My crystal ball for 2013

In the article “My prediction for 2013 – all other predictions will be wrong”, Larry Smith, a respected contributor at Seeking Alpha, suggested that many yearly predictions on 2012 by known organizations and famed individuals are often wrong.

Larry said,

“To prove my point, I thought I would look at some of the 2012 market forecasts that were made at the end of 2011. Let's start by looking at some of the S&P 500 forecasts that were made by the leading Wall Street firms. Morgan Stanley (MS) takes the worst prediction prize by forecasting an end-of-year S&P 500 closing price of 1167, off by almost 300 points. Goldman Sachs (GS) predicted a closing S&P 500 price of 1250 and Seabreeze Partners misfired on the high end by forecasting an S&P closing price of 1527. Click here to see all the major brokerage firms' predictions for 2012. Most of the firms under estimated the size of the stock market rise.
Individual forecasters were not any better; here are some quotes from relatively well-known investors.”

I agree with him completely, but there are exceptions and I try to be one of them. We can profit a lot from an accurate prediction.

My past prediction

Why should you want to follow a prediction from a nobody like me? My predictions have been on track many times, particularly for the year 2000, 2003 and 2009. In 2012, SPY (similar to S&P500 index) has a return of 13%. My prediction is 10%, off by 3%.

My prediction for 2013

First, I do a lot of research based on many researches that are already available. My job is to separate the good from the bad predictions. I try to digest the experts’ views (especially those with good arguments and track records), add my own opinions (see below) and make a conclusion. That’s how I did for 2012 and my prediction for 2012 was better than most predictions from Larry’s Hall of Shame.

 We should review the prediction at three-month intervals and make adjustments. Market conditions constantly change -- it is not beneficial to maintain the original prediction that was created in the beginning of the year.

Prediction on SPY for 2013

I predicted that the SPY would rise by 12% for 2013 disregarding dividends.  I regard the S&P500 over the Dow as a more accurate overall market representation.

First half of 2013

I predicted that the market would decline by about 3% in the first half of the year. The bill on the Fiscal Cliff has been passed but the root problem has not been fixed. The problem is our high debt. We will face several hurdles such as cutting further expenses and raising more revenues. Raising the debt ceiling is not a long-term solution. The market will fluctuate when the next hurdle surfaces. With this, I predict a volatile market until mid year.

Corporate profits on Q1 will not be better than the expected but they will improve after Q1. We can increase profits so much by cutting expenses and employees with diminishing returns. Corporations need to invest in product research and development for real profits.  Apple and its partners could be the exceptions with new profits from selling iPhone5s in China and newer markets in Q1.

Second half of 2013

After mid year, there are many reasons that the market will improve. Here are my predictions.

1.   1.  The EU should have solutions to their crisis. The market will react favorably even though the solutions are not good for some citizens and some countries.

2.   2.    China’s economy should have improved and its internal market is growing fast. It has fixed a lot of serious problems in the past, so I do not bet against that. When China recovers, its import partners of raw materials from Australia, Brazil… will also recover, so are the U.S. and the EU in selling China’s high tech products.

3.       3. Japan and India will not recover in the same pace as the rest of the world. Japan needs more citizens while India needs less. Japan’s trade is suffering from the islet dispute with China.

4.    4.   QE3 and low-interest rate would lead the recovery this time. We will see how the debt ceiling and the fiscal cliff affect the flow of money. Will China be the sucker again in lending us money that will be paid back with ‘monopoly’ money? China wants our trade for creating jobs at a high price. However, the Chinese must be calculating whether lending money to us is worth it or not.

This could be the last tool and the last time for the government to stimulate the economy. The chances to fall into a W-shaped recession and/or Japan’s lost decades are not high but they are not completely ruled out.

5.       5. Corporate profits will be increased, especially the global companies and the companies in the good sectors (see below).

6.      6.  The USA may be on the road to energy independence with the shale oil and shale gas. We have to see how the extraction damages our environment. The pipe line sector will be an important but it has been neglected so far. Without them, the extracted fuels go nowhere.

7.      7.  The two wars are ending. Hopefully they do not drag any longer. To me, these two wars are the prime reason we are having this recession and the financial crisis is the trigger.

Predictions #6 and #7 would lead us to start a secular bull market starting as early as 2016. A secular bull market usually lasts for about 20 years. The last one (about 1980 to 2000) is most likely caused by the lack of war.

Depending on how many and how early the above events materialize, the time frame may shift 3 months later. In this case, the market would be down 3% in the Q3 of 2013 and the market would be 9% up by year end (instead of my original prediction of 12%).

If there is any war with USA, then all bets are off! President Obama, please take notes.

Good and bad sectors for 2013

Good sectors: Technology, Large Cap, Housing and Health Care (depending on the impact from ObamaCare).

Bad sectors: Utilities, Consumer Staples, Defense, Precious Metals (unless we have super inflation), Bond (betting on interest rate going up) and Dividend Stocks (whose value as a group has been above its historical average).

Risky but profitable sectors: Depending on China: FXI (an ETF for large Chinese companies), Energy, Steel, Coal, Copper, and most other industrial minerals.  Financial.

The benefits of a yearly prediction

It is used to plan how to invest for the coming year. If the outlook is rosy, commit more money on equities and invest aggressively, and vice versa. Upon a prediction of a recession recovery, an over-weighted equity portfolio is suggested. As my best investing years were 2003 and 2009-- years of recession recovery.

Conclusion

My last recent market predictions were good for 2011 and 2012. The market was not rational for some years. I do not predict that my future predictions including this one would work every time. Market prediction is not a precise science and the constantly changing dynamic factors alter the landscape. However, it is better to stick with a good prediction than not, and in the long term, it works.

Act on the current events being surfaced and adjust our portfolio prediction accordingly.

------
I am not going to make any changes in this blog except on the comments.

See how accurate is this prediction by year end.

------
My e-book Debunk the Myths of Buffett could save you a lot of money.

http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html


Disclaimer. I'm no responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.