Byron Wien's 10 Market Surprises In 2013: Commodity Effect

by: Matthew Bradbard

I cannot take credit for this as Byron Wien, Blackstone Advisory Partners vice chairman, reports his Top 10 Market Surprises for 2013. He is in my eyes one of the smartest guys in the room. I outline the 10 surprises forecast for 2013 and the potential impact on commodities I added.

No. 1: Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.

My take: This would be particularly bullish for energies which I would likely try to capitalize with a bullish trade in crude oil and gold.

No. 2: A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor's 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.

My take: The front month futures price of the S&P is at 1455 as of this post. This would equate to 11% depreciation. I will have numerous bearish trades throughout the year via futures and options, most of the time in the ES contract.

No. 3: Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.

My take: Pressure stocks lower...currently indices are at 3-4 month highs…a possible reversal in trend. One could play the Nasdaq, Dow or S&P but for with weakness in financials my preferred play is the S&P.

No. 4: In a surprise reversal the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.

My take: This would represent near a 25% loss in WTI oil and would likely equate to a similar move lower in the distillates, heating oil and RBOB.

No. 5: In a surprise reversal the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test. Their goal for 2016 is to win the Hispanic vote, which they believe has a naturally conservative orientation and which put the Democrats over the top in 2012.


No. 6: The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7 percent or better and to begin to develop improved healthcare and retirement programs. The Shanghai Composite finally comes alive and the "A" shares are up more than 20 percent in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.

My take: Increased demand for raw materials and perhaps a more stable currency. China being the 800 lb. gorilla a significant uptick in demand would possibly equate to higher commodity prices.

No. 7: Climate change contributes to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class. Corn rises to $8 a bushel, wheat to $9 a bushel and cattle to $1.50 a pound.

My take: Agriculture is a battered sectored currently, assuming the moves above it represents a 15% appreciation in corn, 20% appreciation in wheat and a 14% gain in cattle. All three aforementioned commodities should be bought on dips in my opinion.

No. 8: Although inflation remains tame, the price of gold reaches $1900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.

My take: Gold at $1900 represents a 15% gain from current levels and likely would also put silver significantly higher. Silver is my vehicle of choice for investors with the risk tolerance. In my opinion gold above $1900/ounce would mean silver is north of $40 once again.

No. 9: The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world's third largest economy.

My take: The Yen has lost 12% in the last 4 months and a further deprecation to 100 is an additional 12% ... putting the Yen at prices not seen since Q1 2009.

No. 10: The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenue from citizens who had been evading taxes. European equities, however, decline 10 percent in sympathy with the U.S. market.

My take: Further losses in the US and European Equities and maybe a play short the Euro, Swiss franc or Pound.

Remember these are Byron Wien's predictions not mine. While I agree with some of what was said the key is to do your own homework and adapt to the ever-changing market conditions. Needles to say based on his track record in years past I will be pricing out numerous strategies for clients trying to capitalize on the moves commodities will make in the next 12 months…Happy trading!

Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.