Mohammad said, “One cannot foretell the future”. I think he was on to something. What looks predictable rarely happens. There are always surprises. I have been tripped up so many times. The following are not predictions of things that will happen. Just some thoughts on what might happen in 2010.
- Tim Geithner will resign as Treasury Secretary. Sheila Bair will replace him.
- AIG (NYSE:AIG) will be dismantled. What is good will be sold, what is bad will be shuttered. The end result will be a loss to the U.S. of $40 billion.
The Mid term elections will go to the Republicans. A surprising number of independents will be elected. The Democrats will still have a narrow majority. The end result will be legislative deadlock.
Gold prices will trade as low as $900 and as high as $1,400. $1,400 will come first.
- Fourth quarter GDP will be at -1%.
- Unemployment will fall from 10% as the 800,000 census workers are hired. Outside of that there will be no growth in employment. Ex the census impact and other government hiring, job creation will be negative.
- Fiat (FIATY.PK)/Chrysler will introduce some sexy new fuel-efficient cars. They will sell well. GM’s (OTC:MTLQQ) Volt will not be in full production. Demand will not be there.
- Boeing (NYSE:BA) will finish a few Dreamliners but they will face many delays and problems.
- Apple (NASDAQ:AAPL) will trade at $300 (tablet) and Google (NASDAQ:GOOG) at $750. Amazon’s (NASDAQ:AMZN) stock will be lower over the full year.
Overall expect a modest down year for equities. However, the market will be significantly higher and lower than current levels during the year. Expect a high low of +/-15%. Playing the SPY will be tough. This will be a stock pickers market.
- Oil will trade at $100 by midyear, but it will be closer to $75 by year-end as the global slowdown re-emerges.
- The La Nina conditions will revert to El Nino conditions. This will result in a significant increase in Hurricane activity. Four named storms will hit the U.S. coastlines. Total damages will approach $50 billion. There will be no CAT 5 hits on the mainland. But the Yucatan Peninsula is hit with a big one. Storm activity will interrupt Gulf gas production. Nat Gas will trade at $9 at one point in the fall.
- Typhoon activity in Asia will fall from the pace seen in 2009. The result will be a significant increase in Pacific Ocean temperatures.
- 2010 will see another significant increase in ice melt. No meaningful steps will be made toward a global response to climate warming.
Fannie Mae (FNM) and Freddie Mac (FRE) will convert their outstanding Preferred stock into common shares at a ratio of 3 to 1.
- After the Preferred conversion the shares of the Agencies will be delisted. Shareholders will be thrown a bone. They will get a beneficial interest in the REO owned by the Federal government. This could be in the form of a trust or individual transactions where old shares are tendered for individual properties. (Hotels/big stuff). The objective of this will be to remove these properties from the market for a meaningful period of time. The result will be that medium priced homes will stabilize in value. Rental costs will fall.
- High-end home prices (+$1mm) will continue to fall in value. In some areas the decline will be 20%. The absence of a viable mortgage market for these homes is the culprit for these declines. Prime defaults will rise to 8%.
- On September 1, 2010 the Federal Funds target will be at ½%. The 10-year bond will be at 4.5%. During the course of the year the ten-year will trade at 3.5% and also 5%. Interest rates will be lower at the end of the year than they will be on September 1st. There will be no meaningful reduction in the Fed's balance sheet.
- At some point in 2010 there will be a test in the bond market for a government auction. At that time the Federal Reserve will, without hesitation or consent, re-establish a form of the QE policy. They will not permit a “failed’ auction.
- The Federal Reserve will become active in the foreign exchange markets. At different times of the year they will both buy and sell dollars. Their objective will be stability. These efforts will be referred to as “smoothing operations”.
- Volatility for all exchanges and commodities will increase from current levels. Intra-day moves greater than 2% will become common.
- The Sovereign Risk Story will continue to be a major theme. Italy and the U.K. will be lumped into the status of Greece, Spain and Portugal. Eastern Europe will see negative growth.
- There will be no breakup of the Euro. Greece will not pull out. The strong members will provide some relief for the weak. But the problems will not go away and the possibility of some form of two-tiered Euro will be a matter of open discussion. It is in this context that the Fed’s FX intervention takes place.
- There will be no meaningful overhaul of Social Security. This topic will be more controversial than Healthcare. It is too hot a potato for a bi-election year. As a result the SS Trust Fund will be at cash flow breakeven for all of 2010. Down from a surplus of +$200 billion in 2006. This reality will impact bond yields.
- The dollar will trade as high as 1.35 vs. the Euro. The low for the year will be at 1.60. At some point the Yen could weaken to as low as 110 to the dollar. Trade the extremes.
- China will surprise us all and revalue the Yuan by 10%. The currency will still be undervalued. China’s GDP will grow at 10% for the year. But the prospect for 2011 will be in doubt. China will not lose its rank as number 2 in global GDP.
- Mexico will devalue the Peso by 15% and Brazil will revalue the Real by the same amount. The Canadian Dollar will exceed 1 to 1 versus the US dollar.
- The Treasury will not sell the 10 billion of Citicorp (NYSE:C) shares that it holds. The argument put forth will be to maximize the value of the holdings.
- Some of the folks from Bear Sterns and Lehman will form a Boutique. It will be a success.
- The debate over Glass-Steagall will linger. It will not happen. It is not practical at this point. This creates a dilemma for Goldman Sachs (NYSE:GS). Can they go private and then just ignore all the noise?
- Fannie and Freddie will be merged. Their troubled assets will be transferred to a workout trust. There will be talk of returning the cleaned up entities to the private sector. The cost of these steps will bring the total losses to $500 billion.
FHA will receive a $40 billion equity infusion from Congress. This capital increase will be necessary as it will be determined that the FHA model is the best approach for Government involvement in the mortgage market. FHA will use the new capital and substantially increase its lending activities. This step will avoid the necessity of a bailout of FHA. These actions will marginalize Fannie and Freddie.
In 2010 over 90% of all new mortgages will come from or be supported by the government.
There will be spot shortages of all manner of things. Soy oil, diesel fuel, specialty steel, industrial chemicals, ball bearings, replacement parts etc. This is an inventory problem. It will result in price jumps for things. This will be a global story.
There will be several occasions when it will appear that we are about to fall off a cliff (or soar to the moon). Beware of these conditions. It is more than likely that the markets will be oversold and over-worried (or too enthusiastic). Take profits at these points. Do not stretch a bet too far. If you have some winnings in the jar consider counter trading big market moves on the day that the issue at hand gets front page coverage in the NY Times.
Japan will not get out of recession. They will have to confront the issue of deficit spending and their debt to GDP ratio. Their response will be to sell reserve holdings to fund the deficit. The amounts involved will be small but the change in direction will be perceived to be significant.
We will pay significantly more for virtually everything that we consume. The CPI and COLA numbers will be modest. We will be poorer as a result.
Americans' distrust of their financial institutions and our financial leadership will deepen. The whole notion of “I Promise to Pay” will come into question. As a result, the availability of consumer credit will continue to dry up.
There will be no curbs placed on Dark Pools or flash trading. The short sale rule will not be re-introduced. There will be no regulated futures market for CDS. The Securitized Market will not recover. Nothing will change.
The “Flight to Quality Trade” will be a dominant theme for the markets throughout the year. At some point this topic will drive the big capital flows. A month later they will have been reversed. This instability is driven by the conclusion that there really is no ‘Quality’ that the capital is Fleeing to. It is just the constant movement of the deckchairs. This creates good trading markets. Great opportunities to make and lose money will present themselves. It should be a fun year. Enjoy it.