Trend Watcher – 2012 Expectations

Joseph A. Gomez, Sr. Investment Advisor 

Will 2012 be a repeat of “Sell in May and Go Away”? Collectively, strategists are expecting the S&P 500 to finish 2012 at 1,350, which would be a gain of over 7%. HSBC has a year-end 2012 price target of 1,190 (down 5+%). Goldman Sachs is expecting the S&P 500 to finish the year at 1,250 (basically flat). Deutsche Bank has the highest price target at 1,500, almost 20% higher. On balance, strategists are bullish, but not overly so. Sectors that are projected to see double-digit earnings growth include: Telecom, Materials, Industrials and Technology. The only sector with lower expectations is Utilities. The remaining sectors are forecasted to see single digit growth in earnings.

In terms of the market’s valuation, the S&P 500 closed 2011 at 13 times earnings, below the historical average of 15.35. If the S&P 500 manages to “revert to the mean”, the S&P 500 would have to increase roughly 18% to the 1,500 level.

For three years, economists have been predicting higher interest rates. Will they finally be right in 2012? In terms of economic sentiment, all but two of the seven surveys of economic sentiment are currently in the lower end of their 6-year range. Economists are expecting the U.S. economy to grow modestly, around 2%-2.5% for the year. Inflation is expected to remain tame and unemployment is expected to slowly drift lower throughout the year.

As I see it, if Ben Bernanke wants to keep his job, he must make every effort for Obama to keep his. Unless there is some unexpected deterioration here or in Europe, the odds for an Obama re-election will continue to strengthen as growth, unemployment and inflation improve. Another positive development, is real estate. Housing seems to have seen its bottom in the last 30 days.

Last week’s earnings were heavily focused on technology and banking and it was ugly. Google’s shares are down more than 9% YTD. Next week, however,we get a much broader measure of the economy with earnings from oil & gas, medical devices, consumer non-durables and aerospace companies. Yet, all eyes will be on Apple’s earnings report (see calendar below). Whether you look at it’s valuation or growth numbers, Apple seems to satisfy both value and growth investors. A closer look reveals that the shares are historically undervalued when you look at conventional metrics. Apple shares are cheap, but how much is already discounted in the price?

No doubt, preliminary channel checks indicate that Apple will blow past expectations this week. The key, however, is the whisper number. One good source of consensus estimates can be found at Estimize.com. Estimize is a platform where social finance users can share their earnings and economic estimates in a structured way. By contributing their estimates, community members will discover a more representative estimate of what the entire market believes, not just a narrow slice of opinion from sell side Wall Street analysts. Below are the consensus estimates for Apple:

EPS CONSENSUS

• Estimize 10.36

• Wall Street  10.05

REVENUE CONSENSUS

• Estimize 39.17

• Wall Street 38.72

Below you’ll find chart trends that stood out last week as well as actual holdings from our model portfolios. I also include an earnings calendar, an economic calendar and key interest rates. Standouts in our portfolios last week include Barcalys, iShares Emerging Market ETF and Panera Bread.

Have a pleasant and productive week.

Apple Metrics since 2004

Source: Apple 2.0/Fortune Tech

 Important Earnings Next Week (bold names are portfolio holdings)

Economic Calendar by Econoday.com

Monday Jan 23	Tuesday Jan 24	Wednesday Jan 25	Thursday Jan 26	Friday Jan 27
Market Focus » 4-Week Bill Announcement 11:00 AM ET 3-Month Bill Auction 11:30 AM ET 6-Month Bill Auction 11:30 AM ET	FOMC Meeting Begins ICSC-Goldman Store Sales 7:45 AM ET Redbook 8:55 AM ET 4-Week Bill Auction 11:30 AM ET 2-Yr Note Auction 1:00 PM ET Obama Speaks 9:00 PM ET	Bank Reserve Settlement MBA Purchase Applications 7:00 AM ET FHFA House Price Index 10:00 AM ET Pending Home Sales Index 10:00 AM ET EIA Petroleum Status Report 10:30 AM ET 5-Yr Note Auction 11:30 AM ET FOMC Meeting Announcement 12:30 PM ET Chairman Press Conference 2:15 PM ET	Weekly Bill Settlement Durable Goods Orders 8:30 AM ET Jobless Claims 8:30 AM ET Bloomberg Consumer Comfort Index 9:45 AM ET New Home Sales 10:00 AM ET Leading Indicators 10:00 AM ET EIA Natural Gas Report 10:30 AM ET 3-Month Bill Announcement 11:00 AM ET 6-Month Bill Announcement 11:00 AM ET 7-Yr Note Auction 1:00 PM ET Fed Balance Sheet 4:30 PM ET Money Supply 4:30 PM ET	GDP 8:30 AM ET Consumer Sentiment 9:55 AM ET

 Key Rates by Bloomberg.com

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Alhambra Investment Partners and/or its clients have positions in: GOOG, AAPL, BCS and PNRA.