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CFA Forecast Dinner January 26, 2012.

Economists were put on earth to make weathermen look good” – Dr. Gary Shilling.

Usually, presenters at the annual CFA Forecast Dinner are either mildly bearish or bullish. Last night, the audience was presented with three of the most bearish outlooks seen in a long, long time.

Hanif Mamdani from RBC Asset Management (formerly PH&N) said that ‘one wants either excessive optimism or excessive pessimism baked into prices’ … Neither is the case today. Reasonable valuations (roughly) complicate things further. Mamdani specifically mentioned U.S. REITs as being significantly overvalued. This is in contrast to the significant number of newspaper articles so far in 2012 touting REITs as likely repeat performers. Investors ought to give some thought as to whether or not REITs will (again) be the place to be in 2012. (see table below). He also mentioned the widely despised Goldman Sachs as being undervalued. Expect to see a ‘muddle along’ throughout 2012 (with more problems later). Expect to see the Canadian dollar end the year at par with the U.S. dollar, oil at $85 and 10 year yields at 2.0% – about where they are today.

Dow Jones US Real Estate index
Cohen & Steers Realty Majors Index
S&P/TSX Capped REIT Index

Source: index returns calculator tool.

David Fisher from PIMCo. noted the continuation of a longer-term secular trend of balance sheet de-leveraging along with a shorter-term cyclical trend of fiscal austerity and Euro Bank recapitalization. Fisher sees the Euro under a cloud of fiscal constraints with no GDP growth… a bad combination. Favour the U.S. dollar over the Euro (and Loonie) and longer duration bonds.

Dr. Gary Shilling said we are only about 20% through a long de-leveraging period reversing over-leveraging that started in the 1970’s. De-leveraging that started in 2007 still has at least 5 more years to go. A longer-term secular bear market that started in 2000 will mean more frequent and deeper bear market dives (and bear market rally’s) for some time to come.

Dr. Gary Shilling, The Age of De-leveraging

Dr. Shilling breaks down the world in three: Europe, China and the U.S.

Europe will see the face-off between Germany (‘if we don’t get what we need right now, we won’t get it at all’) and the IMF (‘you can’t push countries that are already in a recession into a depression’). “Both are right”, says Shilling and ‘compromise will be ugly’. I’ve heard this called ‘consensual, uhm, restructuring’.

China will see a hard landing. No winners here.

Dr. Shilling expects to see long interest rates at about 2.5% (about where they bottomed in 2008 during the Lehman Brothers bankruptcy), dividends to approach 3% (from the current 2%) and the S&P 500 to yield about $80 in operating earnings. With a 10x multiple that would mean the S&P 500 would approach ~800 (from 1320 today). Ouch. Oil should end 2012 at about $80 and the Canadian dollar would hit $0.80 (from par today).


If any of these predictions are even close to being correct, value investors, investors sitting on cash, investors still accumulating will have significant buying opportunities in 2012. Decide what to buy, decide what price to pay … then wait.

Next time?  More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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