Monday, March 12, 2012

TTT Talks 2011 INTO 2012

After a tumultuous year that was among the
most volatile on record, the domestic stock markets
survived a sluggish U.S. economy, a spreading
euro debt crisis, and a gridlocked Washington
to end 2011 virtually where they started.
Propelled by a fourth-quarter boost of
11.9%(1), the blue-chip Dow Jones Industrial
Average closed the year at 12,217.56, an increase
of 5.6%(1), the third consecutive positive year for
the Dow. The S&P 500, a broader gauge of market
activity, climbed 11.1%(1) in the final quarter
and ended at 1,251.60, almost dead even with last
year’s 1,251.64 close. The technical 0.003%(1) difference
was its smallest annual move since 1970.
The technology heavy Nasdaq Composite gained
7.8%(1) in the fourth quarter but closed at
2,605.16, down 1.80%(1) for the year.
The lack-luster domestic stock markets still
outperformed the major international markets.
The Dow Jones Global Index, excluding the U.S.,
tumbled 16.3%(1) in 2011 while the STOXX Europe
600 Index fell 11.34%(1). U.K.’s FTSE
100 Index dipped 5.6%(1); Germany’s DAX Index
lost 15%(1), its first annual decline since 2008.
France’s CAC 40 dropped 17%(1) and Italy’s FTSE
MIB Index, down 26%(1), was the biggest loser.
Back home, the Federal Reserve (“Fed”)
reduced its forecasts for U.S. economic growth.
It predicted that the economy would grow 2.7%
in 2012, well below its June projections of 3.3% to
3.7%. For 2013, the Fed now expects expansion
of 3.2% down from its previous estimates of 3.5%
to 4.2%. The Fed projected a gain of up to 4% in
(1) Return excludes reinvested dividends.
For information regarding the indexes cited and key investment terms used in this report see page 6.
The Central Bank also predicts that the U.S.
unemployment rate will still be at least 8.5% at
the end of this year, at least 7.8% at the end of
2013 and at least 6.7% to 7.6% by the fourth
quarter of 2014.
There were several bright spots on the economic
horizon. For one thing, the Labor Department
reported that the private sector added
200,000 jobs in December, marking the sixth
consecutive month of gains topping 100,000. As a
result, the unemployment rate dipped to 8.5%
from November’s 8.7%, to its lowest level in
nearly three years.
Another positive note was the report by the
Institute of Supply Management (“ISM”) that U.S.
manufacturing expanded in December at its fastest
pace in six months. ISM’s closely watched
gauge of factory activity climbed to 53.9 in December,
up from 52.7 in November and its best
reading since last June. Scores over 50 indicate
expansion. The trade group also reported that its
index of non-manufacturing or service industries
rose to 52.6 in December from 52 in November,
which was the lowest reading in nearly two
Housing, a vital factor in the economy, is
showing signs of recovery. The Commerce
Department reported that housing starts in
November reached 685,000 units, up 9.3% from
October and the highest level since April 2010.
Building permits increased 5.7% to an annual rate
of 681,000. The agency also reported that sales of
new single-family homes rose 1.8% in November
to a seasonally-adjusted 315,000 units, the
highest total in seven months.
The Conference Board reported that its consumer
confidence index spurted 10 points in
December to just above the level of a year ago.
Consumer spending, however, which accounts
for about 70% of U.S. economic activity, inched
up only 0.1% in November compared with
October, according to the Commerce
Department. Spending was restrained because
disposable personal income was flat in November
after increasing 0.3% in October.
Indications that inflation is slowing came
from the Labor Department report that its consumer
price index was unchanged in November
from October. Deleting volatile food and energy
prices, the index was up 2.7% in November. For
the year to date, the rise was 2.2%, slightly above
the Fed’s preferred range of 2%. The agency also
reported that its producer price index grew at a
seasonally-adjusted 0.3% in November. Removing
energy and food prices, the index was up by just
With U.S. imports declining more than exports,
the trade deficit narrowed to $43.5 billion
in October against $44.2 billion in September,
according to the Commerce Department. Exports
of goods totaled $127 billion in October
against $129.3 billion in September. Service exports
of $51.4 billion were unchanged from the
prior month. Imports of goods came to $186.6
billion for October against $188.8 billion in September.
Imports for services inched up to $36.1
billion from $36.0 billion. U.S. import prices,
which had fallen 0.5% in October, grew 0.7% in
November, the highest increase since April 2011.
Compared with most major market currencies,
the dollar ended 2011 within roughly 3% of
where it began the year. The ICE U.S. Dollar Index,
which measures the greenback against a
basket of other currencies, increased 1.5% in the
year. Hitting a new low in the final days of the
year, the euro closed at $1.2960. The chief exception
to the strong dollar was the yen. Despite
a year of deep trouble in Japan, the yen ended
more than 5% higher against the dollar. Climbing
from 81.25 yen at the start of the year, the dollar
fell to a record low near 75.8 yen in April and
completed the year at 76.92 yen.
Last year was a disappointment for deal
makers, with mergers and acquisitions declining
For information regarding the indexes cited and key investment terms used in this report see page 6.
after a strong start, according to Thomson Reuters.
In the first six months of 2011, announced
global deals came to $1.3 trillion, the highest
level since the financial crisis. However, deals
slumped 14% in the second half, bringing the
2011 dollar volume to $2.6 trillion, slightly below
the 2010 figure of $2.66 trillion.
The number of initial public offerings
(“IPOs”) and dollars raised was the lowest since
2009, according to Dealogic. Globally, there were
240 deals, raising $25.3 billion, in the fourth quarter,
the lowest deal volume since the third quarter
of 2009 and the lowest dollar volume since
the second quarter of 2009. For all of 2011, there
were 1,243 IPOs, raising $160 billion, again the
lowest figures since 2009. For the third consecutive
year, the world’s leading exchange for IPOs
was Hong Kong, with $31 billion in deals. The
volume of deals on the Chinese mainland slightly
topped the combined total of Nasdaq and the
New York Stock Exchange.
Based on current earnings estimates, Bloomberg
News reported that stocks on the S&P 500
were trading at a price/earnings ratio of 13.24 on
December 30, 2011. This compares with 11.94 on
September 30 and 14.88 on December 30 last
year. The P/Es for trailing twelve - month earnings
were reported by S&P at 12.96 on December
30, 13.01 on September 30 and 15.01 on December
30, 2010. As we see it, the P/E’s are neither
terribly high nor terribly low. Given present
market conditions, they appear to be in the normal
range as far as valuations are concerned.
The current consensus among Wall Street
research analysts is that S&P fourth-quarter
earnings will climb 8.3% in 2011 to $24.40,
according to Thomson Reuters. In October the
analysts were expecting 15% gains in the quarter.
For all of 2012, the S&P earnings are projected to
increase 10% to $107.20.
Looking to the future, both analysts and investors
were more bullish at the year’s end, with
analysts the most optimistic. Surveyed by Investors
Intelligence, analysts stood at 50% bulls and
29% bears on December 30, a reversal of their
position on September 30, which saw 37% bulls
and 41% bears. At the end of 2011, analysts came
to 56% bulls and 20% bears. Reported by the
American Institute of Investors, their members
totaled 41% bulls and 31% bears on December 30,
32% bulls and 47% bears on September 30, and
52% bulls and 20% bears at the end of 2010.
Since the market had risen since early October,
the increased optimism is no surprise.
They may be right. From August to October, our
sentiment indicators registered a lot of pessimism.
While some of our current indicators still
include some pretty bad numbers, our sentiment
model reading overall is now neutral.
Among our other models, the monetary reading
is bullish. That’s because the Fed has driven
interest rates to zero and is buying securities.
However, we wonder how bullish it can really be
when rates are at zero. As far as the tape is concerned,
we consider the current action quite positive.
It’s difficult to know the tape’s actual
performance because of the distortions caused
by the computer traders who account for more
than half of the volume. There are far more unusual
up and down days than we have seen in the
past. Taking a long view, the tape is acting reasonably
Our stance on the market at this writing is
somewhat bullish and we are about 82% to 83%
long. For our Fund any investment figure over
80% is bullish.

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