Thoughts on 2012 Consensus

My last post dug into what the “experts” are predicting for this year.  Here are my thoughts on that consensus: 

• I tend to think if we avoid those “tail risks” we could have a very good year on the S&P, higher than consensus. 
• At the same time I think the chances of one of those “tail risks” popping up is probably higher than the bulls believe. 
• This makes the market hard to handicap.
• So my conclusion reflects this discrepancy, that by year end we will end up in the poles – either up nicely or down poorly. 
• I really think the US economy could surprise here if it doesn't get derailed, despite the secular deleveraging trend. 
• Here are some general strategies on how to play divergent conclusion:

• Avoid the riskiest assets

• Regardless of asset class, move up the quality chain

• Focus on investments that benefit from monetary/fiscal policy

• Think about investments that are less economically cyclical

• Avoid illiquid investments

Please keep in mind that I am just sharing some general strategies on how to navigate the current environment.  If you implement the above successfully, you can hopefully still get some upside while limiting your downside.

2012 Consensus

In my last post, I pointed to some evidence, which demonstrated how far off the 2011 consensus was. Despite that, I will provide the 2012 consensus below:

• Projections range from very bearish to very bullish.  I expected this given the broad range of opinions I read.
• Even among sell side analysts there seems to be more divergence with S&P 500 performance projections ranging from -9% to 20%.
• The average S&P 500 performance projection was about 7%; however, this is usually the case.
• The S&P 500 EPS earnings projections range from $96 to $110.
• The average S&P 500 EPS earnings projection is about $102.
• Those who are bullish tend to think many of the “tail risks” out there (European collapse, Israel-Iran, China hard landing, etc.), while present, and are unlikely to happen. 
• Those who are bearish tend to think these risks are possible and at the very least will drag on the market.
• The ultra bulls think that we could see some large upside surprises in the US economy – GDP, unemployment.
• The ultra bears think the “tail risks” are probable (especially Europe).

There you have it, the 2012 consensus opinions from my readings.  My next post will outline my thoughts regarding these projections and I will provide you with a few portfolio ideas on how to play this.

2011 Consensus – Eh.

Doug Kass recently wrote about his “15 Surprises for 2012”.  While a good read on its own, he also looked back to how 2011 sell side consensus projections stacked up vs. reality:

• 2011 U.S. real GDP up 3.4% (actual: up 1.8%), and global GDP up 4.7% (actual: up 3.8%);
• 2011 S&P 500 operating profits of $94 a share (actual: $97 a share);
• Year-end S&P 500 price target of 1450 (Friday, Dec. 23's actual close: 1265 & Dec 31^st close was 1254);
• 2011 inflation (core CPI) of +0.5% (actual: +1.7%); and
• 2011 closing yield on the U.S.10-year Treasury note at 3.75% (actual: 2.03%).

Some pretty big misses there.  Hopefully you didn’t make a big bet one way or the other based on consensus views.  I think there are a few key takeaways:

• It is very hard to rely on the consensus views on whole to predict events that have a lower probability of taking place.
• Those events can have large impact on the economy and the markets.
• While each event on its own may have a low probability of happening, when taken together the chances of one of those rare events happening is probably pretty high.
• While not shown, the sell side analysts that make up the consensus tend to all have the same views.  It doesn't pay to different, and the penalty for being wrong as an outlier is great.
• Taking the first 3 together, chances are something unexpected will happen so it’s best to make sure your portfolio is prepared accordingly, for example maybe like this.