You thought 2011 was tough?

By Edward Krudy / NEW YORK

(Reuters) - Shaky Europe. Political gridlock. Volatile markets.

Familiar themes for those who lived through 2011, and investors should be ready to revisit them next year.

With a spiraling debt crisis in Europe, political upheaval around the world, and crumbling creditworthiness in major industrial nations, 2011 was a tough year to know where to invest. 2012 is unlikely to offer much respite.

The S&P 500, a measure of the biggest U.S. companies' market value, spent much of the year getting pushed up and down, flummoxing shorts and longs - and scaring Moms and Pops away from stocks. It ended the year at 1,257.60, down a mere 0.04 of a point.

But the S&P 500's tepid performance was encouraging, compared with other world equity markets. The United States may still be seen as a safe haven, though even that looks uncertain.

For every rally built on improving economic figures this year, selloffs were never far away on worries the European debt crisis would eventually drag the continent into a recession and perhaps the United States as well. That could continue in 2012.

China and other fast-growing emerging markets can no longer be leaned on as those economies slow. In 2011's last half, the poorest-performing sectors outside of banks were most connected to global growth - materials, energy and industrial companies.

"There is a growing realization that the global economy is in jeopardy," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. "There is uncertainty in every corner of the world."

That uncertainty fed substantial volatility in 2011. Despite the S&P's flat performance this year, there were 66 trading days when stocks moved in a 2 percent range. In 2008, when Lehman Brothers collapsed during a global financial crisis, there were more than 130 trading days when stocks swung that much. But that led to a flight from equities by retail investors.

U.S. equity funds had outflows in every month since May. More than $483 billion left U.S. mutual funds in 2011 through the year's second-to-last week, even though the U.S. market outperformed foreign stocks late in the game.

BEATING GLOBAL RIVALS

The S&P 500 ended the year off a scant 0.003 percent, the closest it has come to unchanged since 1947, according to Standard & Poor's. The Dow Jones industrial average finance/markets/index?symbol=us%21dji">.DJI finished 2011 with a 5.5 percent gain, while the Nasdaq Composite Index .IXIC slipped 1.8 percent.

In contrast, the MSCI world stocks index .MIWD00000PUS fell 9 percent, while the FTSEurofirst-300 index .FTEU3 slid nearly 11 percent.

The darlings in the emerging markets fared the worst. China's Shanghai Composite index .SSEC lost 22 percent, India's BSE .BSESN sank 25 percent, and Brazil's Bovespa .BVSP dropped 18 percent.

Strategists say the U.S. stock market may benefit from reasonable economic growth and attractive market valuation. The S&P 500 is expected to rise 6 percent by the end of 2012, according to the most recent poll of Wall Street strategists.


When Wall Street gets back to work on Tuesday, it will face a holiday-shortened week and a slew of economic indicators. The most crucial numbers will come on Friday when the government will release the December non-farm payrolls report. Economists polled by Reuters expect a December gain of 150,000 jobs, compared with an increase of 120,000 jobs in November.

Volatility is likely to persist through early 2012 because of the uncertainty in Europe and rising concern about slowed earnings growth due to recent revisions.

The S&P 500's price-to-earnings ratio - what investors are willing to pay for a dollar of earnings - is under 12, below the 25-year average of 15. In weaker markets like Germany's DAX, the figure is below 9.

"We're building in a massive recession into these numbers," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

U.S. companies cutting earnings' outlooks recently outpaced those raising theirs by the greatest ratio in 10 years. Some sectors, such as materials, have seen a sharp drop in forecasts for the fourth quarter, Thomson Reuters data showed.

Last week, downbeat earnings from Oracle Corp (ORCL.O) shook confidence in the tech sector's health before the quarterly earnings season's start in January. Oracle joined a growing list of companies, including some of technology's biggest names, whose results and outlooks have set off alarm bells.

Next year, S&P 500 earnings are seen rising 9.9 percent, down from an estimate of 13 percent in October.

RECESSION FEARS

Many economists believe the euro zone is already in recession. They forecast that the economies of the 17-nation bloc will stagnate in 2012 after contracting in this year's fourth quarter and the first quarter of the next.

Investors are worried that Italy and Spain will have to keep refinancing borrowings at unsustainable levels early next year, which could escalate the crisis.

The correlation between the U.S. stock market and the euro skyrocketed in 2011 as investors tied bets on risky assets to the euro's moves. That trend ebbed as equities rallied near the end of the year, but it is likely to flare up again.

So far the U.S. economy has stayed on course for moderate growth. Economists expect it to expand by about 2.1 percent next year. But it is unclear how a slowdown in the rest of the world will affect the economy stateside.

The key may be China rather than Europe.

"China is the 800-pound gorilla in the room and is probably the most important country to watch in terms of their contribution to global growth," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Chinese business confidence is weakening. A survey showed export orders fell for the first time in nearly three years.

The drop in materials shares in 2011's second half reflects worry about declining activity overseas. The S&P Materials Index .GSPM lost nearly 14 percent in the last six months.

GRIDLOCK SHOCK

One of the pivotal events of 2011 was the downgrade of the United States' perfect triple-A credit rating. Standard & Poor's cited congressional bickering as the reason for the downgrade.

August's stalemate in Washington over raising the debt ceiling sparked a selloff that accelerated after the downgrade.

Investors expect the gridlock in Congress to get worse as the U.S. presidential election approaches in November. The election is likely to be close, which will not make legislative efforts to tackle high debt levels and weak demand any easier.

Rancor was in view again in December as Congress struggled to pass a two-month extension of U.S. payroll-tax cuts.

"There will be less certainty about taxation and regulation so that will inhibit business formation and business growth," said Brian Battle, a trader at Performance Trust Capital Partners in Chicago.

Goldman Sachs sees global growth highly susceptible in 2012 to even minor shocks - and those shocks may be political.

"Slowing growth (and in places outright contraction), public-sector cuts, and a renegotiation of the social compact between state and society in different parts of the world is an environment ripe for political turmoil," Goldman said in a note to clients.

Iran-U.S. brinkmanship over Strait of Hormuz nears breaking point

By Marc Burleigh / Agence France-Presse



TEHRAN — A showdown between Iran and the United States over Tehran’s threats to close the strategic Strait of Hormuz to oil tankers worsened Thursday with warships from each side giving weight to an increasingly bellicose exchange of words.

Iran’s Revolutionary Guards rejected a warning that the U.S. military would “not tolerate” such a closure, saying they would act decisively “to protect our vital interests.”

The tough language came as two U.S. warships entered a zone where the Iranian navy’s ships and aircraft were in the middle of 10 days of war games designed as a show of military might.

But a U.S. navy spokeswoman said later that the aircraft carrier USS John C. Stennis and the guided-missile cruiser USS Mobile Bay had transited without incident on Tuesday, in pre-planned, routine operation.

“Our interaction with the regular Iranian Navy continues to be within the standards of maritime practice, well-known, routine and professional,” Fifth Fleet spokeswoman Lieutenant Rebecca Rebarich said on Thursday.

The coming war with Iran

Regional chaos might count as a win for the mullahs

By Reza Kahlili / The Washington Times

Iran’s tyrannical leaders, determined to make the Islamic regime a nuclear-armed state, are preparing for war. That’s exactly what the United States and Israel might have to deliver, and soon. @-Text.rag:Iran’s Supreme Leader Ayatollah Ali Khamenei ordered the Revolutionary Guards in May to speed up the regime’s nuclear-bomb program and arm its missiles with nuclear warheads. Now, sources reveal, Ayatollah Khamenei has ordered the guards to prepare for war.

In a recent meeting of Iran’s Supreme National Security Council, it was decided that the possibility of an attack by Israel or America in 2012 is real and that the country’s forces need to prepare several contingencies for war. It also was concluded that in case of war, the regime could be victorious, though the cost would be high, but it would emerge as the one and only champion of the Islamic cause in the world.

The radicals ruling Iran have long believed that obtaining the nuclear bomb will make them untouchable and will facilitate the expansion of the Islamic movement in the region and the world in bringing the West to its knees. They also have concluded that because of the troubles in the world’s economy and financial troubles in America, even a limited confrontation with America would benefit the Islamic regime.

Just as Hezbollah outfought Israel in the 2006 war, Iran can claim victory against the U.S. in such a conflict, which could include attacking Israel from several fronts. But the real prize for the criminal mullahs would be that it would help the regime bring down the monarchy in Bahrain, create instability in Saudi Arabia and, most important, help the Islamists in Egypt undermine military rule. All this would occur by inciting uprisings for a war of Islam against infidels and Zionists.

The guards in their preparations have mapped out several options. One would be to disrupt the oil flow from the Persian Gulf. They know that about 40 percent of the world’s oil and the majority of oil exports of eight countries in the Persian Gulf pass through the Strait of Hormuz, a narrow waterway that could be blocked by the regime’s forces.

The guards’ navy of speedboats armed with cruise missiles, Iran’s submarines and, most important, the guards’ missiles of various kinds could be launched from deep within Iran and still target the narrow strait.

The guards also have mapped out an extensive list of U.S. bases in the Middle East to attack with their missiles, disrupting the movement of U.S. forces and the operation of the Air Force, which the guards believe will be the main thrust of any attack by America.

For that purpose, several U.S. bases have been identified that could be attacked either by short-range rockets with a range of up to 140 miles or with ballistic missiles with a range of more than 1,250 miles. The two air bases in Kuwait, Ali Al Salem and Ahmed Al Jaber, are less than 85 miles from Iran. In Kuwait, the U.S. camps of Buehring, Spearhead, Patriot and Arifjan, with distances of 65 to 80 miles, are all within reach of the guards’ various missiles.

The guards also are targeting four U.S. air bases in Afghanistan as the main launching pads for any attacks on Iran. The Bagram Air Base, home to most of the U.S. Air Force presence in Afghanistan, is just 450 miles from the Iranian borders and within range of all of Iran’s ballistic missiles. Other air bases in Afghanistan that would be attacked by the guards in case of war are in Kandahar, Shindand and Herat.

The super U.S. base, Al Adid in Qatar, which is home to a variety of U.S. bombers and fighters, is within 175 miles of Iran and a prime target for the guards, though because of favorable relations of the Islamic regime with the government in Qatar, the guards are not sure America can use that air base for its attack and therefore will be much more likely to use its other superbase at Al Dhafra in the United Arab Emirates, also within range of various Iranian missiles. Other U.S. targets of the guards are the U.S. 5th Fleet in Bahrain and Thumrait Air Base in Oman.

The guards also have drawn up plans to confront any uprising from within should one occur after the breakout of war and have mobilized tens of thousands of Basijis ready to put down any unrest against the regime.

The Islamic regime in Iran also counts on Russia and China, with which it has close relations, to come to its help and facilitate an end to war in time to save the regime. China, which holds billions of dollars in contracts and is said to have more than 11,000 contractors, mostly of a military nature, in Iran, has the most to lose in the downfall of the Islamic regime, and its officials already have stated openly that China will aid the Iranian regime in case of war.

Though the Islamic regime never should have been allowed to continue with its suppression of its people, its terrorist activities worldwide and its continuation of its missile and nuclear programs despite U.N. sanctions, one cannot imagine a world with nuclear arms in the hands of the jihadists in Iran.

With officials from both Israel and the U.S. calling a nuclear-armed Iran a red line, leaving the possibility of a military option on the table, we must realize that the only possible solution to this dilemma is a regime change in Iran, which a majority of Iranians support. The price we pay today to save world peace and security will be minuscule to what the world will pay in the not-so-distant future.


Reza Kahlili is a pseudonym for a former CIA operative in Iran’s Revolutionary Guards and the author of “A Time to Betray” (Threshhold Editions, Simon & Schuster, 2010) He is a fellow with EMPact America and teaches at the U.S. Department of Defense’s Joint Counterintelligence Training Academy (JCITA).

Soros sees gold prices on brink of bear market

By Nicholas Larkin, Maria Kolesnikova and Debarati Roy / Bloomberg News

Gold is poised to complete its 11th consecutive annual gain, the longest winning streak in at least nine decades, on the brink of a bear market.

George Soros, the billionaire who two years ago called it the “ultimate asset bubble,” cut 99% of his holdings in the first quarter, Securities and Exchange Commission data show. Hedge fund managers John Paulson, Paul Touradji and Eric Mindich also sold bullion this year. While speculators in New York futures are the least bullish in 31 months, the median estimate in a Bloomberg survey of 44 traders and analysts is for prices to rally as much as 40% to US$2,140 an ounce in 2012.

The divergence of views is widening after prices declined 19% from a record close of US$1,900.23 on Sept. 5, or 1 percentage point away from a bear market. As some investors retreated to cash amid a US$10-trillion slump in global equity values since May, others bought more metal, taking holdings in exchange-traded products to an all-time high two weeks ago. Bullion’s 7.6% gain in 2011 means it’s on track to beat stocks, bonds and the dollar for a second straight year.

“It’s done its job this year of protecting investors,” said Michael Cuggino, 48, who helps manage about US$15-billion of assets, including US$3-billion in gold, at Permanent Portfolio Funds in San Francisco and correctly predicted in February that prices would keep rising. “Gold has been all over the place. If you bought gold at US$1,800 then you aren’t too happy. Some people will get out of gold, but the longer-term investors will remain.”

Trading Partners

Bullion was at US$1,530.07 at 2:35 p.m. in London, below this year’s average of US$1,572.47 and six times more than when the bull market began in 2001. The MSCI All-Country World Index of equities declined 10%, on track for the worst year since 2008, and the Dollar Index, a measure against six major trading partners, advanced 2%. Fixed-income securities around the world gained 4.3% this year, the weakest performance since 2007, Bank of America Corp. indexes show.

Investment in physical metal is cooling. The U.S. Mint’s sales of American Eagle gold coins in November were the weakest since June 2008, data on its web site show. Holdings in bullion- backed ETPs fell about 35 metric tons since reaching a record on Dec. 14, according to data compiled by Bloomberg. They are still 140 tons higher than at the start of 2011 and the total of 2,326 tons, valued at about US$116-billion, exceeds the reserves of all but four central banks. ETP holdings climbed 0.3% yesterday, the first increase in two weeks.

Federal Reserve

Demand had strengthened most of this year as Europe’s debt crisis widened and the Federal Reserve pledged to keep interest rates near zero until at least mid-2013. The European Central Bank cut rates to 1% on Dec. 8, matching the record low of the euro era that began in 1999. That increases the appeal of bullion because it generally earns investors returns only through price gains.

“The longer-term trends, mainly government fiscal and monetary policies, haven’t changed,” said Tom Winmill, who helps manage more than US$200-million of assets from Walpole, New Hampshire, for Midas Funds and whose Midas Perpetual Portfolio may increase its 19% investment in bullion and gold mining companies in the next quarter. “Gold has that preservation-of-wealth role and was probably used quite a bit in the last several weeks.”

Options traders are also bullish, with the top nine holdings all betting on higher prices. The two most widely held contracts give holders the right to buy gold at US$2,000 by the end of March and May, data from the Comex exchange show.

Hedge Funds

That contrasts with money managers, who cut their wagers on a rally to 117,151 futures and options in the week ended Dec. 20, from as many as 253,653 in August, according to data from the Commodity Futures Trading Commission. The hedge funds and other speculators are now the least bullish since May 2009, a month in which gold jumped 10 percent.

Paulson, the billionaire fund manager mired in the worst slump of his career, sold 36% of his stake in the SPDR Gold Trust in the third quarter, an SEC filing showed. New York- based Paulson & Co. remains the biggest investor in the largest gold-backed ETP, with a stake valued at US$3.17-billion.

The 56-year-old manager’s Gold Fund was this year’s best performer among his US$28-billion fund family through about mid- December, people familiar with the figures said last week. Redemption requests for the end of the year were about US$2-billion, two people briefed on the matter said last month. Stefan Prelog, a spokesman, declined to comment.

‘Rational’ Buying

Soros Fund Management LLC, based in New York, sold almost all its shares in the SPDR Gold Trust and the iShares Gold Trust in the first quarter, SEC data show. Its 81-year-old founder, who made US$1-billion breaking the Bank of England’s defence of the pound in 1992, said in January 2010 that buying at the start of a bubble was “rational.”

The fund’s gold sales preceded a decision in July to return the less than US$1-billion managed for outsiders and focus on family and foundation money. It bought more SPDR Gold Trust shares in the third quarter and added options, SEC data show. Michael Vachon, a spokesman, declined to comment.

“Gold became very overbought,” said Charles Morris, who oversees about US$2.2-billion of assets at HSBC Global Asset Management in London and cut his bullion holdings to 6% at the end of November from 15% six months ago. “It will at least consolidate following this almighty rally. When the new bull market arrives, maybe a year or so away from now, then gold will once again prove to be a leading asset.”

‘End of Road’

Dennis Gartman, the economist and author of the Suffolk, Virginia-based Gartman Letter, said Dec. 13 that traders were witnessing the “death of a bull.” He sold the last of his gold the previous day and said Dec. 23 his outlook was neutral. The “megatrend” in bullion is “in all likelihood near the end of the road,” Markus Mezger, co-founder of Zug, Switzerland-based Tiberius Asset Management AG, which manages about US$2.5-billion of assets, said in its 2012 outlook report on Dec. 23.

Eton Park Capital Management LP, founded by 44-year-old Mindich, sold the last of its SPDR Gold Trust shares in the third quarter, according to SEC data. The holding was valued at US$135-million based on the average price over those three months. Jonathan Gasthalter, a spokesman for the New York-based company, declined to comment.

Touradji Capital Management LP, led by its 40-year-old founder, sold all of its shares in the SPDR Gold Trust in the first three months of the year before buying back about 26% of that stake in the third quarter, the data show. Its largest holding in publicly traded equities remains Barrick Gold Corp., the world’s biggest miner of the metal. Prelog, also a spokesman for Touradji, declined to comment.

‘Makes People Nervous’

“Gold is going to go higher, but it’s not going to go in a straight line,” said Martin Murenbeeld, the 67-year-old chief economist at Toronto-based DundeeWealth Inc., which manages about US$100-billion in the Dynamic Mutual Funds. “Gold has given positive returns, but it doesn’t necessarily do it in the way that gives comfort, and that makes people nervous.”

Projections for a steady dollar may stall a gold rally. The Dollar Index, which gained 8% since the end of October, will reach 80.3 in the first quarter, from 80.6 now, the median of 10 analyst forecasts compiled by Bloomberg shows. The 30-week correlation coefficient between the currency and bullion is at – 0.48, with a figure of -1 meaning the two always move in opposite directions.

Trading Patterns

Bullion’s decline since reaching an intraday record of US$1,921.15 on Sept. 6 means it is heading for a quarterly average of US$1,684. While that’s the second-highest in data going back to 1920, it’s 10% or more below what Societe Generale SA, Barclays Capital and BNP Paribas SA predicted in September. This year’s high still managed to exceed the expectations of all but five of 35 analysts and traders surveyed by Bloomberg a year ago, who had a median estimate of US$1,700.

The metal closed below its 200-day moving average on Dec. 14 for the first time since January 2009, a sign for some investors who study charts of trading patterns and prices to predict trends that the rout has further to go. Prices have rallied as much as 2.7% since then and also gained after breaching the moving average in each year from 2003 to 2009.

Gold’s high in September has yet to exceed previous records when adjusted for inflation. The metal peaked at US$850 in 1980, equal to US$2,335 today, according to a calculator on the website of the Federal Reserve Bank of Minneapolis.

Central Banks

Mining companies are forecast to make the most profit ever. Barrick, based in Toronto, will report net income of US$4.72-billion this year and US$6.01-billion in 2012, according to the mean of 11 analyst estimates compiled by Bloomberg. Shares of the company, which Bloomberg Industries estimates mines about 9% of the world’s gold, fell 17% in New York this year. It’s trading at 9.1 times estimated earnings, down from 13.4 a year ago, data compiled by Bloomberg show.

The drop in gold may spur more buying from central banks, putting a “floor” under prices, said Adrian Day, who manages about US$170-million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. The banks may add 600 tons to reserves next year, the most since at least 1970, according to Goldman Sachs Group Inc., which on Dec. 1 said bullion would reach US$1,940 in 12 months.

“The bubble is in paper currency creation, not in physical gold,” said Ben Davies, the London-based manager of the Hinde Gold Fund, which gained 22% in the first 11 months of the year and invests in bullion stored in a Swiss private bank’s vaults. “Calls for a top in the market are premature.”

Jim Rogers not optimistic about anything but agriculture

World markets may be riddled with uncertainty, but billionaire investor Jim Rogers anticipates gains in one sector for years to come.

"If I were buying anything I'd be buying agricultural commodities,” he says. “Going forward we’re going to have huge shortages of everything – including farmers – I think ag will be a great place for the next 10-20 years," he says.

But don't take that to mean that agri stocks are a buy – that's not what he means.

"Yale did a study recently showing that investors made 300% more by putting money in commodities themselves rather than commodity stocks – that is unless you're a great stock picker."

In other words, he’d play his thesis with commodities futures or ETFs that track them.

And his thesis is based on massive research, part of which involves the performance of commodities in the 1970's. "At the time economies did nothing and yet commodities went through the roof,” he explains.

Jim Rogers co-founded the Quantum Fund with George Soros in 1973. Although a native of Alabama, Rogers famously moved to Singapore due to his on-going belief that Asia is on the cusp of great prosperity.

"He's an investor who eats his own cooking," says Fast Money trader Stephen Weiss. In other words, he doesn't just talk the talk, Rogers walks the walk.

And largely Rogers is short because he is not optimistic about what’s going to happen in the world over the next two or three years.

“I’m short emerging markets, short American technology, short European stocks – I don't see much reason to own equities,” he says.

In a nutshell, Rogers expects global economic problems to get much worse.

But whether that happens or not he still thinks a long position in commodities makes sense. That’s the one area of the market where he sees potential.

Here's why.

If his thesis doesn't hold and the economies of the world improve, "I'll make money in commodities because (increased demand will generate) shortages,” he says. “But if the world doesn’t get better, then governments print money and the way to protect against that is to own real assets.”

In other words, he thinks commodities are a win/win.

And in case you're wondering about his thoughts on gold, Rogers says, "it would not surprise me to see gold go to $1200 – but if it goes that low I’d buy a lot more – gold has been up 11 years in a row it deserves a substantial correction."