New Year’s
Savings!
Euro Recession
China
Middle East
We
Do Not Decouple!
US Bond Yields Higher
Equities
Global Markets
Gold Bull Market Continues
Commodities
Stocks
Black Swans
Annuity Help
Investment Seminar
Here at MaxOut Savings Advisors we want to wish everyone a Happy New Year! Now is
the time for your New Year’s resolutions, one of which should be to save more money. Now is the time
to increase your savings rate in your retirement plan. Do you know what your savings rate is?????
Our goal is to have everyone save a minimum of 10% of their gross income plus the company match. If
you are behind on your savings for retirement and in your 50s, you should be saving even more than that. So
take charge in the New Year and review your savings.
For other resolutions I thought
you might enjoy the link below. Below is a WSJ.com article by Jason Gay “The 27 Rules to Conquering the Gym” that
I thought would be a great New Year’s read!
http://online.wsj.com/article/SB10001424052970203471004577140900388728374.html?mod=WSJ_hp_mostpop_read
Global Risk
Although
things are looking pretty good here in the United States, 2012 will be marked by continued global risk from the three major
areas outside our country: Europe, Middle East and Asia. Global Risk will be the theme for 2012.
As we wrote about extensively last year, we expect Europe’s problems to worsen through the first
half of 2012. Europe’s problems are twofold. The first is a sovereign debt problem
of too much debt and out of control entitlements. The second problem is an over-leveraged banking system
that is experiencing liquidity problems.
In the sovereign debt problem we are witnessing
the failure of the European welfare state. Many southern European countries have too much debt and a number
have government debt-to-GDP ratios exceeding 100%. According to academic research, this is the point where
growth becomes constrained for a number of years. Most countries in Europe are cutting spending dramatically,
rolling back entitlements, raising retirement ages and raising taxes to get their debt problems under control.
They all see the problem and are working to cut debt growth in Europe. However, we expect a number
of further downgrades of sovereign country debt in Europe. We expect France and possibly the UK to lose
their AAA ratings.
Euro Recession
The
good news is that Europe is working very hard to solve their sovereign debt problems. The bad news is that this will result
in a slowdown in economic growth and a recession for 2012 in Europe. The key word is austerity; these cutbacks mentioned above
will result in a recession in Europe. Dismantling the European welfare state will be painful. The resulting recession will
cause a drop in commodity prices and a drop in multinational corporate earnings in Europe. We expect the
euro to fall against the dollar and most currencies throughout the year. A lower euro will help their export
position around the world.
The second problem is the European banking system leverage
that is proving very difficult to fix. This situation is very similar to the U.S. 2008 financial crisis
and could be just as bad or worse. The European banking system is 2.5 to 3 times the size of the United
States and is overleveraged 25 to 1. This compares to about 10 to one for the US banks. We
expect the European bank bailout to require two trillion dollars in one form or another. We expect several
European bank failures for 2012. Hopefully, without too much damage to the worldwide financial system,
this problem will be stabilized by mid year. If the European banking system begins to fail, it will affect
financial markets throughout the world. Europe’s banking problems continue to be a much tougher and bigger Gordian knot
than many have expected.
The chart below of the German 3 month bill shows a yield
decline from 1.4% to a negative 0.124%. The yield on German debt out to almost one year is now negative, a warning
sign for investors. A negative yield on short term German government bonds is a good indicator of the concern
for a major financial failure in Europe. Europeans are now willing to lose a small amount of money to have
their money protected. We expect quite a bit of progress in resolving Europe’s problems to happen in the first half
of the year. Having said that, expect most of the problems to happen in Europe in the first half as well.
For now, we are avoiding Europe. 
Three Month German Yields Turn Negative -.124%
We
expect real estate problems in China to continue to escalate in 2012. That, coupled with inflation and
excess manufacturing in China, will result in a worsening of the economic slowdown in China for 2012. This
will be the first real economic slowdown China has seen in years. We expect that a slowdown in China will
be a major driver in the investment world for 2012. This will further depress many commodity prices. To
counter this we expect the Chinese government will start cutting interest rates and lowering bank reserve requirements in
2012 to try to grow the economy. Later this month I will be in Beijing, China to witness firsthand what
is going on in the country.
Middle East
The Middle East will play a bigger role in 2012.
The “Arab Spring” is rapidly turning into the Arab Winter of 2012 as radical Muslim groups move into the
power vacuum in Egypt, Libya, Tunisia and other countries. The result is that individuals and companies
are reluctant to invest in these countries and in many cases they are starting to pull their wealth out of those countries
to protect it. This is hurting their economies and causing rising unemployment at the worst possible time.
The other threat to the Middle East is Iran. Major changes in policy toward Iran have been put in place in the last
30 days. In the recent defense bill there was some sanction language that will make it very difficult for
banks and Central Banks to do business with Iran. If Iran cannot deal with the banks it will be very difficult
for them to sell their oil. The Iranian currency has already begun to fall. The Europeans
appear to have agreed to halt oil imports from Iran; other countries will follow suit. This is a big deal
and will push oil prices higher as countries secure oil supplies from other countries for 2012. It will
lead to higher oil prices as Iran becomes more belligerent and unpredictable.
We Do Not Decouple!
We
do not believe that the United States will decouple economically as the rest of the world economies slow down in 2012.
Europe, the Middle East and China all have major problems that will manifest themselves in the United States.
With that understanding we believe that the United States is best positioned for growth in 2012.
The United
States has the world’s highest quality manufacturing base. Two natural disasters occurred in 2011
that will help United States’ manufacturing—the Japanese earthquake and the flooding in Thailand.
The earthquake and subsequent tidal wave destroyed hundreds of factories in Japan that made products and parts for
autos and electronics all over the world. In Thailand, thousands of acres and hundreds of small and large
factories were destroyed. Over 25% of the world’s hard drive capacity was damaged, resulting in earnings
warnings from a number of large computer companies. Both cases highlighted the dangers to global supply
chains. Many companies are now building out more redundancy to their manufacturing and working to shorten
supply chains. Many U.S. companies are now moving some plants and suppliers to the United States.
There is less risk with plants in the United States. This is one reason why we are seeing a resurgence
of manufacturing in this country.
As we have written about, the new shale basins here in the United States are
now starting to provide some of the lowest cost energy in the world, particularly for natural gas. This
low cost energy is a real boost to manufacturing, making us a lower cost country. We believe manufacturing
will be one of the bright spots in the economy for 2012.
For 2012, American companies and consumers should continue
to recover. In an over-leveraged world since 2008, American consumers and companies are the two standout
entities. They have both cut debt and increased savings rates. People in the United
States recognize a problem and solve it. You can see that can-do attitude in personal and corporate balance
sheets over the last three years.
The same cannot be said for many governments around the world and European corporations.
These groups still have big problems. The least of which is not the U.S. government where spending
and borrowing continues to spiral out of control. Over the last three years, U.S. budgets deficits have
been over one trillion dollars each year! U.S. government spending is now over 24% of GDP.
Government spending has gotten completely out of control and this will most likely not end well.
Keep in
mind the Presidential election will be the big story in the United States. Every sitting president tries
to make the economy look good when up for reelection. We should expect the same this year.
Ideally, even the Federal Reserve tries not to raise interest rates much before an election. The
Obama administration will do whatever it takes to win. One concern is that he enacts a “burning down
the house” strategy. In this scenario, President Obama begins to implement his vision of a more utopian
government using his executive branch powers. He would start to force through his more controversial appointments,
understanding the work needed to be done now. He would institute a huge number of new regulations at the
EPA, Justice, Education, Treasury, Interior and Energy Departments. These regulations would drag down business
and depress investment for 2013. If he goes this way it would be a big negative for stocks and the economy
in 2013.
US Bond Yields Higher
We believe we could see 10-year government bonds spike to
3.5% or more from the present 1.95% level sometime later in 2012 or 2013. The rate could jump up for a
number of reasons:
- Investors lose confidence in our government (see Italy)
- Loss of confidence in Federal Reserve, dollar falls
- Europe’s problems are solved, investors move
out of US bonds
- GDP growth
is more than expected (over 4%)
- Inflation
We have ordered them on probability
of happening; they are not predictions. As you can see however, there could be inflationary or slightly
deflationary pressures and US longer term rates could go up. If Europe or the euro collapses, that will
be very deflationary and rates in the United States could fall.
Looking at the chart below of Italian generic 2-year bond yields, we can see bond yields went from
3% to 5% within a month once investors lost confidence.
Italian Two Year Bond Yield
A similar spike in rates in the United States could be
triggered by a loss in confidence in the government or the Federal Reserve to solve our problems. A surge
in rates similar to what happened in Italy could force everyone to the table to reduce our runaway spending and entitlements.
2012 will be a battle between inflation and deflation. The world is beset by huge deflationary
forces in Europe, United States and China from deleveraging of the debt bubble. The Central Banks around
the world are now engaged in massive quantitative easing programs, particularly the United States and Europe.
Over time this should lead to inflation.
Equities
For 2012 we expect a volatile year
in the stock markets. The US markets should perform better in the second half of the year as Europe’s
problems come closer to a resolution one way or another. The question is how bad will the European situation
get and how will it affect our markets?
In 2011, investors pulled $132 billion from domestic equity funds, the
fifth straight year of withdrawals from the stock market. With all that selling, the US stock market was
down just fractionally for the year. If that much mutual fund selling occurs and we break even what happens
when the flow of funds turns positive? When the markets turn up we should begin a substantial rally given
the huge liquidity on the sidelines. The question is from what level?
Global Markets
Last year the S&P global markets ex-US index was down 15.9%, while the S&P 500 was down slightly, but virtually
even. International markets performed poorly last year. Developed and developing markets
all were down substantially except the United States. We do not expect that to repeat this year.
We think that the developing markets are best poised to move higher after a first half correction. The
favorite developing market for 2012 would be India. Overall, we expect international markets to outperform
the US markets later in the year.
Gold Bull Market Continues
In late 2002 we predicted the
start of a twenty year bull market in gold. At the time, I cited Ben Bernanke’s famous helicopter
speech as one of the reasons (interestingly at that time the helicopter reference quote was to fiscal policy).
In the speech he made the case that the Federal Reserve stood ready to prevent deflation and reminded people the Fed
had a printing press. The bull market in gold will continue in 2012 as Europe has now begun a stealth quantitative
easing program through the ECB. We also expect some form of QE3 from the Federal Reserve as they try to
print their way out of the debt bubble deflation. We expect gold to exceed $2000 per ounce and silver to
move higher for 2012 as well.
Commodities
As we stated above, we continue to like gold and silver and their respective equities. The
“China” commodities we have written about in the past will remain depressed. Those include
copper, aluminum, iron ore, steel, cement and coal. China has represented an outsized amount of the demand
for these in relation to its GDP. We continue to like the grains as countries around the world struggle
to feed their people or face revolt. Energy will remain high and subject to a price shock because of Iran.
If a war breaks out in the Middle East with Iran, look for $140 oil. One caveat is that
if the Iranian problem is solved, then we could see oil drop to the $80 level as there appears to be plenty of oil out there.
On the natural gas side, expect prices to continue to remain depressed due to the huge amount of shale
gas now being produced. As we can see from the natural gas chart below, prices have fallen under $2.80
per MMCF. Over the long term we can count on central banks around the world to print money, which will
be good for commodities. 
Stocks
We continue to like our long
term bullish case for blue chip multinationals that pay good dividends and will profit from the huge buildup of the middle
class around the world. That thesis has slowed here recently, but continues to be in place for the long
term. Stock with very strong balance sheets should continue to outperform in 2012. Our
favorite sectors are medical, drugs, energy, energy services and autos. The medical and drugs sectors should
profit from the rollback of Obama care and an aging population worldwide. They continue to be reasonably
priced in our opinion. We like the energy group that is profiting from the huge oil & gas shale boom
going on worldwide. We expect the Iranian problem to keep energy prices high for the next 6-9 months.
Natural gas stocks with higher production costs should be avoided. We believe the autos will benefit
from the huge restructuring the auto business underwent over the last three years.
On the fixed income side, we
would concentrate on high quality or investment grade bonds. With the problems in Europe, continue to avoid
regular money market funds. Many money market funds still have a large percentage of their assets in European
banks and financial companies around the world. Most money markets are yielding well less than 0.5%, so
you are not even being paid to take the risk. At these low rates it does not make sense to risk your funds.
A good alternative is U.S. government, Treasury or tax-free municipal money market funds.
With the level
of global risk in the world today we would remain very cautious. Higher levels of cash should be maintained
to protect portfolios against unexpected shocks, also know as black swan events. With black swans flying
overhead, you should have your umbrella handy! A cash position will provide buying power on corrections
in the investment markets.
Need Help With Your Variable Annuity?
If you’re stuck in
an annuity with few options, there is an alternative solution. Security Benefit offers a no-load, low fee
variable annuity with more than 200 mutual fund options across multiple fund families. Additionally, there
are no penalties for withdrawal like most annuities so long as you are 59½. You would only pay ordinary
income taxes on the withdrawals at that point, just like a Traditional IRA. Through our relationship with
Security Benefit, we can transfer your existing variable annuity using a 1035 exchange and manage your variable annuity for
you here at MaxOut Savings Advisors. Give us a call at the office and we’ll be glad to discuss your
options with you.
Investment Seminar
We are planning a seminar on February 8 or 9; we will
have the date set shortly. We will be discussing our outlook for 2012, our China trip and how we manage
retirement assets at MaxOut Savings Advisors. If you are interested in attending please email me at ted@maxoutsavings.com or call us at the office at 713-627-0400. I should have a lot to discuss after returning from my business
trip to China. Do
you have an account at Fidelity?
Do you already have an account
at Fidelity Investments? The MaxOut Savings Advisors Team can actively manage the assets for you at Fidelity.
We will make the investment decisions for you and you can monitor your account from Fidelity’s website.
We use the same value based investment strategies we talk about on the MaxOut Savings Show. In most
cases, you can sign a simple form to add us as the advisor on your account and we can use your existing Fidelity account number.
Considering an IRA Rollover?
If you are retiring soon or considering an IRA rollover, let the MaxOut Savings Advisors Team
handle your IRA rollover. We can help you take advantage of the NUA tax break if you have low cost basis
stock in your company plan. We will sit down with you, discuss your financial situation and needs, and
develop a plan tailored specifically for you. We will show you how we manage our accounts using our value
analysis strategy to grow the investments and reduce risk.
MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming. Is
your advisor looking at risk and actively managing your retirement? Hiring the MaxOut Savings Advisors team to manage your
money or IRA rollover is a great first step toward a successful retirement. MaxOut Savings Advisors is
an SEC registered, fee-only investment advisor based in Houston, Texas. Ted Geoca has over twenty years
of investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual
funds for our clients using a value analysis strategy that we have developed over the last couple decades. We
look at risk as well as return to actively manage your investments and maximize your returns through today’s changing
markets. We use Fidelity Investments as the custodian for our clients’ assets.
If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would
be happy to meet with you. To schedule an appointment please give us a call at 713-627-0400 or email me
at ted@maxoutsavings.com.
Remember Save Aggressively and Invest
Conservatively™
Ted K Geoca
Kellan Caldwell
President
MaxOut
Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
www.maxoutsavings.com
Remember to catch:
The MaxOut Savings
Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!
The MaxOut Savings Show and Report
does not give out financial advice. Any recommendation may not be suitable for all investors. Moreover, although
information contained herein is believed to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors,
LLC may or may not have positions mentioned herein. MaxOut Savings is a Registered Investment Advisor registered with the
SEC. You should always make investment decisions based on your own financial situation.
To sign up a friend for our free MaxOut Savings Report or to remove your name
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