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At the beginning of the year, I authored an article laying out fifty predictions for 2013. The picks ranged from highly speculative to coin tosses that I believed had a better than average chance of going in my direction based on market strategies that have historically outperformed. Below I list the fifty predictions in bold with commentary on how this forecast has fared year-to-date. I have given myself letter ratings on each prediction. Feel free to assign your own grades in the comments section.

U.S. Stocks

  1. The S&P 500 (SPY) makes a new all-time high, but closes beneath that plateau for the year. The S&P 500 eclipsed its former all-time high close of 1565 on March 28th, faster than I anticipated. With the index now ending the week above 1700 for the first time, closing below 1565 for the year seems a distant memory. Not everyone was calling for a new all-time high to be reached in 2013, and investment bank equity analysts were targeting on average high single digit annual gains at the beginning of the year. I did not expect a 19.9% return through the beginning of August, but I will take it. Grade: B
  2. The equal-weighted S&P 500 (RSP) outperforms its capitalization-weighted alternative. The equal weighted index has produced a total return of 23.34%, besting the market capitalization-weighted S&P 500. Long-time readers know that I have long extolled the virtues of equal weighting. The lagging performance of former top holding Apple (NASDAQ:AAPL), which has 1/14th of the weight in the equal weighted index has contributed to the outperformance of the equal weighted strategy. Grade: A
  3. The Russell 2000 (IWM) outperforms the S&P 500 as small caps outpace large caps. The Russell 2000 has bested the S&P 500 by nearly five percent with the small cap index producing an impressive 24.8% return year-to-date. Grade: A
  4. The shares of Bank of America (BAC) outperform J.P. Morgan (JPM) and Wells Fargo (WFC) on both an absolute and risk-adjusted basis. Bank of America has outperformed the broader market, producing a 28% total return year-to-date, but it has lagged Wells Fargo (32.1%) and J.P. Morgan (31.1%) while exhibiting higher volatility. Grade: C-
  5. The banking sector (XLF) outperforms the S&P 500. The Financial Selector Sector SPDR has produced a 27.9% year-to-date, besting the S&P 500 by roughly 8%. Grade: A
  6. Homebuilders (XHB) outperform the S&P 500, but not when adjusting for their variability of returns, which is over twice that of the broader market. Homebuilders, often extolled as top picks for 2013 given the domestic housing recovery, have lagged the S&P 500, producing a 16% total return that trails the broader market by roughly 4%. Trailing 200 day volatility has been 22% as compared to 12.4% for the S&P 500. Lots of investors were crowding into homebuilders in 2012, and this forecast was meant to highlight that alpha is only generated when outperformance is not achieved through simply taking more than proportional risk. Homebuilders have lagged and been much more risky than the market at large. Grade: B-
  7. Apollo Group (APOL), owner of the University of Phoenix, is taken private. Apollo Group is producing roughly the same amount of free cash flow as in 2006, but is trading at an enterprise value that is roughly one-sixth of its former level. Even despite the controversy over the efficacy of these for-profit learning institutions, and the wary eye of the federal government, I expect an investor to eventually lever up this still impressive cash generation machine. Grade: C-/Incomplete
  8. Safeway (SWY) spins off a portion of its real estate assets into a real estate investment trust, prompting a rise in the shares of the grocer. Safeway has produced a 40% total return and a 74% return over the last twelve months. When Seeking Alpha came out with its Alpha Rich article ideas, Safeway was going to be my first article, but my exposure as a lender to the company at my day job made this a conflict of interest to which I did not want to run afoul. I believed that the company, which had aggressively bought back shares in the past two years only to see its share price continue to swoon, would follow Canadian grocer Loblaw into the REIT concept. Low interest rates had increased the value of REIT equities, and a business that owned the company's real estate assets and leased them to the grocer could command a premium value while freeing up an additional capital expenditure budget that the grocer could use to streamline its business, reduce debt, or return additional capital to shareholders. Instead in April 2013, Safeway IPO'd a minority portion of its prepaid and gift card network, Blackhawk (NASDAQ:HAWK), and in June 2013 Safeway sold its Canadian grocery assets to Empire's Sobeys Inc for C$5.8bn with proceeds used to buy back shares and reduce a debt level that had taken the company to the cusp of below investment grade ratings. Safeway appeared ripe for a reorganization of its assets and capital structure to drive value, and that is what has occurred in 2013, albeit in a slightly different form than I envisioned. Grade: B+
  9. Groupon (GRPN) is taken private for less than half of the value Google (GOOG) had originally offered the firm pre-IPO. Groupon has soared by nearly 80% in 2012 taking the value of the firm to roughly three-quarters of the $6 billion offer from Google. The increased valuation and limited EBITDA ($150mm) makes a takeover far less likely. Grade: D
  10. An activist shareholder takes a major stake in Hewlett-Packard (HPQ), driving the stock to a market beating annual return. Hewlett Packard has returned a scintillating 89% year-to-date. I believed that the company's low valuation at the beginning of the year would invite activist shareholders, which failed to take place; however, lots of shareholders bought into the HPQ turnaround story, driving the stock to top percentile returns in the S&P 500. Grade: A-
  11. An activist shareholder takes a major stake in Dell (DELL), driving the stock to a market beating annual return. The MBO-led by Michael Dell and Silver Lake was proposed just weeks after this article, and has made Dell one of the most topical stocks of 2013. The stock is up 35% year-to-date while the future ownership of the company remains in doubt. The stock returned 30% in the month after this article was written. Grade: A
  12. Either U.S. Bancorp (USB) or PNC Financial Services (PNC) makes a major acquisition to broaden their geographic footprint, spurring further consolidation in the banking sector. I thought that USB or PNC would use their strong balance sheets to buy a footprint in the U.S. Southeast and chase the majors, but this has not come to fruition and regional banks have rallied strongly, increasing the sticker price on such a transaction. Every year prognosticators look north to the handful of oligopolistic banks in Canada and assume that the thousands of banks in the U.S. will choose to consolidate... maybe next year. Grade C-
  13. Johnson & Johnson (JNJ) loses its heretofore sacrosanct AAA rating, choosing to re-lever its balance sheet and return cash to shareholders amidst record low borrowing levels. The company is in the midst of a $2 billion share repurchase program and again increased its dividend, but both moves were consistent with their long-term conservative capital allocation framework. JNJ was rumored to be in the bidding for Bausch & Lomb, whose $10 billion price tag may have triggered a ratings downgrade given the amount of debt that would have needed to be absorbed. I continue to believe that debt levels consistent with AAA ratings is not the optimal capital structure given that JNJ had the ability to issue long-term debt with an after-tax interest cost roughly equal to long-run inflation. That window has likely closed given the backup in interest rates, but would still likely be value accretive given that the debt tax shield outweighs the increase in credit spreads from a more levered capital structure. Grade C-
  14. Berkshire Hathaway (BRK.A) makes an acquisition in the $20 billion enterprise valuation range. Berkshire joined 3G Capital to buy Heinz (NYSE:HNZ) for roughly $28 billion (including assumption of debt) of which Berkshire's share of the purchase price was roughly $12 billion. The company later bought NV Energy (NYSE:NVE) for $5.6 billion. Grade: A-
  15. My guess is Cummins (CMI). I was wrong, but weakness in Cummins' international markets for its diesel engines has seen the company grow comparatively cheaper (13.6% return year-to-date), and I think that this business would still be consistent with Berkshire's long-term objectives. Grade: D+
  16. Alcoa (AA) is the Dow Jones laggard as persisting unfavorable supply/demand imbalance in aluminum further weakens results and prompts a cut of the company's debt to junk. Alcoa is one of only two stocks (Caterpillar) in the Dow that have posted negative returns year-to-date, but Alcoa's -7.6% return has trailed all thirty constituents. The company's debt was cut to junk by Moody's in late May. Grade: A+
  17. Aubrey McClendon, co-founder and CEO of Chesapeake Energy (CHK), follows up a disastrous 2012 with a strong 2013 as rising natural gas prices drive company results, and his part-owned Oklahoma City Thunder win their first NBA championship. Aubrey McClendon resigned under pressure in April due to a shareholder revolt by Carl Icahn and Southeastern Asset Management. Natural gas prices rose early in the year, but are now flat. Russell Westbrook injured his knee in the playoffs and the top seed in the Western Conference bowed out in the conference semifinals in ignominious fashion to the Memphis Grizzlies. Chesapeake's stock is up fifty percent on the year, but this was a bad year for the former CEO and co-founder. The stock performance keeps this prediction above an F, but just barely. Grade D-
  18. Best Buy (BBY) outperforms Amazon (AMZN), which has only 60% of the EBITDA of its bricks and mortar retail competitor, but has a market capitalization 28x higher. Best Buy has returned 167% in 2013, and is the top stock in the S&P 500. Amazon has market performed with a 21% return. While everyone bemoaned the fate of brick-and-mortar retail, they forgot to notice the impressive free cash flow that the company still produces. Grade A+
  19. J.C. Penney (JCP) outperforms Macy's (M). In an additional high beta bet on a big box rebound, J.C. Penney has been a failed turnaround story and was forced to jettison their ballyhooed CEO, draw down on their revolver due to a meteoric cash burn, and lost a long-term major shareholder in Vornado. The JCP stock has returned -28% as Macy's has continued to be a shining "star" up 27% year-to-date. Grade F
  20. Domestic automakers outperform their Japanese competitors as the strong yen and the territorial dispute between China/Japan hurts auto exports of the Japanese firms. The domestic automakers are off to a strong start with Ford (+35%) and General Motors (+28%) outpacing the market. Toyota (+61%), Nissan (+32%), and Honda (+18%) have all benefited from a yen weakened by Abe's aggressive monetary accommodation that has benefited exporters. Grade B-
  21. Newspapers lose their taint as troubled investments as online subscription growth of local and regional periodicals expands. John Henry, owner of the Boston Red Sox, announced the purchase of the Boston Globe today for $70 million, a far cry from the $1.1 billion that New York Times paid for the paper twenty years ago. Berkshire continues to buy strong local papers, but newspapers continue to be a place for deep value investors only. McClatchy (NYSE:MNI) is down 5.2% on the year. Grade C-
  22. Property and casualty companies finally see a mild year for weather catastrophes, boosting results. Not sure why I was trying to predict the weather other than the bad catastrophes we have seen over the past several years were bound to normalize. The S&P Property and Casualty Index is up 27.3% year-to-date, strongly outperforming the broader market. I can not think of a named storm in 2013. Grade: A-

International Stocks

  1. The broad emerging market index outperforms the S&P 500. The MSCI Emerging Market Index has returned -7.8%, lagging the S&P 500 by 27% as slower global growth, decelerating Chinese growth, lower commodity prices from this producer heavy index, and rising geopolitical tensions have fueled a veritable rout. My thesis was that improved growth in the developed world would have positive spillover effects in emerging markets. This has not borne out. Grade F
  2. Rising German inflation signals a new leg of the Eurozone crisis as multi-speed economic growth hampers the effectiveness of centralized monetary policy. German CPI is south of 2% as the economic recovery remains muted. My belief was that faster growth in Northern Europe would fuel inflation pressures, but that ECB monetary accommodation would need to continue to be supportive of the weak economies in the South, creating an uncomfortable disconnect. Growth has not been strong enough anywhere on the continent to cause this type of worry although Germany continues to outperform Italy and Spain. Grade C-
  3. European election results become market moving events. Certainly worries about the return of Berlusconi in Italy post-Monti and a fractured coalition in Portugal became notable market events that weakened each countries sovereign bonds, but the European crisis has notably receded from 2012. Grade B-
  4. Social unrest in China, given the growing gulf between urban wealthy and rural poor, rattles global markets. Concerns in China have rattled emerging markets, but not due to an Arab Spring-type uprising. Grade C-
  5. Greek stocks and bonds both post positive returns, but the economy remains mired in recession. Greece remains in its sixth year of recession, but the Athens Stock Exchange has eked out a tepid 2% total return. The Greek 10-yr bond has rallied year-to-date with the yield on the security declining by 2% from 11.7% to 9.7%. The price on the bond has risen from 50 to 59, producing a total return of roughly 20%. Greek stocks have not made the rebound I envisioned, but I am so far correct on all three accounts. Grade A-
  6. Italian stocks outperform German stocks, but Spanish assets remain laggards. Italy (+3.1%) has continued to lag Germany (10.4%), and has even been outpaced by Spain (5%). Grade: D
  7. CNOOC's newly acquired Nexen unit acquires stakes in other oil sands players, prompting renewed concerns around Chinese imperialism. China's concerns are largely domestic, which may keep state owned companies from new forays into North America for the near future. However, falling global commodity prices could see the country take additional overseas gambles. Grade C-
  8. Japan underperforms other developed markets including the United States. Japan awoke from its twenty-year slumber behind aggressive policies from Abe. The Nikkei is up 39% year-to-date, nearly doubling an impressive return in U.S. markets. Japan has easily bested the returns of the rest of the developed world, but the Japanese markets have exhibited tremendous volatility on this path. Grade: D-
  9. Gold mining stocks outperform the physical commodity after prolonged underperformance. It is difficult to determine which has performed worse. The spot price of gold is down $360/oz year-to-date including an April swoon that was the largest percentage decline in thirty years. Gold mining stocks have also been hammed with Barrick Gold (NYSE:ABX) down over fifty percent year-to-date. I though that physical gold would weaken, but that mining stocks would continue to generate meaningful free cash flow. Both have been amongst the hardest hit assets of 2013. Grade D-

Bonds

  1. The 10-yr Treasury bounces between 1.50% and 2.25% before ending the year at 1.95%, producing a slightly negative total return for the year. The 10-yr Treasury reached 1.66% as recently as early May, but now stands at 2.63% after a local peak of 2.74% as investors have pulled forward expectations on the terminus of quantitative easing from the Federal Reserve as the economy has improved. Both rates and rate volatility have been higher than I forecasted, and 1.95% looks like a rearview level we may not see again. An upper bound of 2.25% was a level that we had not seen since April 2012, so I was directionally correct, but magnitudinally wrong. Grade C
  2. High yield bonds achieve their best returns in January, posting returns only nominally above their coupon for the full year. High yield bonds returned 1.34% in January, continuing my highly bankable "January Effect" trade. Bonds were up over two percent late in that month, but sold off at the close. July's bounce back return of 1.9% after the selloff in June has been the best year-to-date monthly performance. Yields on junk bonds are roughly unchanged year-to-date with credit spreads compressing to offset higher rates, producing a coupon-like return thus far. Grade: B+
  3. Double-BB rated bonds outperform higher yielding single-B and triple-CCC rated bonds as investors increase the likelihood of default for the most speculative credits. Triple-CCC bonds have outperformed BB-rated bonds in every month of 2013 as the higher rated and more rate-sensitive rating cohort has underperformed. Bonds rated BB have outperformed investment grade cohorts and the negative returns of high quality fixed income, but lagged the most speculative ratings cohorts. Grade D
  4. Financial sector spreads outperform industrial and utility spreads as balance sheet improvement in the banking sector continues. Financials briefly traded through industrial spreads in early summer for the first time post-crisis as re-leveraging risk in high quality industrials widened spreads relatively. Bonds of financials have outperformed in part due to lender-friendly regulatory changes. Grade A-
  5. California general obligation debt outperforms the debt of Illinois. The pension woes in Illinois now have the state ranked two notches behind California at Moody's (A3 versus A1). California continues to benefit from the financial policies of Governor Jerry Brown, producing two timely budgets after failing to do so in eighteen of the previous twenty-one years. Grade A
  6. Rumbles of distress in the municipal bond market again fail to materialize as no city with a population of more than 100,000 files Chapter 9 bankruptcy. If you have opened a newspaper in the last month anywhere in the world, you would know that Detroit has made this prediction a failure. That city was certainly the biggest risk, but I believed that an improving auto industry, housing markets, and consumer spending would stave off a bankruptcy that has appeared an eventuality for the better part of a decade. Many prognosticators linked the sovereign crisis in Europe to a municipal debt crisis in the States that has simply not materialized. Municipal defaults remain very rare, but 2013 has featured the most notable default in history. Grade: D-
  7. Non-agency residential mortgage backed securities make a meaningful return to the primary market in less complex form, boosting available home credit. There have been a handful of small deals from specialty lenders, but credit spread compression has not helped to restart non-prime lending in enough size to get the securitization machine running again. Grade C-

Economics

  1. U.S. GDP growth of 2.9% outpaces consensus forecasts, driven by a rebounding consumer. GDP grew by an annualized rate of 1.7% in the second quarter although most forecasters are predicting a second half rebound as fiscal headwinds abate. Grade: C+
  2. The unemployment rate ends 2013 at 6.9%. This was an aggressive prediction, but the unemployment rate has reduced from 7.8% to 7.4% year-to-date, and is slightly behind pace to reach my target by year-end. Grade: B
  3. Housing prices rise for the year in all 20 major housing markets in the Case-Shiller Index. National home prices are up roughly twelve percent year-to-date, and all twenty cities in the index have produced positive returns with laggards including New York City and Cleveland at gains of above three percent. Grade: A
  4. Mortgage rates fall to all-time low in the second quarter as increased competition lowers credit spreads even as interest rates rise modestly. It is hard to believe now, but we approached the all-time low in mortgage rates as recently as a 3.6% print in early May before watching mortgage rates rise by 100 bps over the next two months. Grade: B
  5. Ben Bernanke begins communication about the Fed's timing of ceasing reinvestment of interest from securities on its balance sheet. "Tapering" has become the most cited word in economics, but I believed that the Fed would stop re-investing interest from securities as a first step before reducing the level of purchases. Grade: B

Other

  1. Hugo Chavez passes away, prompting a rally in Venezuelan sovereign debt. Chavez's finally succumbed to his bout with cancer, but the election of Chavez loyalist Maduro and a subsequent broad -based selloff on emerging market debt actually depressed Venezuelan bond prices. My hope was that we would see a reformist candidate elected, and that this oil rich country would begin to slowly rejoin the western world. Right call, wrong effect. Grade: C
  2. A leveraged buyout of at least $10 billion is completed in the United States. Heinz was the largest leveraged buyout post-crisis at roughly $28 billion. A leveraged buyout in the $10 billion range was made possible by the strong equity sponsorship of this deal, and the equally strong demand for junk bonds and leveraged loans by yield hungry lenders. Grade: A
  3. A cyberattack on our nation's infrastructure leads to a minor risk flare in financial markets and Congressional investigations. While I am sure that cyberattacks happen almost daily, none have registered on a national scale. Grade: C-
  4. Social Security privatization, beginning with new labor force entrants, again enters the national conversation. I am disappointed that this has not happened. While our budget deficits are gradually declining with increased fiscal restraint and improving economic growth, long-term entitlement programs have not been addressed. Grade: D+
  5. VIX averages 16 for the year and does not close above 30 on consecutive trading days. The VIX has averaged 14.17, and currently stands at 11.98. Not only have we not approached 30, but the high has been just over 20. Each of the last five years had featured episodes with the VIX above 30. Volatility is below its long-run average. Grade: A
  6. A Fortune 500 CEO is ousted in part due to the cover-up of a sex scandal. The San Diego mayor does not count, nor does a rising Weiner in New York City. This tongue-in-cheek prediction was a reminder of the idiosyncratic risk of single-name stock picks.
  7. My monthly updates on momentum strategies (coming January 7th) become must-reads for asset allocators. I have had strong readership for the series now entering its eighth month with articles on fixed income momentum, equity/fixed income momentum, and equity momentum likely to be updated and published over the next several days. Grade: B+

My domestic stock and bond picks were relatively strong, but I missed the emerging market swoon and re-emergence of Japan. My predictions touched on several of the most topical issues of 2013: Fed tapering, Dell MBO, a large purchase by Berkshire Hathaway in the form of an LBO of greater size than what the consensus had deemed possible, new highs on the benchmark gauge, outperforming small caps, and a decline in domestic equity market volatility. Stock picks Best Buy, Hewlett Packard, Safeway, and Chesapeake, and a pan of Alcoa hopefully made up for my miss in J.C. Penney.

I plan to continue to author a predictions article each year that runs the gamut from outlandish and highly speculative to strategies that I think have a high probability of outperforming with an added sprinkling of important themes and stock picks interspersed for good measure. Thanks for reading. I hope these picks are both entertaining and thought provoking. Comments on the format of this article and its scoring system are welcomed.

Source: Update To My 50 Predictions For 2013