Crystal Ball Predicts Trying Year

01/03/2012 12:54 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Gold and bonds will outshine stocks amid unrest and war, writes senior editor Igor Greenwald.

My crystal ball is made of Gorilla Glass and mounted on a base of precious metals and rare earths. It’s the bastard love child of Watson, Siri, and a Google (GOOG) algorithm too profitable to be named.

Still, any similarity between its forecasts and the touchstone events of 2012 will be purely coincidental. As Raj Rajaratnam could tell you, predicting the future is very hard without well-placed sources on boards of directors. My predictions aim to illustrate the present, and if any of them should stand the test of time, please blame the screwed up universe we inhabit.

So, 2012 will start in the US with a stock-market rally based on stronger manufacturing sentiment in China and India, suggesting that 3 billion Asians are not yet ready to concede defeat because 350 million Europeans owe each other too much money.

But whether it lasts a day or a week, the urge to buy will eventually wane as Standard & Poor’s downgrades France, making it likelier that Italy and Spain will default for lack of allies both charitable and creditworthy.

Surprisingly resilient corporate earnings and decent US economic data could prove more persuasive in the short run, however, pushing stocks higher—to the regret of investors who sold in 2011.

Whatever the S&P may think of France, Europe will scrape up enough financial firepower to get Italy through its busy refinancing schedule over the first three months of the year. Markets will breathe a huge sigh of relief, but not for long.

By May, France will have a new Socialist president. By July, Athens and Rome will have seen more rioting. By September, the increasingly unpopular German chancellor will be suggesting that the exit of some countries from the euro is preferable to the alternative of financial subsidies and money printing.

The political upheavals that began last year will continue, with the Syrian despot overthrown in a sectarian bloodbath, more unrest in Bahrain, and a crackdown on protests in Russia. China will see strikes with increasingly political demands, and will attempt to meet some of these at the local level.

The Saudi monarch’s passing in August will be overshadowed by a massacre of Shiite protesters in the oil-producing Eastern Province a month later. Crude oil prices will spike to $160 a barrel after Israel strikes Iran in October and Iran retaliates though proxies in Gaza and Lebanon. The Straits of Hormuz will remain open, but not before an Iranian speedboat rams a US warship.

The overwhelming US response will boost President Obama’s poll numbers into dead heat with Republican nominee Jeb Bush. Bush will have entered the race in February at the head of the movement to stop Ron Paul, who threatened to run away with the nomination after a string of early triumphs.

Bush will complain that Obama should have attacked Iran earlier. The incumbent’s climb in the polls will stall, than falter as $5-a-gallon gasoline takes its toll on the economy.

By then, general risk aversion and more bond purchases by the Federal Reserve will have driven the ten-year Treasury yield to 1.45%, with no rebound in sight so long as unemployment remains above 8%. The housing market will continue to rebound on the back of the low rates and rising rents.

Google will buy out Research on Motion (RIMM) for its patents, paying a 20% premium to the prior closing price of $11 a share. Yahoo (YHOO) will get sold after a shareholder revolt as well. Oracle’s (ORCL) takeover bid for EMC (EMC) will prove more of a shocker.

Gold will finish 2012 at $2,300 an ounce, while crude will ease off to $110 a barrel as the Iran crisis abates and global recession takes hold. But stocks will respond to signals that the Fed will keep buying assets until asset prices improve. The S&P 500 will end the year at 1,258.

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