Wednesday, December 23, 2009

Doug Kass' Prediction For 2010: Strong US Dollar, Weak Gold And Equities

This is another post to highlight on the different predictions by various "experts" for 2010.

Here, we quote Barron's Randall Forsyth's entire article on
Doug Kass' fearless forecast for 2010 with my comments.

According to Mr. Forsyth, (
black highlights original, blue highlights mine) [parenthesis my comments]

``Seabreeze Partners’ Doug Kass today is expanding on his outlook articulated in a recent Barron’s interview (”Skeptical Growth Will Take Root,” Dec. 14), notably about rising populist fervor in the land. One outcome he sees is Goldman Sachs‘ (GS) deciding it no longer wants to be a public punching bag and will revert to private status.

``And why, you may ask, should anybody pay attention to Kass’ prognostications. For one thing, he saw a “generational low” in stocks in early March, just days before the market’s bottom. In any case, here are Dougie’s Top 20 Surprises for 2010:

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.

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.

[Mr. Kass forgets Bernanke's policy imperative to devalue the US dollar as one major options to save its highly levered banking system and the economy]

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.

[Mr. Kass thinks gold as only benefiting from speculative actions. He joins the camp of populist Nouriel Roubini. My bet would be with Mr. Paulson than with Mr. Kass]

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.

[This would probably the last thing central banks would do. Central Bankers will likely lean towards erring on the side of inflation, in the mistaken belief that inflation can be domesticated than suffer from a repeat bout of deflation that risks menacing their banking system (am speaking of developed economies). Yet, in the event that markets respond negatively to policy measures, central bankers will hastily regress to zero bound policies]

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.

[Mr. Kass appears to be reading from the current direction of US policymakers to impose economic sanctions or embargo on Iran by early 2010, of which Cong. Ron Paul rightly argues that this could be a precursor to a war.]

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.

[Again Mr. Kass ignores two factors: policies directed to pump different markets to save the banking system and too much distortions from government intervention which muddies market signals. Nevertheless, a correction like that of gold's present actions could occur on the truism that markets don't move in a straight line-a midsized probability]

Goldman Sachs goes private. Goldman Sachs stock drops back to $125 to $130 a share, within $15 of the warrant exercise price that Warren Buffett received in Berkshire Hathaway’s (BRKA) 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 indices.

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.

[Mr. Kass evidently is in the deflation camp. Yet he sees rate sensitive issues outperform, i.e. aside from utilities which I also interpret to mean banks, insurance companies, REIT, etc... Nonetheless this would be quite inconsistent with the "deflation" outlook]

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. [More evidence of Mr. Kass' deflation bias]

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.

[This is a high probability event considering that Mr. Buffett is 79 years old and is already grooming several candidates for his replacement. Stephen Burke's inclusion to the Berkshire board makes it all in the family according to this Bloomberg news]

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.

[Obviously Mr. Kass looks at an environment where more regulation would be implemented (13-15) yet is ironically bullish over interest rate sensitive issues]

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.

[more hedge funds will implode only when markets are extremely volatile-mostly to the downside]

Pandit is out and Cohen is in at Citigroup (C). 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 landslide.

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.

[This is much ado out of trivialities; if showbiz personalities can be accepted by media as living a more licentious life, then why can't sports champions]

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.

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