Doug Kass’s 20 Surprises for 2010: Goldman Private, Gold Tumbles, etc.

My friend Doug Kass of Seabreeze Partners has out his list of 20 market/political/economic surprises for 2010. These are always fun reading, and he did surprisingly well with his list of 2009 surprises, so let’s have a look at the latest list. The only one I think is completely outrageous is the Tiger Woods prediction — what the hell are you thinking, man?

  1. There is a glaring upside to first-quarter
    2010 corporate profits (up 100% year over year) and first-quarter 2010
    GDP (up 4.5%).
    It grows clear that, owing to continued
    draconian cost cuts, coupled with a series of positive economic
    releases and a long list of company profit guidance increases in mid
    to late January and early February, there is a very large upside to
    first-quarter GDP (up 4.5%) and, even more important, to S&P
    profit growth (which doubles!). The upside on both counts is in sharp
    contrast to more muted growth expectations. While corporate managers,
    economists and strategists raise earnings per share, full-year growth
    and S&P target estimates, surprisingly, the U.S. equity market
    fails to respond positively to the much better growth dynamic, and the
    S&P 500 remains tightly range-bound (between 1,050 and 1,150) into
    spring 2010.
  2. Housing and jobs fail to revive. An outsized first-quarter
    2010 GDP (up 4.5.%) print is achieved despite a still moribund housing
    market and without any meaningful improvement in the labor market (excluding
    the increase in census workers) as corporations continue to cut costs
    and show little commitment to adding permanent employees.
  3. The U.S. dollar explodes higher. After dropping by over 40%
    from 2001 to 2008, the U.S. dollar continued to spiral lower in the
    last nine months of 2009. Our currency’s recent strength will persist,
    however, surprising most market participants by continuing to rally
    into first quarter 2010. In fact, the U.S. dollar will be the
    strongest major world currency during the first three or four months
    of the new year.
  4. The price of gold topples. Gold’s price plummets to
    $900 an ounce by the beginning of second quarter 2010. Unhedged,
    publicly held gold companies report large losses, and the gold sector
    lies at the bottom of all major sector performers. Hedge fund manager
    John Paulson abandons his plan to bring a new dedicated gold hedge fund to
    market.
  5. Central banks tighten earlier than expected. China, facing reported
    inflation approaching 5%, tightens monetary and fiscal policy in
    March, a month ahead of a Fed
    tightening of 50 basis points, which, with the benefit of hindsight,
    is a policy mistake.
  6. A Middle East peace is upended due to an
    attack by Israel on
    Iran.
    Israel
    attacks Iran’s
    nuclear facilities before midyear. An already comatose U.S.
    consumer falls back on its heels, retail spending plummets, and the
    personal savings rate approaches 10%. The first-quarter spike in
    domestic growth is short-lived as GDP abruptly stalls.
  7. Stocks drop by 10% in the first half of next
    year.

    In the face of renewed geopolitical tensions and reduced worldwide
    growth expectations, stocks drop as the threat of an economic
    double-dip grows. Surprisingly, though, the drop in the major indices
    is contained, and the U.S.
    stock market retreats by less than 10% from year-end 2009 levels.
  8. Goldman Sachs goes private. Goldman Sachs (GS) stock drops back to
    $125 to $130 a share, within $15 of the warrant exercise price that
    Warren Buffett received in Berkshire
    Hathaway’s
    (BRK.A) late 2008 investment in Goldman Sachs. Sick of the unrelenting
    compensation outcry, government jawboning and associated populist
    pressures, Warren Buffett teams up with Goldman Sachs to take the
    investment firm private. The deal is completed by year-end.
  9. Second-half 2010 GDP growth turns flat. The Goldman Sachs
    transaction stabilizes the markets, which are stunned by an extended Mideast conflict that continues throughout the
    summer and into the early fall. While a diplomatic initiative led by
    the U.S. serves to calm Mideast tensions, flat second-half U.S. GDP
    growth and a still high 9.5% to 10.0% unemployment rate caps the U.S.
    stock market’s upside and leads to a very dull second half, during
    which share prices have virtually flatlined (with surprisingly limited
    rallies and corrections throughout the entire six-month period). For
    the full year, the S&P 500 exhibits a 10% decline vs. the general
    consensus of leading strategists for about a 10% rise in the major
    indices.
  10. Rate-sensitive stocks outperform; metals
    underperform.
    Utilities are the best performing sector in
    the U.S.
    stock market in 2010; gold stocks are the worst performing group, with
    consumer discretionary coming in as a close second.
  11. Treasury yields fall. The yield of the 10-year U.S.
    note drops from 4% at the end of the first quarter to under 3% by the
    summer and ends the year at approximately the same level (3%). Despite
    the current consensus that higher inflation and interest rates will
    weigh on the fixed-income markets, bonds surprisingly outperform
    stocks in 2010. A plethora of specialized domestic and non-U.S.
    fixed-income exchange-traded funds are introduced throughout the year,
    setting the stage for a vast speculative top in bond prices, but that
    is a late 2011 issue.
  12. Warren Buffett steps down. Warren Buffett announces
    that he is handing over the investment reins to a Berkshire
    outsider and that he plans to also announce his in-house successor as
    chief operating officer by Berkshire Hathaway annual meeting in 2011.
  13. Insider trading charges expand. The SEC alleges, in a broad-ranging
    sting, the existence of extensive exchange of information that goes
    well beyond Galleon’s Silicon Valley
    executive connections. Several well-known long-only mutual funds are
    implicated in the sting, which reveals that they have consistently
    received privileged information from some of the largest public
    companies over the past decade.
  14. The SEC launches an assault on mutual fund
    expenses.
    The SEC restricts 12b-1 mutual fund fees. In response to the
    proposal, asset management stocks crater.
  15. The SEC restricts short-selling. The SEC announces major
    short-selling bans after stocks sag in the second quarter.
  16. More hedge fund tumult emerges. Two of the most successful
    hedge fund managers extant announce their retirement and fund
    closures. One exits based on performance problems, the other based on
    legal problems.
  17. Pandit is out and Cohen is in at Citigroup. Citigroup’s Vikram Pandit
    is replaced by former Shearson
    Lehman Brothers
    Chairman Peter Cohen. Cohen replaces a
    number of senior Citigroup executives with Ramius Partners colleagues. Sandy
    Weill
    rejoins Citigroup as a senior consultant.
  18. A weakened Republican party is in disarray. Sarah Palin announces that
    she has separated from her husband, leaving the Republican party
    firmly in the hands of former Massachusetts Governor Mitt Romney. An
    improving economy in early 2010 elevates President Obama’s popularity
    back to pre-inauguration levels, and, despite the market’s
    second-quarter decline, the country comes together after the Middle
    East conflict, producing a tidal wave of populism that moves ever more
    dramatically in legislation and spirit. With the Democratic tsunami
    (part deux) revived, the party wins November midterm elections by a
    landslide.
  19. Tiger Woods makes a comeback. Tiger Woods and his wife
    reconcile in early 2010, and he returns earlier than expected to the
    PGA Tour. After announcing that his wife is pregnant with their third
    child, both the PGA Tour’s and Tiger Woods’ popularity rise to record
    levels, and the golfer signs a series of new commercial contracts that
    insure him a record $150 million of endorsement income in 2011.
  20. The New
    York Yankees are sold to a Jack Welch-led
    investor group.
    The Steinbrenner family decides, for estate
    purposes, to sell the New York Yankees to a group headed by former General Electric (GE) Chairman
    Jack Welch.

Related posts:

  1. Kass Surprises for 2009
  2. Quote of the Day (2): Citadel as Goldman
  3. Ben Bernanke Loves Surprises
  4. Another Private Equity Megafund Looms
  5. Byron Wien’s Top Surprises for 2008