As we open 2012 for business we have the following market drivers that should continue affecting global financial instruments.

Global money is in risk aversion mode.
Virtually every single developed nation is teetering on insolvency. The notable exception is Australia. Global money sees no reason to get excited about equities in the face of a slowing China and potential recession looming for Europe and the United States. Japan, well, Japan is set for another lost decade.

The Euro zone has managed to buy itself a year of liquidity, yet has no provisions for 2013 and beyond. The wish, hope and prayer is for emerging economic growth. Against this back drop are moves toward fiscal austerity by sovereign nations. Italy’s new Prime Minister is verbally preparing his constituents for the long slog ahead as is the new leader of Spain.

All eyes are on Spain which can make or break the ECB. Structural fundamental changes will take place guaranteeing slow or no growth in the short term for Spain. In addition to Ireland, Portugal, and Greece, some Eastern European nations are also facing debt concerns and higher interest rates on their bonds. Hungary is the latest basket case.

China is slowing, which means commodity countries supplying raw materials, mainly Australia and Brazil, are seeing their economies negatively affected. A slow down in China, by extension also affects South Korea, Taiwan, and Japan who export finished goods to the mainland. The USA enters the year with a dysfunctional government, but also a Presidential election year. Economic statistics are positive, yet not strong enough to lower the unemployment rate or launch significant manufacturing investment.

Investors have reacted to global events pulling billions upon billions out of equity markets. The liquidation process, which we have discussed, has caused a collapse in many commodity markets most recently gold and silver. US bonds and the US dollar have served as primary safe haven.

What does all this mean for 2012?
The trading landscape is littered with very intelligent experienced traders who have attempted to place absolute bets. And what I mean is the idea “gold absolutely has to rise” or “US bonds absolutely must fall,” or “the US dollar is absolutely worthless scrap.”

My number one advice is that you never buy into any absolutes in trading. The charts show gold might break the up trend, bonds are in a solid up trend with potential moves higher looking at very long term charts and the US dollar is poised for continued moves higher that could surprise everyone.

The ramifications of a climbing US dollar should be in the fore front of your mind. This one single fundamental can affect all markets. It simply does not matter about the fiscal state of the USA. The market is rewarding the US dollar because in the collective market’s mind…at this point in time…there is no safer place to go considering the alternatives.

At the end of the day you must keep focused that the second world reserve currency (Euro) is imploding under the weight of insolvency. And to solve the problem requires more debt! How long can this last? The expected global slow down for first quarter 2012 has caused several respected multinational firms to issue lower earnings guidance. For this reason we should expect on a fundamental basis that global equities will remain weak into the New Year. In the big picture the indexes are sideways and we expect 2%+ up or down moves until the channel is broken.

Separately, a seasonal bias is the idea markets will rise in the year of a Presidential election. There is statistical validation to support this bias. However, nothing is 100% and I would only watch for this fundamental in the last half of the year. The number one shot of rocket fuel potential for global markets is additional quantitative easing (QE3) from the US Federal Reserve. If we see markets rise into the January 25 FOMC announcement, it is due to wishful thinking for QE3. Obviously a QE3 would assist the Presidential election trading year bias since virtually every single asset would rise.

In the absence of rocket fuel we can expect more “value” pundits talking on financial news channels about long term investing in stocks. I think stock trading is going to require a very selective look at underlying trends of society more than anything else. The strongest trends are an aging US population requiring more medical treatment and legislation mandating every single US citizen purchase health insurance.

Even if the current President loses the election, managed health care companies stand to gain tremendously in the future. Both political parties desire legislation that brings in millions of new customers to managed health care.

Technology stocks are extremely selective. The huge underlying trend is wireless computing and continued migration to cloud processing. The promise of biotechnology bringing new ways of fighting life threatening diseases is a growing investment trend based on the aging baby boomer population. Housing should remain sluggish based on inventory, falling prices and continued foreclosures.

Energy remains a wild card. Fundamentals suggest lower economic global growth; i.e. less running of factories, etc. Yet the Middle East is starting to boil with Iran engaged in a game of chicken with the USA and Europe. A Middle East conflict with Iran would launch crude dramatically. Natural gas is still looking for a bottom at generational lows. I count myself among those calling for a rise in natural gas based on the false assumption, “it can’t go any lower.” We need to keep a watch and monitor this commodity.

Unless a severe drought occurs in South America or threats to US planting emerges all the grains are in a world surplus mode. The market has factored in excessive drought and strong concern for Argentina’s corn crop is a market driver. If we see a rising US dollar this would insure US crops will remain the highest priced in the world likely affecting wheat the strongest unless Argentina loses a significant portion of her corn crop.

I am bearish on Sugar and Cotton going into 2012 regardless of today’s action.

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