Below is the full 2012 Bespoke Roundtable Q&A with Bill Luby of Vix and More.


1) Looking back on 2011, what were your best and worst calls?


Best:  Crude oil at $97/bbl. by the end of the year.  The runaway success of VIX ETFs and ETNs.  Job creation would continue to be the biggest hurdle for the US economy, despite a resurgence in US manufacturing.  Continued struggles in commercial and residential housing market.  Major risks to economy would come from European sovereign debt crisis, while partisan politics would sink the US debt ceiling talks.

Worst:  Too many to choose from for this list, but some of my bigger errors were that it would be a strong year for emerging markets, agricultural commodities, semiconductors and banks.


2) What surprised you the most about financial markets in 2011?


The precedence of global influences on U.S. investments was a huge theme in 2011.  Not just the European sovereign debt crisis, but also the Arab Spring, the Japanese earthquake and tsunami, as well as continuing concerns about Chinese struggles with inflation and economic growth.  I was particularly surprised by how long it took the euro zone to begin to mobilize around large-scale solutions rather than putting the problem off indefinitely.


3) The S&P 500 hit its bull market highs in April 2011.  Which will happen first?  Will we first take out the April highs or have we entered a new bear market (a decline of 20% from the highs)?


Technically we already declined 20% from those highs as of early October, when the SPX fell to 1074, but if the question is whether the SPX will break 1370 or 1074 first, my money is on a breakout above 1370.


4) Depending on your answer to question 3, how long do you expect the bull or bear to last? 


I expect the bull move above 1370 to peak in the third quarter of 2012 but for the year to finish on an up note.


5) How should an investor with average risk tolerance be positioned for the year ahead?


In 2012, average risk tolerance should mean overweight in U.S.-based high dividend stocks (or ETPs), underweight in U.S. Treasuries (and international sovereign debt) while overweight in U.S. investment-grade corporate bonds, moderately weighted in commodities (precious metals, industrial metals, energy and agriculture), slightly overweight in REITs and slightly overweight in both U.S. and global stocks.


6) How do you see the European sovereign debt crisis playing out in 2012?


The European sovereign debt crisis will most likely play out slowly and painfully, as has been the case all along, and not be completely played out by the end of 2012.  I anticipate quite a few sovereign credit downgrades, but not a default. 

The three most important months of the year are likely to be February-April, as that is when the bulk of Italy's debt refinancing is scheduled.  I expect that yields on Italy's debt will spike on several occasions, leading to more austerity.  During the second half of the year, the discussion should begin to transition toward economic growth vs. recession and how that impacts outstanding debt. 

Germany will soften its stance if the crisis escalates significantly, so that by the latter part of 2012, things will look to be improving in the euro zone and many of the disaster scenarios will be off the table, but the impact of this crisis will reverberate at least through 2015 and forever shape the political landscape. 


7) How bullish or bearish are you on the following markets: The US, Europe, Developed Asia, China, Emerging Markets?


Bullish:  US, emerging markets.
Slightly bullish:  China, Europe and developed Asia.


8) What do you believe is the contrarian call on equities right now?


Banks rally and China bottoms out in Q2.


9) How confident are you that US companies can live up to current consensus earnings expectations?


Not very confident, but I think these will be mostly near misses, with more problems associated with revenues than the bottom line.


10) Are US stocks cheap right now based on the valuation methods you rely on most?  Will multiples expand or contract in 2012?   


P/E multiples based on operating earnings are likely to contract a little during 2012.  Revenues and margins should both increase about 7% for the SPX in 2012, but a somewhat murky outlook should put a cap on P/E multiples.


11) Describe some of your favorite market indicators and what they are signaling for stocks in 2012?


Very few of the indicators I follow have a good track record for predicting stock prices more than one or two months out.  The VIX futures, Treasury yield curve and other indicators suggest a bumpy road ahead for stocks. 


12) What are your favorite and least favorite sectors for the year ahead? 


I anticipate a strong year for agricultural commodities, energy, banks, biotechnology, semiconductors and retailers.  Utilities will likely underperform next year, as will defense/aerospace and health care.


13) What is your outlook for Financials?


While the short-term outlook for financials is fairly daunting, by the end of the year I expect they will be one of the better performing sectors.


14) What is in store for the US economy in 2012?


I am anticipating US GDP growth of about 2.7% for 2012, which appears to be slightly above consensus estimates.  I am also estimating inflation to be about 1.8% and unemployment to end the year at 8.2%, even with the pickup in economic activity.  Manufacturing and retail sales will both be areas of strength.


15) Economic indicators as a whole came in better than expected in the fourth quarter.  Do you expect this trend to continue in the first part of 2012?


I expect fewer positive surprises in Q1 and the beginning of Q2, but a surprising pickup in economic activity toward the end of Q2.


16) What is your take on the employment picture in the US?  Will we see the unemployment rate get below 8% by Election Day?


While unemployment may dip below 8% prior to the election, particularly if there continues to be a mass exodus from the labor force, but unemployment will be above 8% on Election Day, ending the year at about 8.2%.


17) Are Ben Bernanke and the Fed helping or hurting the recovery?


I may be in the minority, but I believe the Fed has generally been a positive force in the US economy over the past couple of years.  I believe the stimulus actions have helped spur economic activity, with very little impact on inflation and also probably helped to avert a double-dip recession and deflation.


18) The Fed's Zero Interest Rate Policy (ZIRP) has really hurt savers and anyone out there looking for yield.  Where should investors go to find yield right now?


Chasing yield can be a very dangerous game, but some of the risks can be mitigated by using ETPs.  Among some high yield plays worth looking into for 2012 are high-yield corporates (JNK), investment-grade US corporates (LQD), emerging markets sovereign debt (PCY), master limited partnerships (AMJ), utilities (XLU), US REITs (IYT), international REITs (RWX), materials (XLB) and broader ETPs, such US large caps (SDY) and a multi-asset approach (CVY).


19) The housing market continues to struggle.  Are we close to making another bottom in residential real estate?  Are there specific areas of the country that you are more bullish or bearish on?


We are nearing a bottom, but housing could spend an extended period "scraping along" that bottom, largely due to the continued overhang of foreclosures in the pipeline.  With the number of homeowners who have missed mortgage payments as high as 6 million, the foreclosure situation is likely to get worse in 2012 before it improves.  Still, low levels of inventory could signal a rebound in the second half of 2012, with the Northeast and West showing the most strength.


20) Will the Dollar (US Dollar Index) be up or down in 2012 and why?  Are there any other currencies that you have a strong opinion on?  How much trouble is the Euro in?


The euro is in a huge amount of trouble and may possibly fail to make it safely through to the end of 2012, but the problems with the currency certainly can be resolved.  I would not be surprised to see the EUR/USD trade below 1.20 in the coming year, but the euro should end the year on a stronger note. 


Since the euro comprises 57.6% of the dollar index, the performance of the dollar is largely the inverse of the performance of the euro.  For this reason I anticipate a stronger dollar in Q1 and the beginning of Q2, with weakening occurring in the second half of the year.


21) Gold has underperformed stocks in recent months.  Will this continue in 2012?  Will gold see gains in 2012?


Gold should outperform stocks in 2012 and return approximately 15% for the year.


22) The ratio of platinum to gold is currently at its lowest level ever (platinum is actually cheaper than gold right now).  Is platinum a good buy relative to gold?


I have a slight bias for both silver and platinum over gold in 2012, as the global recovery begins and increases industrial demand for silver and platinum.  All three should be solid performers in the coming year.


23) Where is the price of oil headed?  How about the spread between Brent Crude and West Texas?


Several factors are conspiring to drive oil higher in 2012.  These include supply constraints, increased emerging market demand and geopolitical considerations.  The current Brent-WTI spread of just about $10 should decline somewhat during 2012, with Brent Crude retaining a premium of perhaps $6/bbl.  Of course the big wild card in crude oil is the situation in Iran.  Should Iran acquire nuclear weapons by the end of the year and/or there be a pre-emptive attack on Iranian nuclear operations (neither situation being too far-fetched), crude oil could skyrocket.


24) What are your predictions for the 2012 election?  Which party will win the Presidency, the House and the Senate?  Who will become the GOP nominee, and what are the chances that nominee will beat President Obama?


Barack Obama will defeat Mitt Romney in the US Presidential election, but the Republicans will be able to declare victory in the election by gaining control of both the House and the Senate.  Events could conspire to give the White House to Romney (or another Republican challenger), but I would put that probability at less than 10%.


25) How will the elections impact the stock market in 2012 and beyond?


The Republican control of both the House and the Senate, in combination with the increasing influence on the part of the Tea Party wing will be the beginning of a dramatic change in US politics and set the stage for a Republican to win the Presidential election in 2016.  The impact on the economy and stock market will begin with a dramatic decrease in the role of central government, a reduction in Federal spending, minimal tax raises and progress on reducing the US debt/GDP ratio.  These policy changes will have far-reaching consequences for the financial markets, but will, on balance, be a bullish boost for stocks.


26) Will the US Supreme Court rule that ObamaCare is unconstitutional?


Yes, the Supreme Court will rule that ObamaCare is unconstitutional.


27) How do you see the US tackling its debt problems in the years ahead?


Progress on the US debt problem will proceed more slowly than it should, given the enormous risks posed by the debt overhang.  Efforts to slow down the growth of US debt will shift toward achieving a stable or improving debt/DGP ratio.  As debt recently climbed above 100% of GDP, future efforts will seek to stabilize that ratio, then push it down below the 100% level.  Partisan behavior in Congress and in the White House will hamper efforts at finding a compromise solution between the two main parties and Obama will have difficulty using his position to lead the country to a solution that he and the Democrats can support.  The Republicans will continue to gain traction on this issue and by the 2014 mid-term elections, it will become even more important, perhaps even the defining issue for that election.


28) What are the biggest threats to the global financial system right now, and are they avoidable?


Most of the biggest global threats also appeared on my list from last year, suggesting there has been limited progress in these areas:

-European sovereign debt
-Bank capital sufficiency in Europe and elsewhere
-Slowing growth in China, including a deteriorating real estate market; also balancing growth and inflation concerns
-Proliferation of US debt and growing debt/GDP ratio
-Continued declining real estate values (particularly in the US, but also a huge issue in Spain and elsewhere)
-Iran: potential for achieving goals of nuclear weapons; possibility of pre-emptive attacks
-Israel, the Middle East and Northern Africa: the issues are difficult enough without the specter of a nuclear Iran
-North Korea: uncertainty about what changes the succession will bring
-More broadly, 2012 will be the year that the tug of war between fiscal austerity and the need for economic growth becomes a key regional (Europe) and global issue

It is too late to "avoid" most of these issues but there is opportunity to mitigate the problems in Europe, China and the US, in particular.


29) Hedge funds as a whole underperformed the S&P 500 in 2011.  How will hedge funds perform in 2012?  What is your take on the hedge fund model in general?


Hedge funds are starting to lose their luster and as more and more investment companies organize themselves as hedge funds, the performance of hedge funds as a whole will start to mirror that of the mutual fund industry.  While hedge funds will always have more flexibility and some outstanding top performers, the 2 plus 20 pricing model will be hard to sustain going forward.


30) Will the following be up or down (positive or negative) in 2012?  Where noted, what are your 2012 year-end price targets?  The price targets are meant to obtain a wisdom of crowds consensus number from all Roundtable participants.


-S&P 500 (up or down and year-end price target) Up, 1425

-Long-Term US Treasuries (up or down) Down

-Corporate Bonds (up or down) Up (slightly)

-Junk Bonds (up or down) Up

-Gold (up or down and year-end price target) Up, 1835

-Oil (up or down and year-end price target) Up, 107 (WTI)

-Dollar (up or down) Down (slightly)

-Average US Home Prices (up or down) Up (slightly)

-China's stock market (up or down) Up (slightly)


31) Please provide readers with any stocks that you really like right now for 2012 and beyond.


I generally favor ETFs over individual equities.  Some of my favorite ETFs for 2012 are sector plays such as DBA, OIH, XOP, KRE, KBE, IBB, SMH, RTH and geography plays such as RSX, EWZ, EWS, ECH, VNM and GULF.


32) Where is Apple headed as both a company and a stock?  How about Google?


Apple will have to struggle to maintain its current market share across its product lines.  The good news for shareholders is that sales volumes and margins will continue to drive very solid results and should support a strong stock.  Apple is running out of obvious new frontiers to reinvent, but Apple TV is likely to be the next battlefield. 


Google is more likely to make a big leap forward in 2012 than Apple, as some of the company's peripheral markets will begin to drive revenue and profits that start to complement the core advertising business.  The Android model and ecosystem will ultimately prove to be a competitive advantage over iOS, but this might not be apparent by the end of 2012.


33) Facebook is expected to IPO in 2012.  Would you be a buyer or seller of the stock at its opening price on the day it goes public?  How long would you hold it?


I think Facebook is overrated and the social networking space is seeing valuations that will not ultimately be borne out by future cash flows.  I would be a seller of Facebook once it opens.


34) Which technologies are you currently the most bullish or bearish on?  Are any of them game changers like the PC or the Internet were?


As noted above, I am contrarian bearish in the social networking space.  I do think solar will see a revival, but it is still a very difficult competitive environment for solar stocks. 


As far as new and evolving technologies are concerned, I have high hopes for mobile payments, mobile commerce, voice control, TV everywhere, digital identities, location-based services and, of course, tablet computers.


35) What are the website, magazines, newspapers, books, apps that you use the most and would recommend others to use?

Focusing on those with a distinct investment flavor:

Web sites:  Abnormal Returns, The Big Picture, The Kirk Report, China Financial Markets, A Fistful of Euros, Livevol, ETFreplay, SurlyTrader,

Magazines:  Economist

Newspapers:  Wall Street Journal, Financial Times, New York Times

Books:  (none in particular)

Apps:  TD Ameritrade Mobile Trader, CNBC Real-Time

I am omitting Expiring Monthly:  The Option Traders Journal from the above list because I am one of the founders and co-editors, but I do enjoy using that magazine as an options reference.

36) What are your favorite Twitter feeds?

OptionPit, Condor Options, sentimentrader, volatrade, Tun Siedell's badbanana.

37) Do you have any other advice that you would like to share with readers as we enter 2012?

If you have not done so already, take a look at volatility as an asset class.  There are now 31 VIX exchange-traded products that allow investors to implement a wide range of hedging and speculative strategies.