Below is the full 2012 Bespoke Roundtable Q&A with Roger Nusbaum of Random Roger.
1) Looking back on 2011, what were your best and worst calls?
We are, and have been for many years, overweight foreign (but we exclude/grossly underweight Japan and Western Europe) and in 2011 this was a meaningful drag on the portfolio. We had cash raised and we continued to be grossly underweight US financials which leaves us pretty close to the SPX which is what we benchmark to.
2) What surprised you the most about financial markets in 2011?
The drag in foreign is probably the biggest surprise. In last year's roundtable I took the under versus the consensus for where the SPX would finish the year and with that ended up being right. Holding a lot of foreign has been right far more often than not but 2011 turned out to be one of those years where it was not.
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)?
I think the decade will deliver an average annual return that is far below "normal" but still positive (as opposed to the negative return from last decade). With that as a starting point I think a 20% decline is off the table for now unless there is some new news that comes along to make things far worse than we think they are now. That said, after a couple of years of below average returns (the average of the last two years being about 5% annualized) I think there will be a meaningful rally during 2012 however the fast the lift the faster I think it would retrace. I think this lift will start from around current levels give or take 5% and not 20%.
4) Depending on your answer to question 3, how long do you expect the bull or bear to last?
To borrow one from John Mauldin, we are muddling through in a sort of limbo. There will be the occasional lift and the occasional selloff but come 2020 I think we will be looking back on a decade of 4 percent average returns with little in the way of what we usually think of as bull and bear cycles. In thinking about how 2011 is ending we are having extreme volatility without getting anywhere.
5) How should an investor with average risk tolerance be positioned for the year ahead?
I do not think much has changed fundamentally from a big picture sense. Europe still stinks, the US debt, jobs and real estate situations are meaningfully below par for this point in a "recovery" and we do not have clarity as to what the resolution will be for the US or Europe. For someone who would rather not attempt to be overly tactical I would suggest overweighting yield and I still believe in foreign. As many foreign markets are not facing systemic threats, they are fundamentally more sound and I believe that will matter in more years than not. For people willing to be more tactical I think there will be a pretty big rally in 2012 that, if we get it, should then be sold.
6) How do you see the European sovereign debt crisis playing out in 2012?
I do not see a meaningful resolution here. We will know a couple of more things 12 months from now but it will not be over.
7) How bullish or bearish are you on the following markets: The US, Europe, Developed Asia, China, Emerging Markets?
US: neutral, Western Europe: extremely bearish, Japan: very bearish, China: moderately bullish but it may not be a 2012 story, certain emerging markets fairly bullish (go narrower than EEM or VWO).
8) What do you believe is the contrarian call on equities right now?
Based on the pushback at Seeking Alpha on my post talking about a big, fast lift for US equities (even is short lived) in 2012 I would say this is contrarian. I am thinking 25 to 30% but to be clear I do not think it will stick.
9) How confident are you that US companies can live up to current consensus earnings expectations?
I do not think the market cares about earnings now and has not for a couple of quarters if not more. I think we are still at least a couple of quarters from earnings being an important driver of the market again.
10) Are US stocks cheap right now based on the valuation methods you rely on most? Will multiples expand or contract in 2012?
I do very little here from the top as I do not believe valuation is much of a predictor of future market moves. Valuation is very useful for selecting holdings, just not predicting the market.
11) Describe some of your favorite market indicators and what they are signaling for stocks in 2012?
N/A
12) What are your favorite and least favorite sectors for the year ahead?
For people preferring not to be tactical, avoiding financials will still be the biggest sector decision. I also think favoring sectors that generally have higher yields will also be the right way to go. For people trying to be more tactical and if there is a big, even if short lived, rally as I think then I would think the more volatile sectors would participate the most including financials. As I believe such a lift would be fundamentally unjustified I think the faster it were to go up the faster it would retrace.
13) What is your outlook for Financials?
The fundamentals still stink but if there is a big lift in the context noted above I believe they would participate.
14) What is in store for the US economy in 2012?
I believe we are in for a period of many years where GDP growth is below what we have become accustomed to. This has been my thesis, has been playing out recently and I believe will continue to do so in 2012.
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?
N/A
16) What is your take on the employment picture in the US? Will we see the unemployment rate get below 8% by Election Day?
The only way I think this is possible is with a shocking reduction in the labor force.
17) Are Ben Bernanke and the Fed helping or hurting the recovery?
The backdrop here is that because the US did not do the difficult thing in 2008 (let equity and bond holders eat the loss) we have caused this to drag on much longer than it would have. I think Iceland shows us that doing the tough thing would have led to a faster resolution. By now I believe we would have an idea of what the end looks like when because of not doing the difficult thing, we have no idea how this ends.
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?
First thing here is that dividend paying stocks are not substitutes for bonds. They have different attributes and you do not want to find that out at the wrong time. Some sort of dividend stock strategy is valid, but not a substitute for a fixed income portfolio. Our heaviest fixed income weighting is in short dated, investment grade corporates (individual issues). We also own short dated sovereigns from Australia, Norway and Denmark (individual issues), a couple of preferred stocks, one relatively low volume closed end fund, Vanguard GNMA (VFIIX), an emerging market bond ETF and some TIPS exposure.
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?
We might be close to a bottom but that does not mean we are close to turning higher.
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 fundamentals for the US dollar are not very good but the fundamentals for the euro are worse. As US based investors, we have a lot of USD exposure but we also have exposure to currencies we believe to be fundamentally better off like Norway, Australia, Canada and so on.
21) Gold has underperformed stocks in recent months. Will this continue in 2012? Will gold see gains in 2012?
We own gold as insurance. If something bad happens today, we expect gold to go up tomorrow. If gold has a great year then chances are everything else is struggling. We keep our position but hope it is not a top performer.
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?
Platinum and silver are relatively cheap against gold but I think the market needs to start discounting in an economic recovery for those two to start to outperform. At some point this will occur but it is not clear to me that this should start now.
23) Where is the price of oil headed? How about the spread between Brent Crude and West Texas?
N/A
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?
This kind of reminds me of 2004: terrible sitting President but the opposition party is in such disarray that they cannot find someone to win. I think the election will be less important than it has been in a long time due to the disgust that I think many feel toward both parties.
25) How will the elections impact the stock market in 2012 and beyond?
We are doing the wrong thing about the crisis and we do not have any elected officials willing to make difficult decisions and this is true on both sides of the aisle.
26) Will the US Supreme Court rule that ObamaCare is unconstitutional?
I do not know what the Supreme Court will do I just know that Obamacare is the wrong idea stemming from the wrong philosophy for the time we live in. I have no idea if there would ever be a "right" time for Obamacare though.
27) How do you see the US tackling its debt problems in the years ahead?
Sorry to say more can kicking as the US political cycle is not geared to rewarding politicians who make difficult decisions and difficult decisions is exactly what the country needs.
28) What are the biggest threats to the global financial system right now, and are they avoidable?
Nothing unique here from me, we have many countries trying various desperate things to stave off a very bad systemic outcome. As opposed to figuring out whether or not authorities can avoid a very bad systemic outcome it makes more sense for investors to avoid countries where this is going on in their portfolios and instead seek out destinations that have only been dealing with normal cyclical events. This means little or no exposure to Japan, Western Europe and Chinese banks.
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?
The hedge fund model is valid. The number of funds might be where the problem is. An acquaintance is invested in one fund that made 300 percent in 2008 shorting the correct things. Since then the fund has been flat but I suspect that the fund (although I will preserve my acquaintance's anonymity and not name the fund, chances are you have heard of it) will again have another huge year based on its ability to be patient. As the return of various hedge fund indexes indicate, the return of the industry has been lousy which tells me there are too many, perhaps investors will vote with their feet. As a side note, I cannot begin to understand how an index of hedge funds can offer any value.
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 a little after retracing a range busting rally
-Long-Term US Treasuries (up or down) Fundamentals argue for lower prices but I think there will be more of the same.
-Corporate Bonds (up or down)
-Junk Bonds (up or down)
-Gold (up or down and year-end price target) Up a little
-Oil (up or down and year-end price target) Up a little
-Dollar (up or down) Down
-Average US Home Prices (up or down) A couple of percentage points either way
-China's stock market (up or down) Up
31) Please provide readers with any stocks that you really like right now for 2012 and beyond.
After a lousy stretch I think China is due for some good things but I would avoid the banks so this means avoiding most China centric ETFs but I would not bet that this fits neatly into a calendar year. If you get a fast 20 to 30 percent out of something that was down a lot in 2011, I would at least sell a portion of the position.
32) Where is Apple headed as both a company and a stock? How about Google?
N/A
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?
N/A
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?
The internet exceeded the hype but the stocks obviously were a collective disappointment on the first go around so perhaps the most important technologies will not be important investments. My smartphone has made for some very handy efficiencies and tablets will do the same for people if they have not done so already. That said I could envision brands mattering little if companies can deliver reasonably close technology for cheaper prices. Apple products stand out as an exception but as a droid user I am probably agnostic about the brand.
35) What are the website, magazines, newspapers, books, apps that you use the most and would recommend others to use?
Most of my day is spent reading and so any list like this I might construct will be incomplete. That disclaimed: WSJ, FT, Bloomberg, Seeking Alpha, Barry Ritholtz, Index Universe, MarketWatch, Edward Harrison, Mish, Reuters, Abnormal Returns, Zerohedge and so on.
36) What are your favorite Twitter feeds?
I follow feeds for the various MSMs mentioned above along with the bloggers mentioned above. This allows for more efficient use of time. Non market related, I follow several that pertain to firefighting (I am a volunteer firefighter) and several related to sports like Bill Simmons, PTI, Jerry Remy and the Red Sox.
37) Do you have any other advice that you would like to share with readers as we enter 2012?
Although not specific to 2012, I believe most investors are investing for the simple goal of having enough money when they need it but I am not sure enough people realize this is why they invest. If you can figure this out for yourself then I think it makes participating in the markets much easier to do. You have no idea (without looking) whether or not you beat the market in the third quarter of 2009 because it is not important.
