Hedgie Doug Kass puts out an enjoyable annual list of 15 surprises; unlike a lot of other pundits whose 15 surprises are things that are slightly out of consensus, Doug shoots from big outliers. By definition that means he will strike out on some of these, but that's the point – think very outside the box. Here are a few of his 2012 surprises, for the full list go to TheStreet.com. #7 is ironic in light of today's news out of Sears Holding! (Doug posted it on Twitter Friday, so it's not like he is piggybacking the news)
Sears shares are slumping yet again in the wake of disappointing sales and the retailers’ decision to close 100 to 120 stores. The shuttering of several Sears and K-Mart locations appears to be long overdue, something which the company acknowledged in a press release this morning.
Sears has kept “marginally performing” stores open in the past with hopes that they would recover when the economy picked up again. That recovery hasn’t taken shape, prompting the company to focus on its better stores and perhaps be more active in cutting ties with additional underperformers.
Store closings at its namesake as well as Kmart locations will slash about 5% of its 2,200 full-line stores.
The news sent the stock tumbling 20%+. Shares are down more than 50% since late October and off about 60% from its 52-week high hit in February.
Surprise No. 1: The U.S. stock market approaches its all-time high in 2012. The beginning of the New Year brings a stable and range-bound market. A confluence of events, however (discussed further in the body of the 15 Surprises for 2012), allows for the S&P 500 to eclipse the 2000 high of 1527.46 during the second half of the year. The rally occurs as a powerful reallocation trade out of bonds and into stocks provides the fuel for the upside breakout. The market rip occurs in a relatively narrow time frame as the S&P 500 records two consecutive months of double-digit returns in summer/early-fall 2012.
Surprise No. 7: Sears Holdings declares bankruptcy. In a spectacular fall, Sears Holdings(SHLD_) shares are halted at $18 a share during the early spring, as vendors turn away from the retailer, owing to a continued and more pronounced deterioration in cash flow (already down $800 million 2011 over 2010), earnings and sales. With funding and vendor support evaporating, as paper-thin earnings before interest and taxes margins turn negative and cash flow is insufficient to fund inventory growth. The shares reopen at $0.70 after the company declares bankruptcy and its intention to restructure, as we learn, once again, that being No. 3 in an industry has little value — especially after store improvements were deferred over the past several years. A major hedge fund and a large REIT join forces in taking over the company. Ten to fifteen percent of Sears' 4,000 Kmart and specialty stores are closed. More than 35,000 of the company's 317,000 full-time workers are laid off. As a major anchor tenant in many of the nation's shopping centers and with no logical store replacement, the REIT industry's shares suffer through the balance of the year, and the major market indices suffer their only meaningful correction of the year. Target(TGT_) and Wal-Mart's (WMT_) shares eventually soar in the second half of 2012.
Surprise No. 10: Despite the advance in the U.S. stock market, high-beta stocks underperform. Though counterintuitive within the framework of a new bull-market leg, the market's lowfliers (low multiple, slower growth) become market highfliers, as their P/E ratios expand. With the exception of Apple (AAPL_), the highfliers – Priceline (PCLN_), Baidu (BIDU_), Google(GOOG_), Amazon (AMZN_) and the like — disappoint. Apple's share price rises above $550, however, based on continued above-consensus volume growth in the iPhone and iPad. Profit forecasts for 2012 rise to $45 a share (up 60%). In the second quarter, Apple pays a $20-a-share special cash dividend, introduces a regular $1.25-a-share quarterly dividend and splits its shares 10-1. Apple becomes the AT&T (T_) of a previous investing generation, astock now owned by this generation's widows and orphans.
Surprise No. 14: China has a soft landing (despite indigestion in the property market), and India has a hard landing. India becomes the emerging-market concern. With India's trade not a driver to GDP growth, its currency in free-fall, pressure to keep interest rates high by its central bank and signs of a contraction in October Industrial Output, India's GDP falls to mid-single-digit levels.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
