Ed Hyman & Bob Doll's Market Outlook for 2012

This is a summary of a video interview by Consuelo Mack with Ed Hyman and Bob Doll. Ed Hyman has been rated the #1 economist by Institutional Investor for 32 years running and recently named to "All American Research Team Hall of Fame." Bob Doll is the Chief Equity Strategist at Blackrock.

Highlights of 2011:

• Worst Market Volatility in decades
• Corporate profits and cash levels are record highs

Video: Summary of Video:
Ed Hyman:

• Small chance the economy could do a lot better in 2012 than in 2011. Thinks surprises could be to the upside. Says in late 2011 the economy did much better than he thought it could.
• Thinks the economy will do "somewhat" better in 2012 than in 2011.
• Is worried we have higher taxes and spending cuts that cycle the economy lower and lower.
• With slowing inflation, expects more easing in Europe and China which will help.
• Sees a "dark picture" on Europe but not on China. 
• Believes Europe will have a severe recession. 
• Believes rates in Europe will go to zero.
• Bonds were the best winner last year but if Ed is right, he thinks bond yields will go up and cheered by everyone except those who own them.
• Hyman likes the emerging market consumer so Ralph Lauren (RL) and in the US dividend paying stocks that are buying back shares such as Home Depot (HD).
• Doesn't think Obama will be defeated.  Says the market usually likes a change of president so we could get more upside surprise with a new president.

Bob Doll

• Thinks the US will muddle through while the rest of the world slows.
• Average GDP growth for 2012 will be 2.0% to 2.5% with quarterly lows maybe 1% and a high of 3%.
• Thinks US stocks will have a better year aided by money coming from foreign markets to our markets.
• Thinks recession in Europe will be "mild" and not drag the US down as we "muddle through" unless there are significant "financial busts."
• China, India and US growth could offset recessions in Europe.
• Will take a pretty bad world for US 10-year treasury to go from 2.0% to 1.5% for additional capital appreciation. 
• Thinks if the Euro goes bust, then you don't even want to own stocks.
• Because earnings growth is in the US, small and mid cap stocks with more business in the US vs Europe will do better than his specialty, large cap stocks.
• Top investment choice is US S&P500 with accelerating cash flow and earnings.
  

Both agree stocks are the asset of choice on their own merit and relative to other asset choices including cash and US Treasuries.

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Ed Hyman & Dennis Stattman's Outlook for 2011

Summary of Consuelo Mack's interview with Wall Street's long-time number one ranked economist, Ed Hyman of ISI Group, and BlackRock's star Global Asset Allocation Fund manager, Dennis Stattman. You can watch the full interview at the bottom of this summary.

State of the US Economy:

Ed Hyman:

The economy is not very healthy because we are doing quantitative easing.  About 3 months ago, it looked like the economy was going into a double dip. Since then, the economy is looking "much, much better."

Dennis Stattman:

Chronic problems will be with us for a long time. We have too much debt.  We are not producing enough in our economy compared to what we are consuming.  Harder to get employment going due to higher costs of employment.  But, compared to expectations of three or six months ago, the economy on the short-term is doing better.  The big problems will be there for years.

Ed Hyman's expectations

• 3% Real GDP in 2011.  
• 10-year Treasury at 4.0%
• Fed Funds Rate of near zero percent for the full year.

6 quarters of 3% growth and unemployment last month was 9.8% so 3% is not enough to grow jobs. Thus believes the Fed and the president want 4% GDP growth to grow jobs.  Like Clinton, he believes Obama is doing his version of a move to the center to grow jobs and get reelected in 2012.

Dennis Stattman:  Believes the monetary policy is near the level of "desperate."  Spending has been very aggressive but little has been done to address the  production side of the economy.  Regulation and tax uncertainty is hurting small businesses.  Politicians will have to move to address this or they won't get reelected.

Ed Hyman: Believes focus will shift to 2012 with Q1-2011 GDP coming in at a "new high."

Dennis Stattman:   "Stocks in the US are quite reasonably priced."  Many US stocks benefiting from higher growth rates outside the US but they are selling at low PE ratios due to US troubles.  Blackrock's Global Allocation fund is at 36% of fund in US Equities, the highest exposure in a long time.  Fixed income exposure is lowest ever and thinks bond market is dangerous to investors.

Ed Hyman: Believes the US stock market "is going up."  Adding to Dennis`s picture, Ed believes the Fed introduced QE2 to increase the value of stocks, to drive investors into riskier assets, to increase confidence with higher stock prices and thus lead to increased hiring.  Ed agrees "completely" with Dennis on bonds and believes that the bond market (10-year yield) is heading towards 4.0%.  To go above that would be "epic."

On the US Dollar.

Dennis Stattman:  Has about a market weighting in the dollar or 60%.  Most investments are in dollar but that also means 40% are in non-dollar investments.   "I would be very nervous to be 100% US Dollar."

Ed Hyman: "Being neutral sounds like a reasonable position. "Agrees with Dennis and believes the emerging currencies like the Yuan will go up.  Not bullish or bearish on the dollar.

Stocks:

Dennis Stattman: Likes IBM (Charts & Quote).  Get a very solid growth investment with a 1.7% yield. Thinks IBM has a good "blueprint" to get earnings per share to $20 by 2015.

Ed Hyman:  "I would put my money in Dennis's fund."  The one stock that sticks out to him is Citigroup (C charts and Quote).  He likes emerging economies and Citicorp or Citigroup has done a better job than the other banks in the emerging markets.  He also believes Vikram Pandit is "an emerging markets person" and is a great leader.  If Citi gets over $5, then the stock can be bought by more institutional investors.  If I had to pick one stock, I'd pick that stock.

Disclosure:  I own both IBM and C. 

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Ed Hyman & Nouriel Roubini Differ Over Shape of Economic Recovery

Ed Hyman and Nouriel Roubini, often called Dr. Doom, differ on the shape of the economic recovery. Hyman says we will have a "V shaped" recovery while Roubini clings to his belief that the recovery will have a "U" shape and could have a "W" shape.

Q	Q2-08	Q3-08	Q4-08	Q1-09	Q2-09	Q3-09	Q4-09	Q1-10
GDP Growth	3.3%	(0.5%)	(5.4%)	(6.4%)	(0.7%)	2.2%	5.9%

Ed Hyman has an excellent record at predicting the economy.

You have to take what "Dr Doom" says will happen with a grain of salt. It was just a year ago that Roubini said DOW 5,000 was possible and the best the S&P500 could hope for as a rally to 720. See my March 09, 2009 article:

• Nouriel Roubini, Dr Doom, Thinks DOW 5,000 is Possible
  In the best case, Roubini sees the S&P500 (closed today at 676.53 - Charts) at 720, a gain of 6.4%. In the worst case, Roubini thinks there could be another 20% left in the decline with the S&P500 falling as low as 500 to 600 with the DOW down to 5,000 or 6,000.
  

Dr. Doom was wrong but fear sells so he continues his pitch.

The following excerpts I got via email today from Nouriel Roubini as he tries to sell his services.

While maintaining his core projection of protracted U-shaped growth in the United States, Roubini argued that the risks of a double-dip recession in the United States are rising. The following content is excerpted from that analysis, the full version of which is still available just for clients on Roubini.com.

V, U and W

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010.

Kirk: With 5.9% growth in Q4-09, hasn't a U shaped recovery already been eliminated so all that is left are V and W shaped recoveries?

The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

Kirk: More stimulus is on the way including money to buy appliances and "Cash for Caulkers."

This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin.

Ed Hyman and I debated whether the recovery would be U or V-shaped on a February 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful.

Remember it was just a year ago that Roubini said DOW 5,000 was possible and the best the S&P500 could hope for as a rally to 720 while we posted ECRI's article saying that an economic recovery was ahead.

DOW JONES INDU ^DJI - More charts	S&P 500 - More charts

See

• April 3, 2009: Upturn in ECRI's WLI Growth Rate Says US Business Cycle Recovery Ahead
  

• July 21, 2009: ECRI Predicts The End of the Recession is Imminent

The good news is ECRI and Ed Hyman do not predict a double dip recession in 2010.

• March 04, 2010 ECRI Says No Recession This Year, But Recessions Will Be More Frequent so Buy and Hold is Dead.

Ed Hyman Bullish on Bonds

Ed Hyman, head of the ISI Group, believes Treasury rate can go lower which is bullish for US Treasury Bonds according to the December 20, 2008 Barron's article "Rates May Climb, but Not by Much."

Virtually all economists sampled in our semiannual survey -- which is designed to take in the spectrum of opinions, not to be a comprehensive poll -- expect the Fed to maintain its current 0-0.25% range for fed funds (represented in the table here as the midpoint). Only a few look for the Fed to nudge the funds rate up, later in 2009.

Likewise, few seers think Treasury yields can stay at current low levels or even decline further. Yet Ed Hyman, head of the ISI Group, sees a severe global recession taking yields down from here. And Merrill's Rosenberg expects a recession more like the ones seen before World War II, which were longer and more severe than those of the post-War era.

Below is the table of rate predictions from the panel of economists Barron's surveyed for their article.

Table courtesy of Barron's

Currently, as of December 22, 2008, the 10-Year US Treasury Note is paying 2.116%

13-WEEK TREASURY BILL (Historical Quotes for: ^IRX)	10-YEAR TREASURY NOTE (Historical Quotes for: ^TNX)

Charts courtesy of Yahoo! Finance

More Rate Charts at:

• US Treasury Rates at a Glance
  
  
• LIBOR Rates at a Glance
  
  

For sure, a long period of low Fed Funds rate and low US Treasury rates will be good for homeowners. For homeowners with equity in their homes and verifiable income who wish to refinance at low rates, they should have plenty of opportunity in 2009 to do so. Refinancing at lower rates will give them more money to spend which will eventually stimulate the economy.

Homeowners who wish to refinance also need to watch the key London Interbank Offered Rate, also known as LIBOR. It is a daily reference rate based on the interest rates banks in the London wholesale money market (or interbank market) offer to lend unsecured funds to each other.

Graph of 6-Month LIBOR in US Dollars


Graph of 1-Year LIBOR in US Dollars

Graphs courtesy of Bloomberg.com.

More LIBOR charts at:

Current Libor Rates at a Glance

What do you think?

• Will rates go lower as the recession deepens?
• Will rates stay about the same for a year?

or

• Will rates rise faster than anticipated as the fiscal and monetary stimulus pushes the economy to recover quicker than many predict?

Irrational exuberance or irrational pessimism?

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