2012

[2012: EQUITY MARKET OUTLOOK]

Summary of 2012 outlook with forecast direction of equities based on fundamental econometric analysis. The forecast is for very positive conditions in equity markets.

Summary
Market Sentiment
Surveys suggest that fund managers have low market exposure, a possible cyclical low. US markets have had record retail fund outflows - setting the stage for a rally.

US Markets: Dow Jones

Consensus earnings fair value model shows market is cheap and trending strongly upwards. Current fair value estimate is 13,254 (+6.5%). Economic earnings indicator confirms strong growth in earnings per share. Company financials are very strong on all factors including to p line revenue growth per share, earnings per share, dividends per share, cash flow, free cash flow, sustainable debt levels and shares issuance. Low interest cost on debt will continue to fuel earnings growth capacity.

Australian Markets: S&P200

Consensus earnings fair value model shows market is cheap and trending upwards. Current fair value estimate is 5,001 (+19.4%). Economic earnings indicator confirms strong growth in earnings per share. Fair value indicator predicts a new upwards trend in equities the first time since 2006 with a directional target of 5,238. Company financials are very stable, but havent improved as much as Dow Jones companies. It appears that too much cash is being held, which could potentially be used to fund growth.

Market Sentiment
NAAIM Survey
The NAAIM survey is based on active money managers representing their overall equity exposure on a weekly basis.

Money managers have very low equity exposure and typically current levels represent a bottom in the markets. This is very positive for equity market potential.

US Equity Market Fund Flows

Source: Zero Hedge

Retail fund flows in and out of equities is a lagging and contrarian indicator. Retail investors are usually the last to get it and often buy high and sell low. Fund flows have been going out for years, meaning that there is a huge amount on the side-lines that can sustain an ongoing market rally.

Dow Jones Summary

Dow Jones Index value based on consensus earnings expectations

Fair value is trending up strongly, with the Dow Jones still appearing cheap, and is highly likely to indicate a continued equity market rally from here.

Earnings versus economic earnings indicator

Economic indicators suggest that real profits are growing strongly

Earnings & dividends are rising

Since 2006, revenue per share has increased (now higher than 2008), dividends per share having consistently grown by a total of 40% (without a drop!), while earnings per share is also much stronger.

Cash balances are very strong

Strong company earnings are filtering through to cash holdings, with total cash positions almost doubling since 2006. The current cash holding of the Dow companies is expected to total $423 billion. These funds may be used for mergers and acquisition, expansions, research and development, as well as the potential for extra dividends or share buy-backs.

Cheap debt financing is being used to buy-back shares

ASX Summary

ASX Index value based on consensus earnings expectations

Fair value is trending up, with the ASX still appearing very cheap, (more than 2009) and highly likely for a continued equity market rally from here.

ASX Index versus Economic Indicator

The Economic Indicator fair value model suggested that the recovery in 2009 was too early. Now, however, the stage is set for positive equity market movements. This indicator will be watched closely.

ASX Earnings & Dividends are stable

Since 2006, revenue per share has increased moderately, dividends per share having also grown moderately by a total of 12%, earnings per share is moderately up.

Profitability is stable

ASX companies Cash & Liquidity strong growth

Since 2006, cash balances have increased by a massive 158% and are over 2.5 times larger.

No comments or items in this document can be construed as investment advice or an offer or solicitation to buy or sell any stock. All information is obtained from publicly available sources. While the information is believed to be accurate and reliable, it is not guaranteed or implied to be so. The information may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. I accept no responsibility, or assume any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information. Fair value targets are based on quantitative analysis within a defined model and are represent a statement of opinion. As always, seek professional advice.

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