“2012 – The Year of the Dragon”

Jan­u­ary 3, 2012

Tonight when I chase the dragon
The water will change to cherry wine
And the sil­ver will turn to gold
Time out of mind

... Steely Dan, 1980

Year-end let­ters are always dif­fi­cult to write because there is a ten­dency to either dis­cuss the year gone by; or worse, try to pre­cisely pre­dict what is in store for the new year. Nev­er­the­less, 2012 has arrived, and as the Year of the Dragon, I thought I would share these thoughts with you from Cal­i­for­nia Psy­chics, writ­ten by Psy­chic Ver­bena (as para­phrased by me):

“The last Year of the Dragon, which occurred in 2000, was fraught with fear. There was a lot of hand wring­ing about the col­lapse of our tech­no­log­i­cal world, the Y2K bug and other mil­len­nial prophe­cies that turned out to be more hype than bite. The Year of the Dragon is [here] and fear and trep­i­da­tion are once more an issue. This time it’s the Mayan Cal­en­dar and the alleged 2012 Armaged­don prophecy. Is the Chi­nese Year of the Dragon, which comes around every 12 years, truly some­thing to be feared?

Unlike the wicked, fire-breathing drag­ons of West­ern mythol­ogy, China’s celes­tial dragon sym­bol­izes potent and benev­o­lent power. Drag­ons are ancient, majes­tic, wise, and intel­li­gent, and Dragon years are con­sid­ered par­tic­u­larly aus­pi­cious for new busi­nesses, mar­riage and chil­dren. Dragon years also tend to boost indi­vid­ual for­tunes and the world econ­omy. It’s also true, how­ever, that all five of the Chi­nese Dragon years — Wood, Fire, Earth, Metal and Water — tend to mag­nify both suc­cess and failure.

What influ­ence might the Water Dragon, which rules from Jan­u­ary 23, 2012 to Feb­ru­ary 9, 2013, have on the pow­er­ful ener­gies already antic­i­pated at that time? Like all Drag­ons, the Water Dragon is an inno­v­a­tive, fear­less leader. But the Water Dragon is also far more sen­si­tive to oth­ers’ needs, and is more likely to be pro­gres­sive and diplo­matic, as well as socially and envi­ron­men­tally con­scious. Because Water bestows a more peace­ful dis­po­si­tion, this Dragon will act wisely and intel­li­gently, and unlike his fel­low Drag­ons, is will­ing to set aside his ego for the good of all.

This Dragon is a suc­cess­ful nego­tia­tor, and while he is adept at mar­ket­ing, he also knows how to apply force skill­fully when nec­es­sary. ... If you sub­scribe to the dawn-of-a-new-era the­ory of 2012, then it’s easy to see how the influ­ence of the Water Dragon will increase the like­li­hood of suc­cess for pro­gres­sive move­ments gain­ing momen­tum all across the globe. ... But of all the Dragon years, the 2012 Water Dragon is most likely to bestow the Chi­nese Five Bless­ings of har­mony, virtue, riches, and ful­fill­ment and longevity, adding even more weight to the grow­ing belief that 2012 will be about break­throughs, not disasters.”

From Verbena’s lips to God’s ears because I am really pulling for a year steeped with “har­mony, virtue, riches, ful­fill­ment, longevity,” and “adding even more weight to the grow­ing belief that 2012 will be about break­throughs, not dis­as­ters.” As stated in last week’s let­ter, I remain stead­fast in the belief there will be no reces­sion, nor will Euro­quake pull us into one. I also embrace the theme that the nation is mov­ing in the direc­tion of energy self-sufficiency and that an Amer­i­can man­u­fac­tur­ing renais­sance is tak­ing place. More­over, there appears to be the hint of a hous­ing recov­ery, as well as a tech­nol­ogy rev­o­lu­tion. Com­bine these beliefs with the demo­graph­ics of a baby boom echo, which should fos­ter a new cadre of investors, and I think the S&P 500 (SPX/1257.60) will have a mid– to high-single-digit return in 2012. If you layer in a 3–4% div­i­dend yield on top of said return, the allure of equi­ties becomes pretty compelling.

How­ever, that is not true for Barron’s req­ui­site cur­mud­geon Alan Abel­son, who writes in this week’s edi­tion, “It’s so darn tough, try as we might, to dig up gen­uine cheer­ful news.” Barron’s Belly­acher goes on to lament, “Scour­ing the eco­nomic and finan­cial land­scape for bright spots can also be some­thing of an exer­cise in futil­ity.” To which I reply, “How can we all eat at the same table and then dis­agree about what’s been served?!” Indeed, of the 45 eco­nomic indi­ca­tors I track only three are not show­ing stronger growth read­ings. Those three are Michi­gan Con­sumer Con­fi­dence, The Case Shiller Home Price Index, and The Aver­age Work Week. More specif­i­cally, rail­car load­ings tagged new all-time highs recently, credit card delin­quen­cies have plunged to a record low, regional PMIs (Pur­chas­ing Man­agers Index) are stronger, pend­ing home sales are improv­ing, job sur­veys are bet­ter, real retail sales are on track for a +7% rise quar­ter over quar­ter (annu­al­ized rate), and unem­ploy­ment claims are falling. So I ask it again, “How can we all eat at the same table and then dis­agree about what’s been served?!”

Con­tin­u­ing on the fun­da­men­tal tack, it’s worth not­ing there is a global inter­est rate eas­ing cycle under­way and that crude oil is back below $100 per bar­rel. These are not unim­por­tant obser­va­tions because every stock mar­ket rally since last sum­mer has been thwarted when oil trav­eled above $100 per bar­rel. More­over, with the exten­sion of the exist­ing tax and unem­ploy­ment ben­e­fits, real GDP is more likely to approach 3% in 2012. Speak­ing to earn­ings, while fourth quar­ter earn­ings have yet to be reported, based on cur­rent esti­mates the SPX is on track to earn a record $97. Sur­pris­ingly, for the past 11 months my esti­mate for the SPX has been $96, yet many of Wall Street’s finest scoffed at such an opti­mistic num­ber. My esti­mate for 2012 has been $106 for nearly a year, and I still feel com­fort­able with that esti­mate pro­vided we don’t talk our­selves into a recession.

As for the tech­ni­cals, by my work we expe­ri­enced another Dow The­ory “buy sig­nal” last week when both the DJIA (INDU/12217.56) and the DJTA (TRAN/5019.69) bet­tered their Octo­ber 2011 clos­ing reac­tion “highs.” This week we may see another pos­i­tive occur­rence called a “golden cross,” that is if the DJIA’s 50-day mov­ing aver­age (@11934.29) crosses above its 200-DMA (@11946.57). That said, the NYSE McClel­lan Oscil­la­tor is short-term over­bought and the stock market’s inter­nal energy has not yet been fully recharged. Accord­ingly, after the equity mar­kets pop their col­lec­tive “corks” with an early Jan­u­ary upside blow off, it would not sur­prise me to see a pull­back attempt. One thing is for sure, the volatil­ity remains legion, for as the eagle-eyed folks at the Bespoke Invest­ment Group write:

“Through­out 2011, we made numer­ous men­tions of the record num­ber of ‘all or noth­ing’ days in the stock mar­ket. We define an all or noth­ing day as one where the daily net Advance/Decline read­ing for the S&P 500 is greater than +/- 400. Up until recently, these types of days were rel­a­tively rare and there were some peri­ods where more than a year went by with­out any all or noth­ing days. In the last few years, how­ever, we have seen an explo­sion of occur­rences, cul­mi­nat­ing with this year’s record read­ing of 70 days! To put that num­ber in per­spec­tive, from 1990 through 2004, there were only 67 all or noth­ing days!”

Such a volatile envi­ron­ment clearly calls for risk man­age­ment and with these thoughts we wish you a healthy and pros­per­ous new year.

The call for this week: Since the day after Thanks­giv­ing I have stuck with the strat­egy that the Santa Claus rally had begun. On Novem­ber 25th the SPX was chang­ing hands around 1158. We are now 100 points higher. Con­se­quently, I would not chase the dragon right here since I antic­i­pate that an upside blow off is due ...

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