What next? Three views

No one knows what lies ahead for the world economy and global stock markets. But there are a lot of opinions out there, as those attending the Toronto World Money Show quickly discovered. We could be headed for economic Armageddon according to some. Or maybe not.

Overall, the cautious optimists appeared to outnumber the pessimists among those making presentations. But then you have to bear in mind that many of these people have a vested interest in encouraging investors to buy stocks.

Three of the most interesting presentations I sat in on were given by the keynote speakers at the opening ceremonies. Here’s a summary of what they had to say.

Robert Gorman: moderate growth

First up was Robert Gorman, chief portfolio strategist for TD Waterhouse who offered his investment outlook for 2012. On the whole, he struck a positive note.

On the key issue of whether we are headed for a double-dip recession, he told the audience that while the odds are shortening, he still puts the probability of that happening at only 35 per cent. The more likely scenario, he believes, is a period of moderate growth and moderate inflation, which would be good for stocks.

He pointed out that the key S&P 500 Index is only trading at 12.5 times earnings, “a pretty reasonable valuation”. With inflation expected to remain low, that ratio is not likely to contract significantly, he said. “Stocks are much less expensive than bonds and are good value at this level,” he added.

He predicted a fall rally in the stock market and forecast an advance in the upper single digit range for the S&P 500 in 2012. The best bets will be large-cap, dividend-paying stocks like Johnson & Johnson (NYSE: JNJ), PepsiCo (NYSE: PEP), IBM (NYSE: IBM), and Oracle (NDQ: ORCL).

Mr. Gorman said he expects the TSX to follow the same pattern with a rally this fall and single digit gains in 2012. His picks included Power Corp. (TSX: POW), Shaw Communications (TSX: SJR.B, NYSE: SJR), Royal Bank (TSX, NYSE: RY), and Scotiabank (TSX, NYSE: BNS).

As for bonds, he suggested they have a role to play in generating income and for capital preservation but predicted total returns in 2012 would only be in the 1 per cent to 3 per cent range.

Jim Jubak: trouble ahead

Next up was Jim Jubak, a widely-followed U.S. investment columnist and senior markets editor for Moneyshow.com. He chose to look past 2012, in part because he expects the political gridlock in the U.S. to prevent any meaningful action by the government until after the presidential election. Instead, he focused on 2013 and beyond and doesn’t like what he sees. Most of the “solutions” being applied today are really just “delays” that will start to take their toll at that point, he said.

Looking at Europe, he thinks it is inevitable that Greece will eventually default on its debt, perhaps bringing down at least one large French bank in the process. By 2013-14, “the yield on the Greek two-year note will be somewhere north of infinite,” he quipped, noting that it is now over 50 per cent.

“There is not enough money in the pockets of German, Dutch, and Finnish taxpayers to continue to fund that debt.”

In the U.S., the failure of government to act decisively will mean the problems plaguing the real estate market will continue while the unemployment situation will worsen because the skills of those out of work for a prolonged time will become increasingly obsolete.

Among emerging markets, Brazil is facing a serious inflation problem while China has to deal with a growing issue of bad loans at all levels of the economy.

Mr. Jubak’s safe havens: gold, strong currency bonds, and dividend-paying stocks.

Dennis Gartman: opportunities in food, fuel, gold

Dennis Gartman is perhaps the most influential investment newsletter publisher in the U.S. His views are widely quoted and closely followed by financial professionals. He is also a compelling speaker with a very strong point of view and his presentation was one of the highlights of the Money Show.

Unlike Mr. Gorman, he does not want to own stocks right now. “They may be inexpensive but I think they may get a lot more inexpensive,” he said. There will be a time to buy aggressively but that will only come after the markets turn around and start moving back up. “Don’t try to catch a falling knife,” he told the audience. “You’ll just cut yourself.”

He does like gold, although he stressed that he is not a gold bug saying “I don’t believe the world is coming to an end.” Rather, he described himself as a trader and a pragmatist: “I’m willing to go with any team that is winning.” Gold is winning and will keep going up “until it stops”. It should not be considered a safe haven, however. “Safe havens don’t lose 8 per cent in one day,” he noted, referring to gold’s recent one-day loss of more than $200 an ounce.

As for other opportunities, he encouraged the audience to look at food and fuel for long-term gains. World demand for food is going to continue to grow, he said, as people in Asia and Latin America move from lower to middle class and change eating habits. “Food is going to get a lot tighter in the next 20-30 years.”

Investment opportunities include fertilizer companies, agriculture-related ETFs, and, down the road, dry bulk shippers, whose shares have been hammered in recent years.

Turning to fuel, he debunked the whole concept of peak oil saying new discoveries and technologies will give us access to a virtually unlimited supply of oil and natural gas. But high-quality, sweet oil will be tight – much of the world’s supply is “junk” including Saudi oil. “It contains too much sulphur and it’s too expensive to refine – no one wants it,” he contended.

This explains why Brent crude, which is sweet light oil produced in the North Sea, is trading at a significant premium to West Texas Intermediate crude (WTI) which is the North American benchmark, he suggested. The spread between the two is likely to continue to widen.

(Although Mr. Gartman didn’t mention it, there is an ETF that tracks Brent crude. It’s called the U.S. Brent Crude Fund and it trades on the New York Stock Exchange as BNO.)

As for natural gas, he described supplies as “vast and getting vaster”. There is no way we are going to see a significant increase in gas prices as a result, he said. “If you’re bullish on natural gas prices, take a deep breath,” he suggested.

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