Fear 2012? You're Not Alone

Expert bond investor and PIMCO leader Bill Gross began the year looking at his Champagne glass as a little more than half empty:

It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.

These "two moons" represent the two extreme economic possibilities that Gross predicts. Let's take a peek into his crystal ball to find out what he thinks will happen, and what you can invest in to protect yourself.

There's that "delever" word again
The first potential future pictures a world that further delevers, with bleak outcomes. Fool Morgan Housel explains deleveraging in depth, but in short, it refers to the painful reduction of debt and credit that had once fueled economic expansion. Gross points out that only a few sectors of the developed world have actually delevered, like U.S. households, but otherwise total debt has remained the same because of central bank actions like quantitative easing.

But now, Gross says, governments and banks hold few tools left to prop up economies because quantitative easing practices are reaching their politically acceptable bounds and policy rates are falling to near 0%. With few options for further intervention, the threat of "unforeseen-delevering" exists. This ultimately means consumers and businesses will spend less. And with interest rates sitting at 0%, there is no reason to put money into risky investments. Therefore, banks will lend less and investors will hold on to their cash. This nightmarish scenario where money is hoarded, instead of pumped through the economy, is akin to that of any post-apocalyptic movie.

Another less gloomy possibility, please?
The second future presents central banks pumping more confidence into deflated economies. For example, Gross predicts that in January, the Fed will guarantee its rate will remain at the current 0.25% for three years or until inflation or unemployment reach acceptable levels. Following this, the Fed might employ another quantitative easing halfway through 2012. Gross' tone implies these actions will not be enough to reinflate the economy, but hopefully will give the last jolt that the economy needs for the near future -- and then our future has only a slight resemblance to Mad Max.

Where to put your money
Since the outcome of either scenario is uncertain, Gross finishes with a laundry list of recommendations to hedge against either polar possibility, including looking at five-year-or-longer Treasury bonds (especially TIPS), avoiding troubled European bonds, and investing in high-yielding companies with stable cash flows, like electric utilities, big pharmaceuticals, and multinationals. He also mentions that given further quantitative easings, gold could continue appreciating, despite being "pricey."

With these insights, what specific stocks should you seek if you agree with Gross' less-than-rose-colored futures?

For an electric utility, I like Fool Jim Royal's take on Brookfield Infrastructure Partners (NYSE: BIP  ) . As Jim says, "Brookfield Infrastructure has a high level of cash flows represented by regulatory or contractual frameworks -- 80% as of the latest quarter -- providing the company with high-quality revenue." And Brookfield is not solely an electric utility that depends on one region, but it also generates cash from railroads, ports, and timber among its operations in North and South America, Australia, and Europe.

For a big pharmaceutical, I like Israeli firm Teva (Nasdaq: TEVA  ) . Teva had a negative return of 21.8% last year, making it cheap with a P/E of only 13 compared to the industry's P/E of 28. But with the purchase of branded drug producer Cephalon last year, and a new CEO from Bristol-Meyers, this world-leading generic-drug producer is looking to continue bolstering its branded and specialty pharmaceutical products.

For a multinational, Coca-Cola (NYSE: KO  ) is a great brand. Interbrand, a global brand consultancy, values Coke's brand as the most valuable in the world at $71 billion. Coke also has global exposure, with only 31.7% of revenue from North America, and also pays a decent dividend yield of 2.7%. And remember, if the apocalypse comes, the only safe drinks will be bottled ones.

Gross' predictions may fail like so many other expert predictions before, but I still believe these stocks will outperform the market, which is why I'm giving all three stocks a thumbs-up CAPScall. And no matter whether it's the year of gloom or boom, one stock that our analysts think will beat the market is our top stock for 2012 -- read about it here in this free report.

Fool contributor Dan Newman has stocked his cupboards with Spam, just in case. He also does not hold any shares in the companies mentioned above. The Motley Fool owns shares of Teva Pharmaceutical Industries, Coca-Cola, and Brookfield Infrastructure Partners. Motley Fool newsletter services have recommended buying shares of Brookfield Infrastructure Partners, Teva Pharmaceutical Industries, and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On January 11, 2012, at 6:53 PM, MHedgeFundTrader wrote:

    There is no doubt that the recent jobs data has been absolutely blistering. On January 4, weekly jobless claims plunged by 15,000 to 372,000, well below the 400,000 that is required for a sustainable recovery. The next day, the ADP report delivered a gob smacking 325,000 in job gains for December. Then the big kahuna surprised to the upside, the December non-farm payroll, reporting 200,000 new jobs, taking the unemployment rate to a three year low at 8.5%.

    Are happy days here again? Is it off to the races? More importantly, should we be adding risk positions here in expectation of a continued economic miracle?

    I think not. You all know well that I am a history buff. But I know enough about history to understand that it can be a dangerous thing. Don’t let these numbers lull you into a false sense of security. Any slavish reliance on the past can cause you to become history, if you’re not careful.

    There is no doubt that a seasonal surge in hiring caused by the holidays has created this spike. Normally, governments and agencies smooth these figures through a seasonal adjustment process. The problem arises when the structure of the economy is changing faster than can be reflected in these seasonal adjustments, as it is now.

    A large part of our economy is moving online more rapidly than most people realize. According to comScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the November-December holiday period, an all-time high. I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.

    Much of this migration is being captured by Fedex and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. Fedex hired 10,000 temporary workers to deal with the Christmas surge in 2011, a gain of 18% over the same period last year. UPS added a stunning 55,000, a 10% increase.

    Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.

    The Mad Hedge Fund Trader

  • Report this Comment On January 12, 2012, at 4:12 PM, Borbality wrote:

    Meh whatever. Wasn't the guy short on US treasuries last year before admitting defeat and exiting that position? Just goes to show no one really knows what will happen.

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