Weekly Recap & Outlook – 12.30.11

Tower Private Advisors


  • Doug Kass’s 2012 list of surprises
  • Meredith Whitney lambasted for muni bond call
  • Mixed bag of economics

Capital Markets Recap

Every firm is rolling out its version of 2012 lists and forecasts. From what I’ve read, it seems to be more of the same–2012 will look like 2011. If anything, the second half might be better than a rocky first half. If you’re tired of all the slit-your-wrists doom and gloom, check out hedge-fund guy, Doug Kass‘s list of 2012 Surprises. In a slightly different vein, they’re possibilities that few others are anticipating. He has enjoyed a pretty good track record with these. The original story can be found here.

1. The U.S. stock market approaches its all-time high in 2012.

2. The growth in the U.S. economy accelerates as the year progresses.

3. Former Presidents Bill Clinton and George Bush form a bipartisan coalition that persuades both parties to unite in addressing our fiscal imbalances.

4. Despite the grand compromise, the Republican presidential ticket gains steam as year progresses, and Romney is elected as the forty-fifth President of the United States.

5. A sloppy start in arresting the European debt crisis leads to far more forceful and successful policy.

6. The Fed ties monetary policy to the labor market.

7. Sears Holdings declares bankruptcy.

8. Cyberwarfare intensifies.

9. Financial stocks are a leading market sector.

10. Despite the advance in the U.S. stock market, high-beta stocks underperform.

11. Mutual fund inflows return in force.

12. We’ll see merger mania.

13. The ETF bubble explodes.

14. China has a soft landing (despite indigestion in the property market), and India has a hard landing.

15. Israel Attacks Iran.

Late in August 2011, I posed the question of what price gold would be at year end. A handful of hardy souls submitted their carefully-wrought forecasts. Gold was about $1,850/ounce at the time, and only about 10% of guesses were for a price lower than that. It’s going to close about $1,565 today, about 16% below that August price. Two guessers both said $1,500, so those two folks will each receive an Amazon gift card.

Top Stories

You might recall that, one year ago, the municipal bond market was in an uproar. Analyst Meredity Whitney had appeared on 60 Minutes, suggesting that there would be $50 – 100 billion in municipal bond defaults. Many publicly derided her, and we certainly didn’t sell any municipal bonds because of the story. In fact, there were great values to be had, as folks dumped the bonds like bad habits. David Kotok of Cumberland Advisors–who, by the way, has the best free e-mail service around (click here to sign up)–was one of those folks who loudly derided her claims. In an e-mail this week, he cites a post on the Huffington Post website that is a S C A T H I N G response one year on. You can read the Cumberland Advisors recap, which includes the Huffington Post article in its entirety, by clicking here. The title of the piece is “2011: The Year 60 Minutes Misled Americans About Municipal Bonds.” If you own municipal bonds you owe it to yourself to read it. Here are a couple of excerpts:

  • 60 Minutes let a pundit claim these problems translate into near-term massive municipal bond defaults. Meredith Whitney, the pundit, had written a report, “Tragedy of the Commons,” which supposedly backed her claims.
  • Contrary to 60 Minutes’s assertion, Meredith Whitney, a banking analyst, did not have a great track record. Gullible reporters had given her great PR for an October 31, 2007, call on Citigroup that had been correctly made many months earlier in her presence by my friend Jim Rogers, a legendary investor. They appeared on television together, and at the time she refuted Rogers. [GPS emphasis]
  • Subsequently, Whitney wouldn’t justify her analysis saying “Quantifying is a guesstimate at this point.” (“Whitney Municipal-Bond Apocalypse Short on Specifics,” by Max Abelson and Michael McDonald, Bloomberg News, Feb 1, 2011.) 60 Minutes admitted it had never reviewed her much-touted report. The report never mentioned sizable defaults, only that there “invariably” would be defaults.


This week there didn’t seem to be any European meetings, summits, scoldings, or anything else. Spain announced $11.5 billion in spending cuts, while its tax revenues will have to be boosted, as its deficit was larger than expected. Yields on Spanish government bonds, meanwhile, fell to new lows for the second half of 2011 (bottom panel below.) Italy had what some are calling a successful bond auction, issuing bonds at rates well below one month ago.

That has more than a passing correlation to a news story that the European Central Bank‘s (ECB) balance sheet had grown to 2.73 trillion Euro ($3.55 trillion). (For comparison purposes, the Federal Reserve’s balance sheet is presently $2.817 trillion large.)  That marked an increase of 10% in one week, as the ECB loaned considerable sums to European banks. Contrary to public opinion, European bankers aren’t stupid–dumb, maybe–they know a spread over the low cost of the ECB’s loans when they see one, and it’s likely that much of those loan proceeds went to invest in bonds of Spain, the safest of the PIIGS.

This Week

While indicators next month will tell us how December shook out, this is, naturally, the last report on releases in 2011. We expect that the economy in 2012 will be much like 2011′s, slow growth, but with no recession. Housing could become a tailwind for the economy in 2012, which will be a welcome change from the last four years. While hiring hasn’t yet begun to pick up, certainly the rate of firings has slowed down. As with 2011, as with stocks, so it is with the economy in 2012: much will depend on what happens in Europe. It’s a foregone conclusion that Europe is in some sort of recession. A mild one shouldn’t hurt the U.S. too much; a deep one or a crisis that turns worse will substantially increase U.S. recession risks.

With respect to economic indicators, it was a mixed bag. One of my former, cliche-challenged colleagues would have called it a mixed bag of worms. On a year-over-year basis, the CaseShiller Home Price index fell about in line with economists’ estimates and the September decline. (CS data runs about two months in arrears, so this week’s data reflected October figures.) They fell another (-)3.40%, although the price level remained above the March 2011, low, which was the lowest level of the last five years. On a positive note, Pending Home Sales for November rose by 7.3%, confounding economists, who expected a barely noticeable rise of 1.5%. This series looks a whole lot better than other housing-related indicators, down, as it is, just 20% from 2005 levels.

The Conference Board’s Consumer Confidence Survey bounced nicely in December, coming in at 64.5, versus economists’ estimates of 58.9, and well above November’s 56.0 reading. While that leaves the reading still 42% lower than 2007 peak levels, it also takes the indicator back to the improving trend begun in 2009.

There were four regional activity indexes that came out this week from Richmond, Kansas City, Milwaukee, Chicago, and Dallas. All but one was worse than expected. Two were better than the previous month’s reading; two worse; one unchanged. Initial Jobless Claims remained below 400,000 for the fourth week in a row, while the four-week moving average remained pointing down. At this time of year, economists and others are quick to point out that claims are volatile, and the moving average is a better gauge.

While economists spent much of the second half of 2011 worrying too much about the economy, under-estimating its strength, they’re recently begun too over-estimate its strength, as is on display below.


 Next Week

 Key indicators to watch. Only one matters next week. The rest get relegated to side shows.

  • Nonfarm Payrolls (Friday) – December
  • Unemployment Rate (Friday) – December
  • Change in Household Survey employment (Friday) – December – This won’t be the headline report–the first two will take that place–but this could be the more important report, as it tends to be near turning points. Make no mistake, if we’re in a turning, it’ll be like an aircraft carrier turning, not a Mini Cooper.

With this last blog posting of 2011, I hope that 2012 is a good year for you and yours.

Graig Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


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