Europe Will Dominate in 2012

 | Dec 27, 2011 | 1:00 PM EST  | Comments
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hpq

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dell

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goog

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It's the time of year to pause and take some best guesses for what we'll see in 2012. If I've learned anything over the last few years, it's that you're more likely to be right if you're a true contrarian.

  1. The eurozone will crack up. European leaders will continue to debate and try to prevent this from happening, but they will have to face this inevitability. I suspect it will come in summer or early fall rather than the first part of the year. It seems commonplace for people to bet on something coming early on, but I suspect the Eurocrats will push it off longer. The stepchildren countries will be forced out and likely write down their debts.
  2. The break-up will lead to a flash-crash, followed by a slow decline in U.S. stock prices. The S&P 500 will close down 15% next year. We have a tendency to believe that the next crash will be like the last crash. People want to think that a eurozone break-up will be like Lehman Bros. In reality, future events are never exactly like recent ones. Their uniqueness is only obvious in hindsight. Rather than a six-month decline, a break-up of the eurozone is more likely to lead to a rapid drop in stocks, followed by a quick bounce thanks to some kind of coordinated central bank effort to calm nerves. I suspect, though, that this rebound is likely to be faded as investors see an inexorable path towards a global recession in the aftermath of these financial changes.
  3. A prolonged European recession will be bad for the U.S. Many multinational U.S. companies will be sideswiped by a European financial crisis that spills over into a longer recession there. It's going to take down even large tech companies like Cisco (CSCO), Hewlett-Packard (HPQ) and Dell (DELL). This stock decline is going to affect people's views of their net worth and throw cold water on the U.S.'s nascent recovery.
  4. The biggest country at risk in a European breakdown is China. China's government recently dropped its reserve requirements, signaling that it is starting to ease its monetary policy designed to stamp out domestic inflation. It surprised me since the Chinese government doesn't tend to do things by half-measures. The fact that it was moving now to ease worries me that they see real internal problems with their economy – which depends on exports – at the moment, and we haven't even started the full-blown European crisis. If that hits with a long recession to follow, Chinese exports will be affected and the economy will throttle down. That will unquestionably have wider global economic effects in the emerging markets and in the U.S. A Chinese slowdown combined with a European recession could restart a longer recession at home.
  5. Commodities will head lower. China's the main engine keeping commodity prices stable now. If China slows, commodities will get whacked to lower levels in response.
  6. Gold heads lower, too. The European crisis will take down another sacred cow: The idea that gold, and its exchange-traded fund the SPDR Gold Shares (GLD), can only go up and that it's the new safe-haven currency. When some kind of flash crash caused by Europe happens, people will need liquidity and gold will be one of the places they tap. We've already seen the gold miners tumble precipitously in 2011, but that hasn't yet happened in the bigger ETF.
  7. Yahoo! (YHOO) will be bought by Bain/Blackstone/Alibaba/Softbank before April. One of the most frustrating positions I've had in 2011 has been my Yahoo! long. Many people have given up on it, but I'm still optimistic that a deal will happen where it is bought by a consortium of Bain Capital, Blackstone (BX), Alibaba and Softbank before April.
  8. The patent war between Apple (AAPL), Google (GOOG) and Microsoft (MSFT) will get even more heated. If you thought 2011 was big for the patent wars between the three tech giants, just wait for next year. It will only get more heated, and might lead to actual injunctions that meaningfully affect revenue and products, such as what we saw recently with Apple's win against HTC in the U.S.
  9. Credit markets will freeze up following a European crisis and take a while to open up again. This big chill might finally force some countries that have done pretty well to this point in real estate (Canada, Australia, and Hong Kong) to see their real estate markets finally take a big leg down in 2012, followed by a long flat period as consumers deleverage over the next decade.
  10. Middle-market mergers will continue before the European crisis erupts. We will see many M&A deals for companies in the $1 billion to $5 billion market-cap range until the summer, when the European crisis causes the credit markets to close up again.

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