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?
- 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
- 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.
- 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.
- 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
- 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.
- A Middle East peace is upended due to an
attack by Israel on
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.
- Stocks drop by 10% in the first half of next
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.
- 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.
- 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
- Rate-sensitive stocks outperform; metals
underperform. Utilities are the best performing sector in
stock market in 2010; gold stocks are the worst performing group, with
consumer discretionary coming in as a close second.
- 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.
- 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.
- 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.
- 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.
- The SEC restricts short-selling. The SEC announces major
short-selling bans after stocks sag in the second quarter.
- 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
- 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.
- 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
- 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.
- 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