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Here’s Why The Market Scares You

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					Here’s Why The Market Scares You

I see a great sense of uneasiness from most individuals who are into personal investing today.
Many people aren’t quite sure why they feel this way and can’t explain their inherent inertia. I
think it is important to get very granular on what the risks are to the stock market and why
people actually should feel unsettled.

I have broken down four major risks to stocks and their forecasted earnings as we enter into the
first half of 2012. I am genetically a Bull and believe stock prices over time will go higher.
However, we cannot ignore the potential short-term threats that domestic stocks are currently
facing. Anything that attacks forecasted earnings is what you should be worried about. Here are
four major threats to earnings for U.S. Corporations in 2012.

• Europe represents 20% of the world’s gross domestic product. The concern for Europe has
many facets. However, one of the major problems is that if Europe’s economy goes from having
a cold to a severe flu, we will see their imports from the U.S. and around the rest of the world
slow to a trickle. Here is the key factor: U.S. stock prices have risen in anticipation of announced
and forecasted earnings. Stocks move six to nine months ahead of this information being
announced. As the top 100 companies move, the rest of the market follows. Over 50% of the
growth of these 100 companies is expected to come from outside U.S. borders. It is important for
all investors to watch earning revisions from analysts because when we start to see lower
earnings revisions that is a red flag to be concerned about. I believe there is a 15% chance that
Europe will come out of 2012 unscathed and a 35% chance we will see the economic picture in
Europe suffer dramatically.

• I believe that we will see interest rates on the long end of the yield curve in the United States
rise. When this happens it will cause a negative ripple throughout the balance sheets of most
U.S. corporations. Although as investors we often focus on the stock market, we must remember
that most corporations fund their operations by issuing debt in the form of bonds. If interest rates
rise, corporations will be required to pay more in interest payments and this will detract
significantly from their earnings. I place a 50% probability on interest rates rising dramatically in
2012.

• Commodity prices are on the rise. We all hear that manufacturing has left the U.S. from most
major corporations. Although this may be true, regardless if manufacturing occurs inside the
U.S. or outside the U.S., rising commodities prices will hurt corporate earnings because it will
cost more money for these corporations to manufacture their products. Although they often pass
this additional cost onto the consumer, not all of those additional costs can be passed on. There
comes a point where the consumer won’t pay the ever-increasing price for the product brought
on by rising commodity prices. This increase in costs to the consumer will translate into less
purchasing power and as a result should hurt earnings for those companies. I place a 70%
probability of this happening in 2012.

• Iran could be a wildcard. We read non-stop about the threat from Iran. However, most
individuals who are into personal investing do not understand how a potential military action
from the United States or other countries in that region will impact their portfolios. That is why
portfolio optimization is very important. There are multiple detrimental results that will arise
from this potential action but the greatest one is a disruption in oil distribution around the world.
 Even though we don’t import oil from Iran, other countries do and if that oil flow is shut-off,
there will be a significant impact on production and that will cause the price to skyrocket
worldwide. Higher energy prices have a direct negative impact on everyone outside of the oil
industry. I place a 60% probability of some disruption occurring in or around Iran in 2012.

All of these events will negatively impact the stock market and contribute to the reason why
individuals who are into personal investing should be concerned. So if you are feeling uneasy
and uncomfortable, now you know why you should be.

				
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Description: I see a great sense of uneasiness from most individuals who are into personal investing today. Many people aren’t quite sure why they feel this way and can’t explain their inherent inertia.