It’s been a rough year for markets. Between the unrest and disruptions associated with the Arab Spring to the ongoing sovereign debt crises in Europe, a new — or in the case of the Eurozone, the same on-again/off-again event — crisis has rocked the markets every time volatility began to subside.
With the new year around the corner, we asked analysts to look ahead to 2012 for their opinions of which markets have the potential to outperform next year. As it turned out, looking ahead necessitates a look back at recent events because most analysts feel that many of this year’s problems will not be resolved anytime soon.
Chief among the issues that will continue to affect markets next year is the sovereign debt crisis in Europe, even if some sort of plan is put in place, says Travis Rodock, senior futures analyst at eFutures. "It’s going to take some time for things to actually work. Nothing is really immediate in economies and it typically takes some time to start to see things [come] around," he says.
Shawn Hackett, president of Hackett Financial Advisors, says that even if Europe gives some clarity to the markets about a possible resolution to the crisis, it really wouldn’t change the economic picture, especially for economic-sensitive commodities. "If Europe gets its act together, it will just change the sentiment from ‘It’s the end of the world,’ to ‘We’re just muddling along,’" he says. "Muddling along is not bullish for economically sensitive commodities."
Greece continued to be the source of most concern throughout 2011, particularly as questions arose about its willingness to agree to austerity measures, but Spencer Patton, chief investment officer at Steel Vine Investments, says the other shoe is yet to drop in the Eurozone crisis. "We are not going to get out of this mess until Italy and Spain have a day of reckoning. It remains to be seen if it expands from there," he says.
Ongoing economic questions in the United States likely will continue to figure prominently in 2012 as well, especially considering the role the Federal Reserve may play. "If we do start to stabilize and continue growing, then the Fed is going to have to start raising rates [by mid-2012]," says Kurt Kinker, chief market analyst at Mirus Futures. "That’s dependent on if we double-dip, and so much of that depends upon the European fiasco."
Although the Fed seems to be backing away from fears of a double-dip recession, it still hasn’t seen much indication of an expanding economy. In the November meeting of the Federal Open Market Committee, the Fed said, "The Committee also decided to keep the target range for the federal funds rate at 0 to 0.25% and currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
Patton was mostly in line with the Fed’s analysis, but says Europe still could affect the U.S. economy. "I have no doubt that in the U.S. we are not headed for a double-dip recession; the data just does not confirm that. It’s just a matter of if Europe can force us there," he says.
With that backdrop for the markets, we asked analysts for their top picks for hot markets next year. As it turned out, a lot depends on your definition of "hot."
One common asset many analysts mentioned watching next year is the euro currency. Opinions differed about the direction the euro may take as well as its survival and long-term make up. "It’s really anybody’s guess [which way the euro will move] because we don’t even know how it will look," Kinker says. "One or more countries could pull out, but the flip-side is they could completely stabilize this mess. There’s so much in the air right now."
Patton called the euro his "number one bearish pick" for 2012. "We’re going to see the sovereign debt crisis expand. Even if by some miracle we get some delay in the contagion, there’s been a fundamental problem with the euro exposed in that they have no central resolution authority when they have issues," he says. Patton expects the EUR/USD to fall conservatively to 1.15-1.10. Further out, Patton says that "within five to 10 years, we’re not going to have the euro at all, or at least it will be in a dramatically different form."
This of course would be good for the U.S. dollar. Rodock agrees and expects the U.S. Dollar Index to do very well next year. "I’m looking for the U.S. dollar to have some legs under it," he says.
In addition to the euro and the dollar, some analysts say to keep watching gold in the first part of 2012, although there was disagreement about the way they expect the metal to perform going forward.
Gold prices have followed an almost exponential growth chart pattern since starting to rise in earnest in 2005 (see "Golden goose," below). Rodock says he expects gold to continue to be hot through 2012 and beyond because of fear and uncertainty in the marketplace. "Gold has turned back into its old safe haven. Even if the Eurozone does come up with a plan, you’re going to see a lot of support in gold," he says. "If economies start heating up and taking off, you still will see some of that inflation creep in. That’s almost an inevitable result of the easy money policies by some of the western central banks." Rodock expects to see our first $2,000 gold print in early 2012.
Patton has the opposite outlook for gold. "At one time, it was a real flight to safety trade, and it’s become anything but that now. It’s become a risk-on/risk-off trade, just like everything else," he says. Patton expects gold to be subdued as long as inflation remains a non-issue. "The Fed is clearly not concerned about inflation and that’s rightly so," he says.
At the moment, Patton says gold has given up its safe haven status to the U.S. dollar. "You can see that on the big down days we’ve had, rather than having gold up, you see gold down $30-$50 because it’s trading inversely to the U.S. dollar," he says. "The dollar has become the flight to safety and gold has become the risk-off trade, so it gets sold off when everything else gets sold off."
Given the public’s infatuation with gold, Patton says we’ve probably put in a pretty long-term top at $1,950, and he wouldn’t be surprised to see gold visit the $1,400-$1,550 range next year.
Ag opportunities
In addition to gold and the euro, some analysts pointed to other commodities they expect to do well later in 2012, particularly the ags.
This year’s crop will be one of the tightest ending crops on record for corn, according to Patton, who says it should put a floor under corn. "There’s very little room for error in the 2012 crop. We always have weather or pest scares, so I’m expecting corn to be the strongest grain next year."
Additionally, Patton says strong and consistent demand for corn from China will provide additional support. Increasing demand for ethanol is another bullish factor making $5.50 a likely floor for corn in 2012. Although the crop isn’t even in the ground yet, he says corn could get back up to highs we saw earlier in 2011.
With such potential upside in corn, it’s no surprise that Rodock is watching live cattle very closely (see "Grazing cattle," below). "As we see supplies further out, some of the Cattle on Feed reports that we’ve seen have shown some weakness out into next year with a lower supply coming to market of feeder cattle that will be fat by that time," he says. Rodock is looking for live cattle to hit the $150 level.
Hackett also says live cattle are showing potential for the second half of 2012. "The first half of the year will see too much herd liquidation coming on the market. That eventually will lead to contraction of supply in the second half of the year," he says.
Finally, many analysts saw potential in the softs markets, where many commodities have experienced generational moves over the last two years (see "Are softs hitting a hard wall?" on the ). Among the softs commodities, Hackett expects coffee and cocoa to outperform a swath of others.
While 2011 proved to be a volatile year for markets because of constant geo-political factors, many of those same themes still will be in play in 2012. Although these factors can change significantly in a short period of time, their effects also can be ongoing for some time. New Year’s is a time for reflection and anticipation. It doesn’t take much reflection to see what lies ahead in 2012. More volatility!
Are softs hitting a hard wall?
Is the major market sectors grew more correlated, a number of the soft commodities made generational moves. Although it’s difficult to point to a single reason an entire sector can perform so well, there are a few underlying factors that helped launch these moves.
Following the financial crisis, a number of emerging markets became epicenters for growth. "What we’re seeing is a real shift in growth in the middle class of emerging nations," Spencer Patton says. "As soon as you start seeing individuals having disposable income, some of the first things they start to crave are things like sugar."
Shawn Hackett agrees and says the main reason is growth in per-capita income. "The softs are very sensitive to per-capita income growth. If you look at a chart of per-capita income growth in any country, there’s a direct correlation to the demand for these bit more luxury items," he says.
Ultimately, when people make more money, then things like sugar, cocoa and coffee start to become staple items when they previously were unaffordable. The result is easy to comprehend given the enormity of these emerging markets. "If 3.5 billion Asians all want to buy one more tee-shirt that they never had, then all of a sudden the demand for cotton is outlandishly high," Hackett says.
In addition to increases in per-capita income in emerging markets, Travis Rodock says fluctuations in the U.S. dollar lent support to some of the softs over the last couple of years (see "Chocolate dollars," below). "We saw some big fluctuations in the U.S. dollar and anytime the dollar rallies, you’re going to see pressure put on the softs, typically," he says.
It’s the general lack of correlation to the more prominent sectors that make softs worth watching in 2012, though. It is hard to find markets that are not moving daily based on Fed projections or the latest Eurozone rescue plan.
Finally, despite macro-economic factors affecting these markets, each also rallied for factors related to supply issues. In many cases, inclement weather contributed to supply shortages, such as in cotton and coffee. In other cases, geo-political factors contributed, such as the civil war in the Ivory Coast for cocoa.
Most of the softs have sold off over the last few months. Hackett says nothing has changed fundamentally. "No market goes straight up forever. There are a lot of speculators in the market and when people get spooked about the macro-economic situation, people sell," he says. This of course is what makes this sector so attractive. Whether you are talking coffee, cocoa, sugar or cotton, there is usually a trend and when it gets overdone, as it almost always does, there are opportunities in the other direction.
Looking ahead, Hackett sees medium-term cotton support at $0.90 and strong resistance at $1.10. Patton has support at $0.81 and resistance also at $1.10 in the March contract. Rodock expects cotton to trade down to $0.92 as it starts fighting for acreage with soybeans.
Hackett has cocoa as one of his top plays for 2012 and expects it to trade around $3,000-$3,200 per ton once demand levels get back to normal. Patton sees support in the March contract at $1,900 and resistance at $3,150, but expects trading around the $2,100 level.
Coffee is another of Hackett’s top plays for 2012 and says it could retest the $3.10 high. Patton has support in the March contract at $2.00 and then at $1.70, and resistance at $2.90 and $3.15. Rodock is looking for coffee to push higher technically in the short-term.
Finally, Hackett says sugar is fairly priced at $0.25 with support at $0.20 and resistance at $0.30. Patton has support also at $0.20 and resistance at $0.3150, but says he is more bullish because sugar is adjusting higher.
