5 ‘Black Swans’ We Could See in 2012

01/13/2012 4:22 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Although anything could happen over these 366 days, it can make all the difference to be prepared and act early in the face of a dynamic-changing event. MoneyShow.com markets editor Jim Jubak explains what he sees as the five most likely of these events, and how you can profit in either direction.

I’m sure that after a year like 2011, you can put together a list of things that might go wrong with the stock market.

2011 feels like a year when everything that could go wrong did. A debt crisis in Europe. A credit downgrade in the United States. Rising inflation and rising interest rates in Brazil and China. Another year of sinking prices of natural gas, and of soaring prices for commodities such as rubber.

If you’re an optimist, you might even remember 2011 as a year when lots of things went right, too. Thanks to the Euro debt crisis the price of US Treasuries rose steadily.

High volatility and low rates on money markets turned high-dividend strategies like Dogs of the Dow into winners. The S&P 500 returned 100 times the yield on a US Treasury bill. (Of course, that did still amount to a return of just 2.12% for the year.)

As we head into 2012, it’s only logical to work off that list of wrongs and rights from 2011 as a guide to what will happen in 2012. Turning over a calendar leaf doesn’t put a period to a trend.

The Euro debt crisis didn’t end just because the calendar said January 1, 2012 instead of December 31, 2011. Yields on money markets and CDs didn’t suddenly go from microscopic to mouth-watering just because we counted the ball’s descent in Times Square. Dividend-paying stocks are still incredibly attractive.

But you shouldn’t limit your thinking about what might happen in 2012 to what did happen in 2011, either. Looking in your rearview mirror is a great way to navigate if you’re driving backwards, but it’s not a good way avoid the bumps ahead or profit from the opportunities around the next curve.

To invest for the future—for 2012 instead of 2011—you need to mix your knowledge of the road behind and the terrain ahead.

To help you plot your strategy for the year ahead, I’ve put together a short list of five things that didn’t happen in 2011, but that might happen in 2012. In other words, these are potential new “things” that should get figured into your investment thinking for 2012.

1. War with Iran
We’re already engaged with Iran in a battle of economic sanctions that’s designed to even further cripple an already struggling Iranian economy.

If you connect the dots—assassinations of Iranian nuclear scientists and computer virus attacks on Iranian uranium enrichment plants—it looks like somebody is engaged in a covert war with Iran. The goal is to stop Iran from producing a nuclear bomb.

The danger is that the current economic and covert battle will escalate to a hot war in the Straits of Hormuz, the narrow passage that carries about 20% of the world’s oil. It looks like push will come to shove in 2012.

The Iranian government seems determined to press ahead with its nuclear program and is building new facilities that would be much tougher to destroy by bombing. The US and Israel are deeply worried that letting that go forward means that stopping Iran’s nuclear program could get a whole lot harder.

I’d definitely make sure that I had some exposure to oil in my portfolio in 2012—even if the world avoids a hot war, the saber rattling will push up the price of this commodity.

2. The Gold Overhang
Gold is an incredible store of value in uncertain times. That’s why worried investors buy it in years like 2011.

But what happens when investors who stocked up on gold need to realize some of that value? They sell…and the price of gold struggles.

In fact, the price of gold struggles even when the markets just fear this kind of selling. In early 2009, for example John Paulson’s hedge fund bought almost 100 metric tons of gold. Paulson & Co.’s main fund, Advantage Plus, has struggled recently, losing about 50% of its value in 2011. That’s raised fears that Paulson will sell some of that gold in order to raise cash for the fund.

But Paulson isn’t the only troubled potential seller. The central banks of Greece, Spain, Portugal, and Italy hold among them 3,200 tons of gold. Might one of more of those countries need to start selling? The fear is enough to keep pressure on gold prices until later in 2012.

We’ll know more about any selling by Paulson & Co. in February, after the company files its December quarterly statement about its holdings in the SPDR Gold Trust ETF (GLD). Any certainty about selling by the troubled members of the Eurozone will have to wait for the end of the euro crisis.

Continued…

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3. Beijing to the Rescue of the Shanghai Stock Market
China’s press has started to report worried remarks from the country’s leaders that China’s stocks have fallen far enough. China’s government can’t simply command that stocks go up, but it can do the next best thing—direct more money at the Shanghai market.

Right now, China’s financial regulators are working on a number of reforms that would allow China’s pension funds to invest hundreds of billions of yuan in new cash in Shanghai’s stocks.

One reform would let housing provident funds, which manage money put aside by companies for their employees’ future housing purchases, to invest in the stock market. Another would let urban pension funds run by the government buy and sell stock.

Right now, rules limit stock market investments to relatively few social security and annuity funds, which can invest up to 40% of their assets in stocks. And at the end of 2010, China’s urban pension funds controlled 1.5 trillion yuan ($231 billion) in assets.

Expect new rules to allow more stock investing as soon as the Beijing bureaucracies fight out which agency will get to administer the new rules. The possibility of new cash from pension funds is one more reason to expect an end to the bear market in Chinese stocks (as best bet on with the iShares FTSE China 25 Index Fund (FXI)), and to expect gains in correlated stock markets, such as that of Brazil (and the iShares MSCI Brazil Index Fund (EWZ)).

4. Food Commodity Prices Can Move Down, Not Just Up
The long-term trend for food prices is still up, and then up some more, as the world tries to feed more people on a shrinking base of farmland.

But that doesn’t mean that in the short run food prices can’t go down. It’s been a long time since that’s happened—so long that many investors have forgotten that it can happen—but it looks very possible for 2012.

Already this year the Food and Agriculture Organization of the United Nations has reported that its food price index fell to its lowest level in more than a year. And the US Department of Agriculture sent grain prices down in early January by announcing it had found an extra 200 bushels of corn in the nation’s grain bins in December.

Lower food prices wouldn’t be great for food commodity-related stocks, such as Deere (DE) or Potash of Saskatchewan (POT). But it would be good news for food makers and retailers (such as Coca-Cola (KO), PepsiCo (PEP) and McDonald’s (MCD)) that would see costs fall, as well as for consumers who would see stable prices at the grocery store.

5. The Breakup of the Euro
Investors spent 2011 worrying and anticipating an end to the euro—2012 will see it happen. The catalysts will be downgrades to France, Austria, and maybe one other member of the shrinking number of AAA-rated Eurozone economies, leaving Germany unable to support the Eurozone’s AAA rating all by itself.

Those downgrades would lead to a defeat of French president Nicolas Sarkozy in elections this spring and his replacement with a much more euro skeptic president. And the impossibility of a Greek economic recovery within the euro will become undeniable to all.

The breakup will be considered impossible until the last moment—thus making the event as messy as possible. And, to everyone’s surprise, the European Union, the economic single market, will actually survive the demise of the single currency.

I’m not sure that this chaos will drive US interest rates even lower—0 is 0 after all—but the dollar and the yen will be major beneficiaries of the turmoil. (And, by the way, you’ve still got plenty of time to refinance, it would seem.)

Do I guarantee each of these give events will happen in 2012? No way. Nobody can ever actually guarantee any future—not even my neighborhood seer Psychic Maria (who has predicted that the New York Giants will win the Super Bowl.)

But I do think you’ll be a better investor—more flexible and more cautious at the same time—if you let these strong possibilities into your thinking in 2012.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Deere and Potash of Saskatchewan as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here. .

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