- - Thursday, December 22, 2011


As we sprint toward the end of December and with roughly six trading days left in the year, the temptation is to say “that’s a wrap” and coast in the coming days with the Christmas season in high gear and New Year’s Eve right around the corner. While I can understand the temptation to do just that, recent warnings and misses from the likes of Oracle Corp., II-VI Inc., Texas Instruments Inc., Emerson Electric Co. and others have me revisiting investment theses and double-checking data points on the one hand while looking at fresh ideas and companies.

Over the last week or so, we have been reminded that the domestic economy continues to move ahead, albeit it at a slower than desired rate. On the positive side of the equation, regional Federal Reserve indices of economic activity, such as the Empire Manufacturing Index and the Philly Fed Index, point to just that. Weekly unemployment claims fell for the third straight week to 364,000, putting it at the lowest level in more than three years. On the other side, gross domestic product (GDP) for the third quarter of 2011 dropped to 1.8 percent from 2 percent. The drop reflects lower health-care spending than previously expected.

Meanwhile, despite a number of commodity prices, such as cocoa, cotton, wheat and others, falling, it appears that a watchful eye must still be kept on inflation per November’s producer price index at least if you need to pay for food and fuel.

So while the domestic recovery appears to be continuing albeit slowly, Ifo Institute’s latest report shows that German business morale rose sharply in December while current expectations call for a weak economic start more broadly in Europe in 2012.

France’s National Institute of Statistics and Economics recently reported a dip in December business confidence to a reading of 94, down from November’s 96. It projected that France’s unemployment will climb from 9.3 percent in the third quarter to 9.6 percent in the current one. The net of this has the instituteforecasting a recession in early 2012 for France.

As far as Italy goes, “A flurry of poor economic data and the intense financial contagion hitting Italy from the euro zone debt crisis point to a painful and prolonged recession which is expected to prevail until the final quarter of 2012,” according to IHS Global Insight.

With 2012 in the view of many looking glasses now, there is growing unease about headwinds to global growth above and beyond what is going on in Europe. Some are looking here on the domestic homefront and are raising concerns that recent temporary factors — the restocking of lean inventories, the drawdown on the savings rate, Japan’s post-tsunami rebound — coupled with prospects for higher taxes and reduced government spending will weigh heavily on the domestic economy in 2012.

Shake, pour and stir the above and we have yet another round of uncertainty for the stock market as we set our sights on the first quarter of 2012. In terms of what is expected, Wall Street is calling for the companies that comprise the S&P 500 to deliver aggregated earnings of $25.20 in the first quarter of 2012, up from $24.50 in the current quarter and $23.50 in the first quarter of 2011. As the festivities and gift giving subside and we return to work in early January, our attention will turn to not only what is expected for 2012 but to whether the underlying assumptions are viable and probable. Driving our attention and fueling that scrutiny will be the fourth quarter of 2012 reporting for the S&P 500 group of companies as well as their respective outlooks both near and longer term.

Given the number of warnings already issued, it would appear that more bumpy road lies ahead.

Merry Christmas to you one and all!

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] times.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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