Below is the full 2012 Bespoke Roundtable Q&A with Prieur du Plessis of Investment Postcards.
1) Looking back on 2011, what were your best and worst calls?
Worst call: Selling of U.S. 10-year Notes earlier in the year.
Best call: Cutting equity exposure in second quarter and reinvesting in September.
2) What surprised you the most about financial markets in 2011?
I was most surprised by the extreme volatilities (and least by the unfolding of the Eurozone crisis).
3) The S&P 500 hit its bull market highs in April 2011. Which will happen first? Will we first take out the April highs or have we entered a new bear market (a decline of 20% from the highs)?
My expectation is for a cyclical bull market taking place within a long-term secular bear market.
4) Depending on your answer to question 3, how long do you expect the bull or bear to last?
The cyclical bull market should last at least six months, coinciding with the good six months of the year. Volatility is expected to remain high, though.
5) How should an investor with average risk tolerance be positioned for the year ahead?
a. 40% equities (10 to 15% emerging markets)
b. 5% gold
c. 40% cash (25% earmarked for buying opportunities)
d. 15% medium-dated bonds
6) How do you see the European sovereign debt crisis playing out in 2012?
Greece will have an orderly default, the bailout of European banks will commence, and austerity measures will be implemented in Italy and Greece. Business sentiment in Germany and France is expected to start improving early in 2012.
7) How bullish or bearish are you on the following markets: The US, Europe, Developed Asia, China, Emerging Markets?
US: lukewarm bullish; some pain still ahead
Europe: reasonably bullish; some pain still ahead
Developed Asia: neutral
China: quite bullish
Emerging markets: reasonably bullish
8) What do you believe is the contrarian call on equities right now?
Contrarian call on equities: bullish
Contrarian call on economy: stronger growth in 2012 instead of a recession or very low growth
9) How confident are you that US companies can live up to current consensus earnings expectations?
Reasonably positive as most economists are not that bullish about economic prospects in the U.S.
10) Are US stocks "cheap" right now based on the valuation methods you rely on most? Will multiples expand or contract in 2012?
Shiller's PE10 is currently at 20. According to my models, this correctly reflects the Conference Board's current level of consumer sentiment of 56. I see consumer confidence picking up in 2012 to the 80 level. That will entail a Shiller PE10 of 25.
11) Describe some of your favorite market indicators and what they are signaling for stocks in 2012?
My 23-week RSI gave a major buy signal a few weeks ago. Barring any unforeseen crisis we should see an extension of the rally through mid-2012.
12) What are your favorite and least favorite sectors for the year ahead?
Best: Energy, Materials, Consumer Discretionary
Worst: Utilities, Consumer Staples
13) What is your outlook for Financials?
Somewhat better but risk aversion, deleveraging and higher long bond rates are likely to keep equity prices in check.
14) What is in store for the US economy in 2012?
Sluggish growth initially but stronger in the second half.
15) Economic indicators as a whole came in better than expected in the fourth quarter. Do you expect this trend to continue in the first part of 2012?
The employment outlook has improved and is likely to push consumer confidence higher, resulting in better retail sales and some improvement in the housing market. No great shakes though as business investment is likely to remain low due to the still significant overcapacity in the economy.
16) What is your take on the employment picture in the US? Will we see the unemployment rate get below 8% by Election Day?
Yes, possibly below 8%.
17) Are Ben Bernanke and the Fed helping or hurting the recovery?
Without QE1 and QE2 the U.S. would have been in a depression rather than limping around.
18) The Fed's Zero Interest Rate Policy (ZIRP) has really hurt savers and anyone out there looking for yield. Where should investors go to find yield right now?
Yield opportunities should be sought in emerging markets. Emerging market currencies (bar the yuan) are still at crisis levels. One should therefore get the added benefit of currency strength.
19) The housing market continues to struggle. Are we close to making another bottom in residential real estate? Are there specific areas of the country that you are more bullish or bearish on?
House prices are interlinked to consumer confidence and mortgage rates. The collapse in consumer confidence impacted severely on home prices since the middle of this year. Real estate is likely to be supported by Operation Twist in the short term while consumer confidence is likely to gradually improve through end-2012, assisting a recovery.
20) Will the Dollar (US Dollar Index) be up or down in 2012 and why? Are there any other currencies that you have a strong opinion on? How much trouble is the Euro in?
The U.S. dollar is likely to remain firm against the euro and gain against the yen due to better relative growth prospects. The situation in the Eurozone and the possibility that some countries may lose their membership underline the necessity of the U.S. dollar as reserve currency, at least in the shorter term, but longer term I think the yuan and gold will play an increasing role as reserve currencies.
21) Gold has underperformed stocks in recent months. Will this continue in 2012? Will gold see gains in 2012?
In my opinion gold is fairly valued. However, I do think the bull market will continue due to increased demand especially as a result of increased wealth in China and India.
22) The ratio of platinum to gold is currently at its lowest level ever (platinum is actually cheaper than gold right now). Is platinum a good buy relative to gold?
Absolutely, platinum bore the brunt of the Eurozone crisis. One needs to look beyond the Eurozone crisis. How about silver? Silver came under pressure from two different sources: China and the Eurozone, and the usual seasonal strength never materialized. Although China's economic growth has probably receded to below 8% YoY, the PBoC is renowned for successfully jumpstarting the economy. I think by the end of 2012 we will look back at silver below $30 having been a good entry point.
23) Where is the price of oil headed? How about the spread between Brent Crude and West Texas?
The premium of Brent to West Texas should fall to zero in the coming months as Libyan production returns to normal and the tensions in the MENA countries ease somewhat.
24) What are your predictions for the 2012 election? Which party will win the Presidency, the House and the Senate? Who will become the GOP nominee, and what are the chances that nominee will beat President Obama?
25) How will the elections impact the stock market in 2012 and beyond?
26) Will the US Supreme Court rule that ObamaCare is unconstitutional?
27) How do you see the US tackling its debt problems in the years ahead?
The country cannot "afford" a significant reduction in the budget deficit right now as consumer confidence that drives consumer spending and the stock market will be severely dented. The authorities should wait for the economy to recover first.
28) What are the biggest threats to the global financial system right now, and are they avoidable?
I am less concerned about Europe as moves are being made to address the issues, albeit at a lethargic pace. Iran and North Korea will always be the dark horses, but their backers (China) realize what the consequences are. I am more worried about a major flare up in smaller MENA countries.
29) Hedge funds as a whole underperformed the S&P 500 in 2011. How will hedge funds perform in 2012? What is your take on the hedge fund model in general?
30) Will the following be up or down (positive or negative) in 2012? Where noted, what are your 2012 year-end price targets? The price targets are meant to obtain a wisdom of crowds consensus number from all Roundtable participants.
-S&P 500 (up or down and year-end price target) Up to 1,450
-Long-Term US Treasuries (up or down) 10-year Note up to 3%
-Corporate Bonds (up or down) AAA yield up to 4.8%
-Junk Bonds (up or down) Up
-Gold (up or down and year-end price target) Up to $2,000
-Oil (up or down and year-end price target) Brent up to $130
-Dollar (up or down) Up by 2%
-Average US Home Prices (up or down) Up by 1 to 3%
-China's stock market (up or down) Up by 15%+
31) Please provide readers with any stocks that you really like right now for 2012 and beyond.
32) Where is Apple headed as both a company and a stock? How about Google?
33) Facebook is expected to IPO in 2012. Would you be a buyer or seller of the stock at its opening price on the day it goes public? How long would you hold it?
34) Which technologies are you currently the most bullish or bearish on? Are any of them game changers like the PC or the Internet were?
35) What are the website, magazines, newspapers, books, apps that you use the most and would recommend others to use?
36) What are your favorite Twitter feeds?
37) Do you have any other advice that you would like to share with readers as we enter 2012?
-Predictions and forecasts change with changing conditions.
-Follow a buy-and-hold strategy on long-term growth stocks (stocks that will continue to grow earnings despite economic downturns), i.e. the core of your equity portfolio.
-Look for deep-value situations.
-Watch non-core cyclical stocks closely and take profits when decent returns have been achieved.