Last year proved to be another rough one for markets as geopolitical factors kept traders on their toes. In addition to a continuation of the sovereign debt problems that have plagued Europe for the last couple of years, we saw the Federal Reserve expand its quantitative easing programs as growth in the United States remained anemic at best.
With 2013 upon us, we asked analysts to look ahead and discern which markets they saw as having potential to outperform in the New Year. As it turns out, to look ahead requires a brief look back because most analysts see a continuation of 2012’s problems into next year.
According to Joseph Trevisani, FX analyst at World Wide Markets, most markets are trading in a risk-on/risk-off world primarily because of central bank actions. “The traditional trend drivers are pretty much moribund until the central banks end their zero interest rate policy. It’s become the universal panacea that doesn’t make anything actually better,” he says. “That’s what we’re still going to be trading on in 2013.”
In its December Federal Open Markets Committee (FOMC) meeting, the Federal Reserve adjusted its parameters for changing interest rates by attaching unemployment and inflation targets as policy objectives whereas previously the promise of low interest rates was linked to a time horizon. In the press conference following the meeting, Federal Reserve Chairman Ben Bernanke explained the change saying, “We think it’s a better form of communication. The date-based guidance served a purpose, but that was a nontransparent process.”
That change in policy should give traders greater insight into when the Fed may adjust interest rates. “If we get better than expected economic growth or numbers, that will be bad for the markets because it could indicate the Fed will begin to pare back its quantitative easing,” says Keith Springer, president of Springer Financial Advisors. “My belief is that it is going to be worse because they wouldn’t have just expanded QE if they saw good things on the horizon.”
Given the forecast for 2013, Springer is bullish precious metals and dividend stocks. His top play for 2013 is to buy gold. “Continued printing by the Fed should push gold higher. I could see gold at $2,000 an ounce sometime next year,” he says.
As to dividend stocks, Springer is looked at preferred shares over Master Limited Partnerships (MLPs). “Those types of stocks will do better in a down market. We’re expecting a bear market next year,” he says. “We’ve already had four years of a bull market in the face of economic stimulus and bed economic growth. We are due for a recession.”
Kurt Kinker, chief market analyst at Mirus Futures, concurs with Springer’s assessment of the U.S. economy, but disagrees about how markets may react. “I could see a disconnect between the stock market and the economy,” he says. “If the economy were to deteriorate or even go into a recession, I’m not sure it would have the expected impact on the [stock] market. Right now we are through resistance, so the path of least resistance is up.”
Kinker is looking for a bull market in stocks next year and has the S&P 500 as his top pick for 2013. “The S&P 500 is the one that will see the biggest move higher. Initially, 1505 is my target,” he says. “If it was to get through that, especially decisively, we easily could move up to the 1550-1560s, which would be pretty close to all-time highs. That would be the big ‘Can the market do it?’ point.”
In contrast to both Springer and Kinker, Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., expects the U.S. economy to strengthen next year. “I’m probably at odds with a lot of people that just see tepid recovery,” he says. “As the U.S. economy builds steam, you’re going to see a change in interest rate expectations. My big trade for the New Year is a central bank trade which would be to play calendar spreads on Eurodollars and Euribors.”
Wilkinson expects that opportunity to develop as the growth differential widens dramatically between an austerity bitten Eurozone and a slowly recovering United States. “While the FOMC probably is quite a ways from taking away the punch bowl, I feel there’s a very good opportunity for interest rate markets to run the Fed’s thought process and for the yield curve to steepen,” he says. “The Fed’s main unemployment objective is still probably three years away, but if the trend turns favorable, you’re going to see investors react negatively in yield terms to incrementally higher payroll reports.”
Given that, Wilkinson is touting a calendar spread with four legs: Long the near expiration and short the further out expiration in Eurodollars; short the near expiration and long the further out expiration on the Euribor curve.
In currencies, Trevisani says 2012 presented a trading environment not encountered before in foreign exchange. “There’s been a fair amount of price volatility, but there is absolutely no trend. If you look at where we were at the beginning of the year compared to now, there’s been almost no change,” he says. “I expect that to continue if there are no surprise central bank moves.”
He expects the Australian dollar to outperform other currencies, mostly because of expectations for growth to continue in China and the risk-on paradigm to continue. “The opportunities for the first quarter or so are in the Australian dollar and those types of currencies,” he says. “China has new rulers that appear to be willing to spend money to keep things rolling for a bit. Even if you don’t get recovery in the rest of the world, certainly for the first couple of quarters the Chinese will keep things rolling, as long as they have enough money to do it.”
Trevisani expects the Aussie to strengthen through the first quarter and maybe into the second quarter. His price target in the AUD/USD is 1.08-1.10, and is his top play for the first six months of 2013.
Growing grain anticipation
Following the historic drought recorded this past summer, anticipation is mounting as to how the grain markets will perform in 2013. “[The drought] is one of those factors that from a pure fundamental perspective should lead to good underlying support in the markets. That’s sort of where the market for corn in particular is being caught off guard by this push of weakness we’ve seen recently,” says Randy Mittelstaedt, vice president , research for R.J. O’Brien & Associates.
Mittelstaedt says two things are happening in the grains complex. “We have a focus on very negative demand for U.S. corn, which has been the overriding fundamental for the last couple of months,” he says. “And, we have a situation in soybeans that is just the opposite, where we have phenomenal demand at current price levels that is being tempered by what is looking like a (possible) massive South American crop. We’re kind of at differing ends of focus between corn and beans.”
In both corn and soybeans, assuming normal weather, he expects to see significant increases in production, although he doubts demand will increase with that production. “Anytime you’re coming off a historic situation like we are this year with the drought, the longer-term outlook has to be to the downside in the coming year,” he says.
At the moment, Mittelstaedt says new-crop corn could see $5.00 per bushel and maybe lower, and soybeans should return to the $12 handle in the November contract, with the caveat of with normal weather.
In the short-term, though, Mittelstaedt says to watch the Jan. 11 WASDE (World Agricultural Supply and Demand Estimates) report from the U.S. Department of Agriculture. “There is no more important set of numbers for the grain market than those Jan. 11 numbers. If we get a bullish surprise on corn stocks, then all this negative talk goes away for the time being,” he says.
Although he agrees that 2012’s drought caused tight supplies in the grains, Shawn Hackett, president of Hackett Financial Advisors, sees its impact on grains dissipating over time. Instead, in 2013 Hackett is watching the soft ags and cattle, markets that typically have longer cycles.
In the softs, Hackett says 2012 was the year of the surplus, but now prices have fallen in nearly every instance to below the cost to produce them. “A year from now, we will be talking about tight supplies in nearly the entire softs complex. Weather will determine if they are still adequate or if they will be too tight,” he says. “Where the grains likely are looking at much more supplies a year from now, the soft ags have fallen so dramatically that we’ve likely priced in most of the surplus.”
Within the softs, Hackett is most bullish on coffee because he says the fundamentals for coffee likely will tighten first compared to other markets where surplus are much higher. “There’s a possibility that we could see coffee going to $2.00, and it could see $2.50 if we have weather problems in Vietnam or Brazil,” he says.
The second market Hackett is expecting to outperform is cattle. “The drought effect will be leaving the grains and entering the livestock markets. The herd liquidation has already taken place,” he says. “The lower supplies are coming due to the fact that we slaughtered so many animals because of the tighter economics. This suggests we’ll be entering a period of significantly tighter supplies of beef, pork and dairy.”
He explains that cattle has a much longer cycle than the other meats. Where hogs can see a turnaround in the herd in about six months, and even less than that for chickens, it is a couple of years for cattle. “The only way to get through the next couple of years will be to get prices high enough that people stop going to steak houses,” he says.
Hackett expects live cattle to go to record highs in 2013 with a price target above $1.50 per pound, but says that if we have more heat or dryness over the summer, we could get to $1.80.
Although 2012 is a year many are happy to see behind us, a lot of the same problems seem poised to follow us into 2013. Nonetheless, opportunities can be found.