Events That Could Move the Market in 2012

 | Dec 28, 2011 | 9:00 AM EST
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The year-end prediction season is now officially upon us. Much like the College Championship Bowl games, we will see a flurry of predictions leading up to the big one next month when the Barron's Roundtable report is published. The vast majority of predictions will be bullish in nature and predict a 10% or more rise in the major averages, as they have done every year I can remember.

I will not regale you with precise or even general market predictions. I am not going to select any specific stocks either as the market has been rising all month and most of my handful of indicators are much closer to overbought than oversold right now. I am not a big buyer of individual stocks right now and I'm hesitant to put out a list of great stocks for 2012. A list of stocks to buy in 2012, if they trade at a huge discount to tangible book value in a steep market decline, strikes me as a little silly as well. Of course, I have one of those on my desktop full of banks and infrastructure stocks, but I will keep those to myself until the time is right.

For my predictions, I shall borrow form JP Morgan. When asked what the market was going to do, he famously responded that it will fluctuate. I have no clue where the market will close next year, but I am pretty sure that we will get one or two very steep selloffs that will create a buying opportunity in stocks. Many sharp rallies will occur and give you a chance to sell some of your cheaply purchased merchandise at good prices. The fear-and-greed cycle will give you a few opportunities to sell puts on undervalued stocks and falling knives at very rich prices. Long stretches of time will occur where the right thing to do will be very little, if anything.

The following are some events I think might move the markets in 2012. No one really anticipated the Arab Spring uprisings last year. Right now, few are talking about the consequences of that series of events. I predict it will turn into a nightmare, as struggles for control of the Middle East turn increasingly violent. This, of course, would not good for oil prices, and we could see several war-related spikes in prices. This is especially true if the situation in Iraq descends into full-blown civil war in 2012, as I think it will.

We are not done with the debt crisis concerns in Europe either. The liquidity injections and bond buying activities this month have soothed some traders, but we will hear much more from Greece, Italy and Spain in the new year. The combination of high debt levels and a population accustomed to high benefit levels is going to continue to cause disruption in the markets. A real solution for the EU is a long way off. Of course, a real solution involves sovereign and large bank defaults along with strict financial austerity measures and these would not necessarily be great news for markets either.

Here at home, I think we will see more of the same with a continuation of better, but not good, market action, as the recovery maintains an 'L' shape and fluctuates around a flat line all year. The real downside is that this is an election year in the U.S., and a lot of economic noise and news will sound as the polls rise and fall. It will be a very loud, angry, partisan election and many sound bites will provide noise for the stock market. This will be fantastic for newspapers and radio stations in the second and third quarters of the year.

My biggest prediction for this year relates to banking stocks. Smaller banks are facing a wave of new regulations, restrictions and fees many of which take effect in 2012. The regulations designed to reel in big banks can cripple their smaller brethren and make it difficult for them to prosper. We will see a wave of bank mergers and consolidations starting this year.

Many banks need to plug holes in their balance sheets and others will find that in a sluggish economy the only way to grow is by acquisition. A portfolio of small banks with healthy loan portfolios and capital ratios should begin to show the results that make them the trade of the decade. Look for small banks trading below tangible book value with tangible equity-to-asset ratios above 10 and favor those that pay dividends. I think the 2012 year-end result will have you drinking Dom instead of off-brand bubbly.

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