Seabiscuit We Ain't, But 2012 Should Provide For An Exciting Finish

As the famous Belmont Stakes announcer Dave Johnson roared as Secretariat defied our visual senses and shattered the record books, "Down the stretch they come!", so to, we face such a finish to 2012. The investing year hasn't enjoyed such a straight uninterrupted run to the finish though. We've heard, "Sell in May go away". Nice ditty, not an investment strategy. During the Spring market correction some pundits broke out the old, "Look for a return OF capital not ON capital", again cute bit most likely propagated by news "reporters" or S&L's pushing CD's. I could go on, but you get the point. Investing must be a long term journey unencumbered by emotion, and importantly opportunistic. The market has experienced one of the most distrusted and unloved rallies I've ever experienced in my entire career. Investors were nervous about the new Greek tragedy, a potential default and exit from the Euro zone. Frightened by the flash crash caused further retreat. Now we seem to be closing in on the looming fiscal cliff which again has caused potential investors to steer clear of equities and risk assets. All the while bond funds have become the new chick magnet for all genders. While Warren Buffet coined derivatives the Financial Weapons of Mass Destruction, current bond funds investors unknowingly are treading into a financial minefield. The road seems safe right up until the legs of the portfolio (least risky investments) get blown off when rates begin to rise. Investors that hold individual bonds and fixed income products can always hold investments to maturity and receive their principal back. Bond funds have no such maturity so the pain will be severe and extended. How long can someone take a 2% yield while simultaneously getting pole axed with a 30-40% hit to principal? My sense is and history supports the retail investor will take near max pain before cashing in his chips at or near the absolute market bottom. The all important Where We Are. The market appears reasonably priced. Earnings season is about to officially kick off tomorrow with Alcoa. Some companies have already preannounced a softer quarter, such as Federal Express and Caterpillar. The stock prices have already corrected to reflect the lowered earnings and revenue guidance. So, if all goes as anticipated S&P 500 company earnings should come in around $100-103 per share for 2012. Attaching a 14x or 14.5x multiple gives us our year end target range of 1400-1493 which may prove conservative. GDP: GDP is currently estimated to have been running at a 1.5 to 2% growth rate for the just closed out 3rd quarter after an anemic 1.3% growth rate for the 2nd quarter. . Barring any major spikes in capital gains, dividends and taxes in general this tepid growth rate should continue into early 2013. A lot can and should happen before the end of 2012 to keep these rates manageable, as allowing for an unrestrained spike in the above mentioned rates coupled with the mandatory spending cuts to budgetary spending would most likely push the US economy back into a recession. Neither party or Presidential candidate can tolerate this or use it to their benefit, so it most likely will not occur and we'll get the grand compromise that has so far proven so elusive. Leading Economic Indicators: This declined .1% in August but is averaging .3% over the previous six months supporting a continued, slow below trend growth rate to close out the fourth quarter and into early 2013. This also suggests we are stuck with elevated levels of unemployed and underemployed for the foreseeable future. The major positive buried within the report were new orders for non-defense capital goods. There was a concerning negative contained in the LEI report that being consumer expectations. ISM Purchasing Managers Index for Manufacturing: This came in at 51.5 above the all important 50 which signifies a neutral posture neither expanding or contracting. The recent report reverses the prior three months which showed slight contraction. Positive surprises came in the 5% pop in new orders which bodes well for the future. ISM Purchasing Managers Non-Manufacturing Index: This came in at 55.1. Up 1.4% from August's release. This "services" sector index shows managers optimistic about the current quarter and reflected some easing of concern about unemployed and the pace of activity. Some mentioned the strains the drought had put on business along with companies putting major emphasis in driving cost efficiencies and productivity. (working existing employees longer and harder) Housing: IT'S BACK BABY! I've been waiting four plus years to say that. For the last four years housing has been a laggard and a drag on domestic US GDP and employment. No longer. Housing Starts were up 2.3% in August to a 750,000 run rate. Single family home starts rose to a level not seen since April '10. Conditions remain favorable. The pace of bank foreclosures has slowed to a manageable rate. Thus the huge overhang created by homes being dumped on a lackluster market has come down dramatically. With a stabilizing jobs market and near generational lows in interest rates we can have even more confidence the housing market is/has bottomed. Employment/Unemployment: Jack Welsh made a splash this past Friday after the release of the Non-Farm Payroll and Unemployment rate release after "tweeting", "THE FIX IS IN!". Baloney! What Jack and the other talking heads forgot to mention was the "maneuvering" Jack crafted to beat Wall Street's earnings estimates for years when he ran GE. So, you'd think if anyone could figure out how one was gaming the figures he could. Still waiting for any support for his "outrage". (FYI, he now makes a few pennies writing books and hits the speaking tour in order to keep those baloney sandwiches tabletop) Once he left his CEO perch the SEC investigated and fined GE and forced them to restate earnings along with some hefty fines. Who's cooking the books? Friday's jobs report was not notable for the 114,000 jobs created it was more the unemployment rate dropping below the 8% rate. HOORAH!! Really? No. The U-6 (number of unemployed + underemployed) is still stuck at 14.7%. If they wanted to game the numbers, here is where the eraser would have been used. Putting our political hats back in the closets and our pins in the drawer, one must conclude the jobs front is getting incrementally better. Weekly unemployment claims have settled into a not overly impressive 350,000-385,000 range. Analysts suggest 100,000-150,000 new jobs must be created in order to simply absorb new entrants. So, we're doing better, but clearly have some wood to chop. Central Banks: Spigots wide open. Four major central banks are flooding the markets with cash and outright expanding their balance sheets while purchasing assets. With the new European Central Bank president and Chairman Ben Bernanke both having initiated policies of "Whatever it Takes, For However Long It Takes" it is, has become a fools game to bet against the markets. As much as you or I may agree or disagree with their stated policy, we are investors here and you currently make money by getting in the passenger seat alongside the central banks. Black Swans/Potential Shocks: Look no further than Europe, still. Greece continues to replay the Clash hit for the markets, "Should I stay or Should I go". Spain is keeping us on pins and needles as we await their formal request for a bailout. Chairman Draghi is on full alert, but we're on watch of him being on watch. Next let's shift back yet again to the Mid East. Syria is in civil war. Turkey is getting sucked into the Syrian conflict which might set off a regional contagion. Iran, where to start. Iran is supporting Syria, influencing Iraq and attempting to expand its sphere of influence in general at the same time as they push their nuclear capabilities. Israel was just short of mounting their troops for an assault. They've since backed off as the Iranian economy is in a tailspin from UN sanctions and the near complete collapse of their currency, the Real. To Asia we go. The Asian Tigers have been downgraded to polecats. China's economy has not hit stall speed, but it has slowed to an estimated 7.7%-8% annual GDP growth rate. Impressive for any other developed economy, but down sharply from the heydays of double digit growth. China must jump start their economy or face continued and escalating bouts of domestic unrest. They've initiated stimulus packages in the hundreds of billions already. Should the deceleration continue the global expansion as tepid as it stands would be in jeopardy of contraction. With Central banks already in crisis mode this would be disastrous. Going Forward: There most assuredly is enough to keep investors awake at night. Europe is reentering a recession and must continue to be proactive amid a weakening global economy, ex-US. However, the improving domestic jobs front buoyed by a rebound in automobile manufacturing, housing and yes energy production for now affords us some protection. Another reason for our optimism is strong corporate earnings, reasonable valuations along with a resilient US consumer that helps gives us some cover and comfort. The aforementioned strengths along with an accommodative Fed, rock solid balance sheets of domestic banks and Corporate America in general allows us to maintain our cautious optimism and aggressive posturing to the markets overall. We'll be on high alert for any significant deterioration in market sentiment or economic indicators and for signs it's time to take some of our chips off the table. This 2012 contest has been difficult to navigate, uphill at times with many unforeseen obstacles. But as we head to the finish line, I'm betting the bulls take this one by more than just a nose. Thank you again for the opportunity to serve your and your patience in these very challenging times. Yours in pursuit of the KWAN!