"A year has passed since I wrote my note. I should have known this right from the start."
A new year has arrived and with it, the Street is aflutter with predictions, price targets and prophecies.
While we, at Minyanville, pride ourselves on adapting rather than conforming, we’re happy to toss our hat in the ring and gaze across the financial horizon. We did so last year
with some success but we’re well aware that you’re only as good as your last trade.
So, without further adieu and in no particular order, I humbly submit ten themes that could bear fruit during the next twelve months. Hedge Funds Buying Brokers
The carnage in the financial arena is well documented with massive write-downs, derivative contagion and margin compression weighing on this once proud industry. We’ve been eyeing the evolution for years, wondering when perception would finally catch up to the cumulative reality
Throughout Wall Street history, the principle value of brokers was order execution, research functionality and IPO’s. Given the emergence of low cost trading platforms, the implementation of Regulation FD and the slowing issuance calendar, the motivation to align with brand name banks has not only faded, it is becoming anathema.
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The critical issue facing financial institutions, after years of financial engineering and risk recreation, is the solvency of their balance sheets (particularly if they’re forced to move Level III assets back onto their books). Look for large, well-capitalized hedge funds to take selective stakes in troubled brokers as the financial continuum begins to come full circle. Migration Towards a Middle Class Mindset
One of our major themes to date has been the growing chasm between the haves and the have nots
. The middle class steadily eroded between the lifestyles of the rich and a struggle to exist.
Structurally, and unfortunately, my sense is that this dynamic continues. The wealthy will endure on a relative basis as the “other side” gets squeezed. What will change, in my view, is the perception
of wealth. Black cards, fast cars and private jets will be frowned upon while philanthropy and other acts of selflessness will be embraced.
As Kevin Depew recently wrote
, “If the 90s were about wealth, accumulation and consumption, 2008 will continue the mean reversion toward something altogether more austere, if not more sensible. Debt reduction and the rejection of (and guilt projection toward) materialism will continue what began in 2006 and 2007 as meditations on not just doing more with less, but doing less... period.”The Return of the Dollar
It’s easy to hate the greenback. The printing press hasn’t stopped since the back of the tech bubble, drowning out foreign holders of dollar-denominated assets and staking claim to the world’s most frustrating fiat currency.
While risk remains—for instance, if OPEC decides to denominate crude in Euros—it’s important to remember that the dollar “crash” already occurred. The greenback is off 37% since 2002 and a stunning 97% since 1913. Factor in the widespread negativity of money managers, rappers and supermodels and a counter-trend bounce doesn’t seem so strange.
What, you ask, are the structural underpinnings of a stronger dollar? The credit crunch, for one, as an indebted world begins to pay off debt. That could bode well for the buck but through the lens of “asset class deflation vs. dollar devaluation,” we should be careful for what we wish
.The Relative Performance of Pharmaceuticals and Consumer Non-Durables
For years, I’ve been an advocate of “energy and metals over tech and financials.” If I had slapped that trade on and opened a taco stand in Costa Rica, I would be a happy camper right now.
While I continue to believe that secular winds exist for things needed to feed, energize and educate the world—as opposed to things we want
such as laptops, cell phones or plasmas—this trade may have gotten ahead of itself, particularly if the greenback rally emerges.
I still foresee the energy sector reassuming the top weighting in the S&P
. As our financial destination isn’t as important as the path that we take to get there, however, traditionally defensive sectors such as pharmaceuticals and consumer non-durables will likely outperform on a relative basis as global slowdown fears permeate. The Other Side of Zero Percent Financing
Credit issues were front and center in 2007 as the housing market slid down the slippery slope. Fannie Mae
(FNM) and Freddie Mac
(FRE), which facilitated the velocity of money, were poster children for these problems through both their price action and accounting irregularities.
The tipping point already arrived for consumers but it is being fought with massive intervention. Central bank liquidity injections, discount window collateral shifts, adjustable-rate mortgage freezes and working groups on financial markets have all been pawns in the greater game of moral hazard
While sub-prime was the first domino to fall, more ominous issues loom as the debt bubble unwinds. The other side of zero-percent financing is upon us and that will likely manifest through credit card delinquencies, auto loans and other forms of consumer credit deterioration. Dislocation
Speaking of tipping points, and despite Herculean efforts by global central banks, I believe we’ll see a market dislocation this year as measured by a 10% move (or more) in a single week. This has been crystallizing in my mind for a few months so I wanted to pass it along despite the steep slippage we’ve seen thus far.
The mainstream mindset has been conditioned to believe that the Federal Reserve can spur the herd by cutting interest rates. A similar situation existed in January 2001 and it took time, price and a fair amount of pain before a legitimate low was made
The only difference between mistakes and lessons are an ability to learn from them and while history doesn’t always repeat, it often rhymes. Vertical Social Networking
Barry Diller once said that networks without a specific branding strategy would fail miserably. He was referring to social networking and while valuations of initial players would seemingly invalidate his view, the proliferation of second movers supports his stance.
Last year, we offered that life-stage marketing would emerge as a media catchphrase and vertical social networking is a direct extension of that. The ability to connect with others who share common interests and similar goals will not only build brand loyalty, it will create organic global distribution that will challenge traditional models of big media.
What were once networks will become single channels in the next generation digital age. High Anxiety!
One of the more troubling dynamics last year was the societal acrimony that manifested despite the market probing all-time highs. We were, by conventional metrics, enjoying an economic expansion yet nobody seemed to feel
like we were in a bull market.
If the collective stress was that high in a “good” market, what will happen when the other side of the business cycle arrives? We’ve already entered recession, in my view, albeit one that’s been masked by the lower dollar and hidden behind economic numbers skewed by a slim representation of society.
This dynamic will inevitably manifest into the elections, both stateside and abroad, as political infighting and geopolitical tensions mount. And please don’t shoot the messenger, although that would likely be an intuitive extension of this very theme. Transfer of Wealth
It’s interesting to note that following years of isolationist posturing, we haven’t heard a peep from the powers that be following foreign stakes in Merrill Lynch
(C), Bear Stearns
(BSC) and other financial institutions.
I believe that this is because the investments were a function of need, on our part, rather than want.
We should continue to see a transfer of wealth
as foreigners purchase depressed equities, real estate and potentially homebuilders. While this is an intuitive progression in the era of globalization, it will likely serve as a buffer than a savior. Run to the Light!
I’ve long offered that the opposite of love isn’t hate, it’s apathy.
Following that logic, the other side of recent bubbles—from dot.com to debt and real estate to derivatives—would be abject disinterest in financial markets. The opening bell rings, nary a tick flickers and we slither sideways until the other end of the day arrives.
That’s the way it was in the early 70’s, or so I hear.
The good news is that even if this is to occur—and there’s no knowing if it will—psychological continuums take time to evolve. This, my friends, works to our advantage, particularly if we’re prepared, patient and proactive.
The financial dynamic will become increasingly difficult but the individual, instead of burying their head, will demand greater involvement in their financial decision making process. This evolution of empowerment, or the need thereof, will be a central tenet of our forward progress.
Capital preservation, debt reduction and financial intelligence will stand tall when 2009 comes knocking.
Fare ye well.
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