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Tuesday, December 21, 2010

US stock picks and Economy: Predictions for 2011 / 2011 year of us stocks?

The benchmark gauge for American equities will rise 11 percent from last week's close to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.'s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.

Ben S. Bernanke said in an interview broadcast Dec. 5 by CBS Corp.’s “60 Minutes” program that the economy is barely expanding at a sustainable pace and that he may increase bond purchases. China, the world’s fastest- growing major economy, said this month it’s moving to a more “prudent” monetary policy to counter inflation.

Kostin, Goldman Sachs’ New York-based strategist who said last year the S&P 500 would end 2010 at 1,250, wrote in a note Dec. 6 that below-average bond yields help create a “superb backdrop” for equities. He expects the S&P 500 to finish 2011 at 1,450, the second most-bullish call among 11 firms surveyed. Total per-share earnings among companies in the index may rise to $94 next year, he said.

The profit forecast would be a record and compares with an average prediction of $92 a share in the Bloomberg News survey of strategists. The index trades at 13.5 times that estimate, compared with a median price-earnings ratio of 16.4 since 1956, according to data compiled by Bloomberg.

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Higher Yield

The S&P 500’s earnings yield, or annual profit divided by share price, was 6.45 percent at the end of last week, according to Bloomberg data. That was 3.13 percentage points more than payouts on 10-year Treasuries and about 2.4 points more than the average interest on U.S. corporate bonds as measured by Barclays Plc. The spread between S&P 500 earnings and corporate bond yields is close to the highest level in more than two decades.

That suggests stocks are cheap relative to bonds and may spur investments by individuals, institutions and companies in 2011, Kostin said.

“As we go forward we’re going to see the economy do quite nicely in 2011…The fundamentals of the stock market are going to strengthen as we go forward. Corporate earnings should continue to grow and of course they will adjust to higher P/E ratios,” Peter Cardillo, chief market economist at Avalon Partners Incorporated told CNBC.Better GDP growth

According to the economists, the Gross Domestic Product (GDP) growth will be better than the previous year. Since the GDP growth is an indicator of the economy’s well-being, positive figures will lead to positive outcome. According to the survey, the GDP will grow 2.6% in the current quarter; up from the 2.4% growth projected in the survey conducted last month. Also since the concerns regarding the double-recession have melted down, the economy will lead to greater expansion in the first half of 2011and into 2012.

Retail ?
Retail sector has posted modest to robust gains this year on the back of the stronger holiday-season sales. Although there are gloomy events occurring like A&P’s decision to file bankruptcy, the overall outlook is bright. Plus, the consumer confidence index is up so, retailers just need to sit tight with their revised business models for 2011 and there will be growth. the ? is how much ..

Housing sector

After tumbling for a while, the housing markets have gained momentum. The housing stocks have been up as housing sales are picking up. However, economists are little skeptical about the overall outlook of housing markets, which is heavily dependent on the employment figures that need a drastic improvement.Which will improve in 2011 , housing signs for 2011 looks positive .

For the Dow Jones Industrial Average, the median estimate for the middle of the year is 12,050 among 23 respondents, which would translate into a gain of about 6 percent from Tuesday's close of 11,359.16. The new target is higher than the 11,620 forecast in the September survey.

The year-end target for the Dow is 12,105 in another signal that investors are feeling guarded about the second half of next year.

Tax Plans for USA

Obama’s revised tax plan which includes the extension of the Bush-era tax cuts has been accepted by many. The added tax-cut factor is expected to stimulate the markets and hopefully boost the job markets as well.

Goldman Sachs is bullish on the U.S. economy for 2011, and forecasts U.S. stocks will see their third straight year of gains.

The investment banking powerhouse sees the S&P 500 [.SPX 1252.13 5.05 (+0.4%) ] gaining nearly 25 percent to a level of 1450 in the next 12 months, fueled by strong corporate profits, easy monetary policies and an improving U.S. economy.

Goldman [GS 167.92 1.87 (+1.13%) ] sees stocks gaining as the U.S. economic growth accelerating from 2.5 to 4 percent by the end of 2012, but says investors will continue to have doubt. (Watch comments by Goldman's Chief U.S. Investment Strategist David Kostin in the video clip later in this story.)

“Despite these many positives, the equity investing landscape is hard to decipher,” Goldman’s U.S. investment strategy team writes in its 2011 U.S. equity forecast, which is headlined “Easy Money, Hard Market.”

Investors remain understandably skeptical about positive economic data, Goldman says, because the improvement is coming from a fairly low base. But the strategists argue with strong corporate balance sheets, low inflation and interest rates that “the path of earnings growth has rarely been smoother.”

Goldman is recommending its clients increase their investments in cyclical sectors. It continues to overweight technology, and has raised its outlook on energy and financials to overweight from neutral.

Goldman also recommends investors underweight defensive sectors like health care, consumer staples and utilities.

Long U.S. Bank Stocks

Goldman’s global investment team rates U.S. Large Cap Commercial Banks among its "Top Trades for 2011." The firm expects financial sector earnings to grow 24 percnet, with the economic recovery leading to improving loan demands and credit trends for the big banks. It also believes the large cap banks will get back to paying dividends in 2011.

The firm recommends clients gain exposure to the sector through the KBW Bank Index [BKX 51.06 0.72 (+1.43%) ] or SPDR ETF based on the index [KBE 25.36 0.36 (+1.44%) ].

Commodities: Gold, Oil Higher in 2011

Goldman believes low U.S. interest rates will continue to underpin the rally in commodities like gold. The firm expects the precious metal futures to climb to $1,690 an ounce by the end of 2011 and continue to move higher.

But the firm believes prices will likely peak at $1,750 an ounce in 2012, as the U.S. recovery will see interest rates move higher.

Goldman’s commodities strategists also see oil futures rising to $105 dollars a barrel in 2011, and demand improving along with the U.S. economy. The firm notes, “Energy is historically the best performing sector when the ISM is above 50, which seems increasingly likely given strong October ISM and our US economists upgrade to their 2011 growth outlook.”

Currencies: Top Trade, Bad Call

Among the risks Goldman sees for 2011 is moderating growth in China, as Beijing tries to reign in inflation.

While its economic teams saw the improvement in U.S. growth lagging emerging markets in 2010, Goldman strategists believe the trend has reversed over the last six months, “with our US economics team now more constructive on domestic growth, but our China economists expecting monetary tightening through increases in interest rates and reserve requirements over the next three to six months.”

One of the firm’s top trades for 2011 involves shorting the U.S. dollar/Chinese yuan exchange. The firm argues low rates in the U.S. will keep the dollar lower, while China will have to let its currency rise next year, as it undertakes policies to control growth. “Rising external political pressure on the CNY from the US and other countries, as well as the threat of escalating trade tensions, expose China’s dependence on exports. More gradual CNY appreciation would help alleviate these tensions.”

While most of Goldman’s 2010 predictions on the U.S. stock market, commodities prices and economic growth have generally proven right on the money, its crystal ball was much more cloudy when it came to some key currency calls.

One of Goldman’s top trades for 2010 proved a big loser. The firm’s currency strategists recommended shorting the New Zealand dollar and going long the British pound, saying at the time, “We are more bullish on Sterling, linked to a stronger cyclical momentum in response to a large easing in financial conditions.”

But the Kiwi has been strong performer this year on the strength of the country’s rising commodity prices. The analyst who made that call reportedly apologized to clients in a recent note, saying it may have results in losses of more 12 percent.

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