Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Counter-Productive Side of 2010 Predictions


There's nothing special about December or January that helps analysts make forecasts.

It's become a tradition for financial-markets commentators to publish predictions at year-end. And the more sensational, the better.

Personally, I believe that this tradition has an important counter-productive aspect to it; namely that it incites analysts and investors to artificially "force" predictions. Predictions are based on data. And there's nothing special about the months of December or January that better equips analysts to make predictions.

Beware of any predictions published by an analyst in December or January that weren't made previously by that analyst. What changed since November that would warrant such new, grandiose predictions? There's a high probability that the analyst is "forcing" a prediction that would probably be better if it were made at another date when the relevant information is available.

For my own part, I'll simply reiterate a theme that I've been stressing for months: The economy and financial markets are at an important crossroads. Massive fiscal and monetary stimulus have pulled the economy out of the global economic and financial crises of late 2008 and early 2009. However, during the course of 2010, the incremental contributions to growth from global fiscal and monetary stimulus will begin to recede, and at some point, the year-on-year contributions will turn negative. The question is whether the growth initially sparked by fiscal and monetary stimulus can morph into a self-sustaining growth dynamic led by private consumers, investors, and businesses.

My own view is that the answer is still unclear. I'd currently place the odds of a self-sustaining recovery versus a "double-dip." At around 65%-35%. Based on my review of Wall Street economists and strategists, this would place me well on the cautious end of the spectrum.

Far more important than this particular interpretation of the odds, is my view of the asymmetry of risks in financial investing at this time. A healthy economic recovery could generate 10%-20% upside for the S&P 500 over the next 12 months. However, one must consider the potential downside, and in this regard, it needs to be recognized that worldwide, there will simply not be the financial or political wherewithal to structure another round of massive and systemic bailouts in the event that a double dip materializes. A double-dip scenario could create a true economic calamity on a global scale that could generate downside upwards of 40%-50% in equity markets.

Thus, in this scenario, aggressive long side exposure isn't justified. On the other hand, in the absence of clear catalysts, betting on a global financial meltdown is similarly unwarranted.

To the extent that the resolution of the current economic dilemma remains unclear, I expect markets to behave in a manner consistent with such uncertainty -- i.e. to establish a trading range. I see this playing out for several months. I'd expect the upper end of the trading range to be near current levels, while the lower end of the range probably won't go much lower than 950 on the S&P 500. Financial markets could become "boring" for a while.

What should investors be watching for as they try to determine which way things will ultimately go? Signs that the employed US consumer will continue to loosen the purse strings is a key variable to monitor. In addition, two to three consecutive months of employment growth would probably be sufficient to assure that the recovery has enough momentum to become self-sustaining.

One downside catalyst that must be accounted for would be Mideast conflict, particularly related to Iran. Perhaps never has the global economy been so vulnerable to such vagaries. Spiking gasoline prices would be a major blow to consumer psychology at a sensitive moment. In addition, the fears of stagflation that such a scenario could generate combined with the negative psychological impacts of another major global conflict could greatly affect the propensity to invest and consume among individuals.

I'm 100% in cash. Further fundamental confirmation or lower prices are required to justify substantial long-side exposure. On the other hand, shorting in the context of an incipient recovery, and in the absence of a clear catalyst, is far from a compelling choice.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos