Useful or Useless Calendar Year Returns

Every year, as the expiring calendar comes off the wall to make way for its replacement, the world of people and institutions who care about investments (whom does that leave out?) performs a ritual that has the apparent purpose of appraising and evaluating their year’s returns. The standard 12-month performance look-back typically creates either a proud glow, or a sheepish confession, despite the fact that most of what happened was delivered by the marketplace, rather than by the sweat of yours or anyone else’s brain. Investments, after all, do not care whether you, or we, have keen interest in an investment-related calendar-year bonus or tax calculation.

Even though calendar year periods are meaningless for investment markets, they do have patterns; if they did not, their returns would be completely random and every market day would have no relationship to the past or future. That said, there is no sign that market patterns can be boxed and ribboned by the calendar, as if their cycles were close kin to a retail clothing store. Instead, markets are ultimately a multi-year proposition, and we never know how many years will form the next cycle, or finish up the one we’re in. The most useful sort of forward information we can discern is whether markets are currently low or high on the totem pole of a cycle. At FiduciaryVest, we have spent portions of the past five years studying what we know about the cyclical behavior of markets and exhaustively testing how to use it for high-probability, near-term forecasting.

2011 – so what?

2011 is done. And what did it deliver? T-bills: zero; US Stocks: nearly zero; non-US stocks: double-digit-bad; bonds, in the aggregate: not bad… nearly 8%. There were a few investing niches that offered a worthwhile return: REITs: 8.5%, long-maturity US Treasuries: 30%!, Gold shares (GLD) 9.5%, after ringing up 32% through August, and for five years ended December 2011: 149%.

2012 – now what?

Despite the frailty of forecasting, we can be rather certain that Treasury bond yields will not go below 0%. US equities are off to a sprint-start in 2012 which, we believe, is prodded by the market makers’ win-win prospects for: (1) an awakening economy… a housing bottom in many metro markets, plus business borrowing demand and credit availability from the banks…or, (2) if needed, a new Fed QE liquidity program to be announced in February. Despite these two roses in the path of US economic recovery, we are sticking to our previously expressed psychological conclusion that US businesses will not create significant new full-time jobs until they are drowning in sales growth.

Continued disorderly conduct in Europe

Dark horizon: All of the optimistic good stuff in the US rests in the fragile arms of final fiddling by a nervous, reluctant Germany and its menagerie of Euroland partners who face major debt payments before the end of this quarter. If the Euro comes a-cropper, all rosy US stock market bets are off. The potential Euroland daisy chain of events would flow about like this: (1) Greece finally does not arrive at a workable solution to its debt, causing (2) very frail Portugal to default, causing (3) Italy to face the strong probability of a “negotiated default” of some sort, all of which brings (4) Europe’s major banks to their knees.

There is little reason to expect that this scenario will not run head-on into the US Fed, before it gains the full momentum that will plunge it into Step (4). In fact, the Fed has already stepped into Europe, via something called a “dollar swap” program. It goes like this: The European Central Bank (ECB) sends Euros to the US Fed which sends that amount of value in dollars to the ECB which then lends them to capital-starved Euroland banks. If you think you missed something in this description, you did. The key to unwrapping the swap is to ask: Where did the ECB get all those Euros they swapped with the Fed? [The answer appears to be that the ECB simply printed them, in which case the Fed has, in effect printed those dollars and, also in effect, the Fed has printed dollars to shore up European banks. Suppose the Euro fails... a real possibility; do we think the Fed will then get its dollars back?]

Part 2: The 99% Movement in the US

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