THE U.S.

IN 2012
BUSINESS INSIDER

THE U.S. IN 2012 ² A SLOW HEALING ECONOMY
WALL STREET·S top investment houses have issued their predictions for the new year, with a variety of opinions on how 2012 will turn. BUSINESS INSIDER surveyed the top strategists at a dozen firms, talking commodities, FX and, of course, the economy.

U.S. GDP
LOW 1.60% MEDIAN 2.20% HIGH 3.00%

ƒ U.S. GDP is expected to rise modestly in 2012, as the country·s business in Europe comes under pressure. Largely though, economists are upbeat.
ƒ The banks weigh in: ƒ BANK OF AMERICA MERRILL LYNCH: ´Despite a 2012 recession in Europe, the US and the global economy will continue to grow, albeit at a modest pace. International growth will continue to outpace US GDP growth by roughly double. The relative strength within US national accounts will continue to come from equipment & software spending and gross exports despite some deceleration. This will benefit the Industrials and Tech sectors.µ ƒ CITI: ´A contraction in Euro area GDP for 2012 may not entirely overwhelm globally-exposed US firms, as long as the rest of the world continues to. US corporates are much more prone to a sharp global slowdown than a localized recession in the Eurozone.µ

U.S. GDP COMMENTARY (CONT.)
ƒ DEUTSCHE BANK: ´This projection reflects the effects of two sets of countervailing forces. On the positive side are several key drivers of growth, including pent-up demand for durables and structures, strong corporate sector balance sheets, and household deleveraging. Spending on consumer durables and business equipment, as well as investment in business structures and housing, in the aggregate, is still running near historic lows as a share of GDP. This spending will add an extra 5% to the level of GDP in the years ahead as it returns to levels needed to keep the stock of homes and durables expanding in line with a growing population.µ ƒ GOLDMAN SACHS: ´We also expect growth to slow in the US, although we still do not expect a recession and have made no significant changes to our forecast.µ ƒ J.P. MORGAN: ´The bounce back from low levels appears to be a central factor behind the strength in capital spending, which has been a major force behind the recovery thus far. While capital spending is now returning to more normal levels, investment in housing and other structures remains unsustainably low, and should be forward.µ

S&P EPS
LOW $96 MEDIAN $102.5 HIGH $106

ƒ S&P earnings are likely to accelerate headed into 2012, with most financials forecasting EPS topping $100. Credit Suisse is unconvinced, expecting 0% growth in earnings.
ƒ The banks weigh in: ƒ BANK OF AMERICA MERRILL LYNCH: ´At close to 9%, the net margins of the S&P 500 Non-Financials are near the high end of their historical range. While we have little doubt that these margins would be unsustainable in a recession, there are several reasons why margins should remain higher than the historical average on a secular basis. Importantly, most of the improvement in net margins has been the result of changes below the operating line.µ ƒ CITI: ´Visibility is extraordinarily poor in late 2011, subject to political resolutions with unusually large economic consequences both in the U.S. and abroad. In general though, the growth ´just behind usµ is likely to be stronger than the outlook going forward. With risks in mind, we hold for now our S&P 500 EPS estimate for 2012 unchanged at $101.µ

EARNINGS TO GDP
Corporate profits have returned to all-time highs in 2011, after falling more than 50% during the crisis.

U.S. UNEMPLOYMENT
LOW 8.00% MEDIAN 8.90% HIGH 9.10%

ƒ Estimates for unemployment skew in the high 8·s, with only Oppenheimer Co. predicting it could hit 8.00% even.
ƒ The banks weigh in: ƒ BANK OF AMERICA MERRILL LYNCH: ´Personal consumption growth will decelerate in 2012 and savings rates will rise from current levels, while slowing payroll growth will lead to a rising unemployment rate.µ ƒ DEUTSCHE BANK: ´The broad consensus expectation, and our own, is that real GDP growth will struggle to rise much above its trend rate of about 2.5%. This means that unemployment is likely to remain uncomfortably high near 9%.µ

INITIAL CLAIMS OFFER SOME IMPROVING NEWS
Initial claims spiked during 2009, but have since crossed back under 400,000, indicating improving conditions. The unemployment rate also dropped at the end of the year, to 8.6%.

U.S. INFLATION
LOW 1.60% MEDIAN 1.80% HIGH 3.20%

ƒ High unemployment will keep inflation surprisingly low in 2012, most financials agree.
ƒ The banks weigh in: ƒ GOLDMAN SACHS: ´The large output gap should result in renewed disinflation, pushing core inflation to 1.2% by late 2013.µ ƒ J.P. MORGAN CHASE: ´With wage inflation contained, the possibility of a wage-price spiral has been removed. The periodic episodes of higher headline inflation experienced in this expansion have not translated into lasting increases in underlying inflation. In the spring months of 2011, higher commodity prices, as well as temporarily higher prices of autos after the Japanese earthquake, gave a boost to core inflation. More recently, however, core inflation has eased back lower.µ ƒ UBS: ´Inflation pressures will remain subdued. Deflation risk presents more of a challenge for policymakers in developed economies. And even in many emerging economies we expect inflation to fall in 2012, albeit due to base effects as commodity (especially food) prices level off.µ

EURO/DOLLAR
LOW $1.20 MEDIAN $1.30 HIGH $1.45

ƒ Recession in the Eurozone, which nearly every bank is forecasting for 2012, will lead it to decline against currencies like the USD and JPY.
ƒ The banks weigh in: ƒ CITI: ´Our FX team sees the Euro/dollar rate dropping into the ½1.25-1.30 range over the next year due to further European turmoil and weak growth; however, this should be partially offset by better US growth ² the dollar tends to do well in outright US recession, but less well in a cyclical slowdown where risk aversion may be less.µ ƒ DEUTSCHE BANK: ´Directionally, the EUR is expected to remain a favorite short. EUR/USD levels near 1.40, or 20% above PPP, will remain an active sell zone, while the downside limit is less easily demarcated but will likely stall before 1.20. A collapse in the EUR is not expected without more evidence that capital flows are exiting core asset markets.µ ƒ UBS: ´A gradual recovery in the US economy versus recession in the Eurozone will lead to a depreciation of the euro over our forecast horizon. We expect the euro/dollar exchange rate to end 2012 at 1.25 and fall toward 1.20 by the end of 2013.µ

DOLLAR/YEN
LOW ¥71 MEDIAN ¥76 HIGH ¥83

ƒ Economists are bullish on the Japanese Yen, expecting it to gain on the crisis in Europe.
ƒ The banks weigh in: ƒ MORGAN STANLEY: ´We are bullish on JPY in the year ahead and believe that a global low-yield environment marked by riskaversion and deleveraging will keep JPY well supported « We forecast that JPY will benefit strongly as a safe haven currency in a world economy beset by uncertainty.µ ƒ NOMURA: ´We see downside risk for USD/JPY toward mid-2012. The main fundamental drivers are: 1) further monetary easing by the Fed (QE3); 2) intensifying European fiscal/financial problems; and 3) subdued Japanese investment in foreign assets.µ

BRENT CRUDE OIL
LOW $86/bbl MEDIAN $105 HIGH $128

ƒ Demand for crude oil, and therefore its price, will closely follow Europe as EMs cannot supplement developed nation pull back.
ƒ The banks weigh in: ƒ CREDIT SUISSE: ´We noted that unless the situation in Europe worsens noticeably and begins to drag down growth in the emerging markets and North America, we expect the price of oil to move modestly higher over the coming year, with Brent trading at around $120 in 4Q 2012.µ ƒ DEUTSCHE BANK: ´We find that OPEC has a successful track record in defending oil prices via production cuts although not when world growth is below 3% as the cartel is unable to cut production as fast as world oil demand growth is slowing.µ ƒ OPPENHEIMER: ´Given the ambiguous global growth outlook over the next several months, escalating commodity costs are likely a thing of the past. That does not mean oil will not eclipse $100 anytime soon. To the contrary, we believe there is enough global growth and geopolitical uncertainty to keep oil prices elevated within an$80-$100 range.µ

GOLD FUTURES
LOW $1,850/oz. MEDIAN $1940 HIGH $2,200

ƒ Gold is expected to go even higher in 2012, with some banks predicting a spike above $2,000/oz.
ƒ The banks weigh in: ƒ DEUTSCHE BANK: ´Consequently, our strongest conviction trade remains long precious metals and specifically gold. In an environment where real interest rates are negative and the US equity risk premium is high we expect this will sustain strong private and public sector demand for gold.µ ƒ GOLDMAN SACHS: ´We expect gold prices to continue to climb given the current low level of US real interest rates. Further, with our US economics team forecasting slower US economic growth throughout 2012, we expect US real interest rates to remain lower for longer, supporting higher gold prices.µ ƒ MORGAN STANLEY: ´Beyond the safe haven status associated with uncertainty surrounding the European sovereign debt crisis, we also believe that: 1) the gold to oil ratio highlights that, on a long-term real purchasing power basis, gold is close to fair longterm value; and 2) the prospect of sustained negative real interest rates reduces the opportunity cost of holding non-yielding assets.µ

GOLD PRICES IN REVIEW
Over the past five years, gold prices have continued on an upward path. Recently, however, it has experienced a large pullback as investors sell off.

SILVER FUTURES
LOW $32.40/oz. MEDIAN $34.79 HIGH $50.00

ƒ Silver futures are expected to closely track those of gold, which banks forecast will trend higher than current levels (silver trades below $30 on the CME at present).
ƒ The banks weigh in: ƒ MORGAN STANLEY: ´Following a sharp correction in 2Q2011, silver remains an attractively priced safe haven commodity relative to gold. However, silver·s well attested volatility, its vulnerability to weakening industrial demand, and weaker supply credentials make it a less fundamentally supported market than gold at the present time.µ

COPPER FUTURES
LOW $7,360/t MEDIAN $8,400 HIGH $9,500

ƒ Copper, like metal peers, is forecast to price higher in the new year as supply is constrained
ƒ The banks weigh in: ƒ CREDIT SUISSE: ´Global growth would need to weaken noticeably for the price of copper to fall substantially on a sustained basis from the current level (the only time this occurred in the past six years was in the free-fall seen post Lehman).µ ƒ GOLDMAN SACHS: ´We expect that an end to de-stocking in Europe, Chinese policy easing and solid construction activity (underpinned by the build out of social housing) will act as upside catalysts for copper prices in 1H12. In addition, copper supply disruptions are presenting significant upside risks to copper at present.µ ƒ MORGAN STANLEY: ´We believe copper·s constructive fundamentals will make it an outperformer among the base metals. Supply side difficulties remain, which should keep copper prices elevated and well above marginal cost until such time as the global inventory pipeline is replenished and a more reliable supply environment ensues (likely post-2014).µ

NICKEL FUTURES
LOW $18,125/t MEDIAN $21,000 HIGH $22,000

ƒ Nickel is expected to rise rapidly in 2012, with some forecasts putting growth above 20% for the year.
ƒ The banks weigh in: ƒ GOLDMAN SACHS: ´As both demand and sentiment towards demand recovers through 2012, we expect high cost nickel pig iron will still be needed to clear the market. European turmoil and the knock-on effect to economic growth remains the key downside risk to our nickel forecasts.µ ƒ MORGAN STANLEY: ´Nickel prices will likely be tied to Chinese stainless steel production and exports, which are at risk given slowing industrial production. We remain wary of exposure until supply trends in NPI and laterite become clear.µ

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