.

The U.S. has over 100 years worth of natural gas and more is being found every day. We will begin exporting it early next year. I’d like to use it here, but we will at least be invested in the companies that will be producing and shipping it to buyers all over the world.

Happy Valentines Day,

Ph. 5 12.345.6789

2009 S. Capital of Texas Hwy. 2nd Floor
Austin, TX 78746


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