Byron Wien's 10 Surprises for 2010: A 2011 Scorecard

Includes: DIA, FXY, QQQ, SPY, TBT, TLT
by: Harry Tuttle

No. "2010" is not a typo. Given that this is the time for 2011 predictions, I thought I would take a look at last year's predictions beginning with one of the most famous predictors. So, without further ado, I give you Byron's predictions from a year ago followed by my (short) comments and score.

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80.

C+. Growth was below 5%. Although "during the year" could mean "at some point" which may have happened at some point in the 1st quarter. Exports, inventory and technology lead the way but no more building (Thank God!). Unemployment is close to 10%. As of today, S&P has an estimate of $75 for operating earnings in 2010. Close enough.

2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end.

F. Byron should know better.

3. Heavy borrowing by the US Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, "the suits are finally listening".

F. Pretty bad call from a seasoned strategist. The highest rate was 4% and it was driven by higher expected inflation and not because foreigners feared the credit of the US Treasury. Obama is still with the suits.

4. In a roller coaster year the Standard and Poor’s 500 rallies to 1,300 in the first half and then runs out of steam and declines to 1,000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors.

C. Although the levels and volatility are roughly correct, the first half was the low of the year (1011) and, more importantly, the index closed at the high, which invalidates the prediction.

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain.

C. Bad miss on the yen but accurate on the euro, even if for the wrong reasons (the sell off was driven by credit concerns and NOT by anything to do with purchasing power parity)

6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000.

F. Japan was not even close to being the best performing major industrialized market (-3% in JPY). The Nikkei closed at 10,228.92

7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020.

D. Although I did not hear Obama making a push for nuclear energy, it is hard to keep up with everything he says. I am willing to revise this up if am presented with evidence that he did.

8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected.

F (for lack of a lower grade). Byron, c'mon man!

9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market.

B. The industry is happy with the law. However, financial service stocks did not become exceptional performers. MS performance for the year was -8%

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal.

C-. Ahmandinejad is still in power, theology is still the main issue in Iran and the talks about the nuclear inspections have gone nowhere. The anti-Israel rhetoric is, in market terms, flat from 2009. However, Iran is still a nuclear threat. Whether Pakistan is a hotspot depends on your definition of hotspot.

Byron's GPA for 2010: 1.196 (A=4, B=3, C=2, D=1, F=0)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.