I was a bit surprised by this chart, namely the performance of HP, not so much Apple given its innovation and new products.

 

It makes you wonder what the "experts" are talking about calling for large cap technology as a leading industry.  Are these companies total 90's, not quite this Century? 

Innovation is the key to long-term growth of growth companies, otherwise own utilities and real estate if you want coupons. 

Year four and as always this list is in no particular order

1.       Total U.S. consumer consumption will continue to contract in 2010 as consumers pay off negative savings from the past and begin building a savings buffer.  The consumer deleveraging trend will continue.

2.       The dollar rebound will last through most of the first quarter, but will hit new lows by year's end.

3.       Small Cap Growth will be the top performing asset class in the US.  Look for outsized returns in this sector, they get to make up for 2009's underperformance and put in 2010's natural premium.  If the normal premium is 3-5 percent, look for 6-10 percent of excess performance.

4.       By year's end the number one topic will be inflation.  TIP and WIP will be top fixed income asset classes.  This means interest rates will be going up - dramatically.  Rates to double!  10-year US Treasury at 3.50% will be 7.00%. 

5.       Total Global demand will increase even with the US consumer deleveraging.  US may stop losing jobs, but it will not be creating new ones.  Productivity will make up US's portion of increase global sales.  Exporters will have the best year.  XLK, XLI and MOO will be the sweet spot in U.S. Large Cap equity market.

6.       Local governments will struggle with declining revenues as the US consumer market contracts.  Just like people, local governments are spending all their savings before cutting staff and services.  When the savings run out - dramatic cuts will be the only option.  If you own Muni's, do your due diligence.  Once the downgrades begin you will not find the exit fast enough.

7.       Emerging market equities (EEM) will be the top overall major asset class.  I am thinking between 25-40 percent by year's end and will have two really great trades during the year.  If you own it now, a sell and a buy.  If you don't own it now, a short and a cover and buy long.

8.       IYR and XLU will be the most stable coupons earned 2010.

9.       US Equities at this point in time are fairly if not slightly over valued.  How they do will depend on how bad the dollar falls.  Equities will earn about three quarters of what the US dollar falls. 

10.   Congress will be put in a position it must make real decisions with immediate consequences regarding spending, borrowing and the realization of trillions of dollars of losses at the Fed and Treasury.  It will be their action that creates the double dip in the economy and the slope of the following recovery.   

 

I see a big V coming in the stock US Stock Market this year and all fingers will be pointing at the Administration, FED and Congress in this election year.  Congress will do what it should have done last year and not have spent all that money and let the Fed and Treasury leverage themselves up. 

2010 the year of Financial Reckoning! 

So it is that time of year you need to make a RMD decision.  Yes, I know Congress waived the requirement but is that the smart decision?

If you believe as I do that income tax rates for high net worth individuals will be increasing in the very near future.  Some of you may have seen a drop in taxable income besides not having to take the RMD in 2009.  No longer earning a wage or board fee, taxable portfolio income or rental income fell whatever the reason, you might want to consider withdrawing more from your IRA this year and incur the tax now rather than later.

Tax preparation is between you and your accountant, but from an economic perspective you might be money ahead by paying the lower tax rate now and not waiting to see how high Congress and President Obama raise them. 

Make the call to your accountant today if you have not already done so and ask the question "How much of a tax increase would make me wish I made a withdrawal this year and not waived the RMD?"

January 11, I posted the 2009 Mutual Fund Challenge.  I screened in Yahoo Finance, Large Cap Blend, Top 10 percent of any family of funds. 

Well, how did they perform against the SP 500?



Only one fund clearly outperformed the SP 500 and some significantly underperformed over the period. 


The three chart offers some hope for active management.  One major point on this analysis is last years top performers were last years top performers and that has little value in predicting next years top performers. 

So I was on the radio today, KJNO Action Line with Murray Walsh. 

So I want to explain the contraction of the consumer market.  I don't know why the best thoughts happen about 15 minutes after the microphone is gone. 

So let us say that there the USA has $100 of earnings per year and we have been spending $110 per year for the past several decades.  All of a sudden that $10 of spending in excess is no longer available, for whatever reason!  Now USA must contract its demand by $10 and in doing so a recession begins and many suffer in the economic dislocation.  In fact, the economic dislocation of some impacts the many who have also  been living beyond their means, contracting demand even more.  Now, where there was $110 of demand and only $100 of ability to pay;  assume the ability to pay remains constant (a generous assumption, most likely contracted) there is only $85 of demand or a contraction of nearly 25%.

Negative savings is eliminated.
Paying back negative savings from previous decades (national debt + state and local debt + consumer debt)
Actual savings

Those three things will significantly reduce consumer demand and society will experience the consequences, and they will not be pleasant. 

hey the chart speaks for itself!

How did I do in 2009?

Well let us see how I did!

1. We are almost half way through the economic contraction as measured by GDP.  Third quarter 2009 will be the first positive one, but will be very weak.
   
   If you think about it there are two predictions here, which quarter and magnitude.  Both were dead-on BULLS-EYE. 
   
   
2. Consumers will discover that non-consumption is a good thing and will start demanding higher quality products.  A notion will be put forth that most of the planets environmental problems are caused by the disposable society.  This recession will be credited with saving the planet by changing consumerism forever. 
   
   This one did not pan out as I envisioned, but in the next few years I believe you will see this work out to be one of the best predictions. 
   
   
3. Ford will be the only major US auto manufacture remaining at the end of 2009.  GM and Chrysler will be so radically changed it would be hard to describe or compare them to what they are now or were in the past.
   
   Dead-on BULLS-EYE!
   
   
4. SELL US Treasuries and sell duration unless they are Treasury Inflation Protected Securities which you should keep.  Interest rates are going to rise and spreads will narrow a bit.  Short duration corporate bonds will be the sweet spot in the fixed income markets.
   
   Out of TLT, IEF, SHY and TIP the first sentence was perfect!  Interest rates did rise and spreads narrowed a lot!. Short Corporate bonds were the sweet spot.  All in there were four predictions in this one and three were BULLS-EYE and one off in magnitude but right in directions.
   
   
5. Chairman Bernanke will print as much money as possible and be very accommodative with the new administration in order to keep his job.  Sell dollars and buy a portfolio of other currencies Friday, January 2.  Move back into the dollar late in the fall of 2009.
   
   Rarely do I get the politics as right as I did on this one, but there are two market predictions in this expectation:  Sell dollars 1/2/09 (BULLS-EYE)  move back into dollar late fall, (BULLS-EYE)
   
   
6. Jobs will continue to be lost.  Some talking heads are noting that the initial claims are running up to the 80-81 record levels.  The US population is 50 percent larger than it was in 1981 so it would not surprise me to see several, million job lost months in the very near future. 
   
   Jobs continued to be lost BULLS-EYE but never did achieve a million job month in losses. 
   
   
7. China and India will lead the world out of this recession as they start building out their domestic infrastructure and develop their middle classes.  Southeast Asia will be the top performing region in the world in 2009. 
   
   It is hard to say the first two points are wrong but you cannot really call them bulls-eyes either.  Pretty certain Latin America as a region outperformed S.E. Asia.
   
   
8. I do not think peace will break-out all over the world and in fact this global economic contraction is only exacerbating many of the regional conflicts.  These conflicts will start changing US policies and President Obama will implement  a national self-sufficiency program for energy and food.   Pakistan is the powder keg and there are multiple fuses running in many directions. 
   
   No real market predictions in this mess, but the response in #2 is appropriate here as well.
   
   
9. Energy and Commodities will be the best performing sectors for 2009, but financials will make a major recovery at the end of the year.
   
   XLK is the top performer so far followed closely by XLY and XLB.  Energy actually has underperformed the SPY.  XLF recovered before I expected but the magnitude was a little short.  I almost want to call this a bulls-eye, it is only 95% right.
   
   
10. 2009 will be a year of conflict, false starts and significant changes in behavior.  Returns will be below historical norms but the foundation for a better 2010 and 2011 will be laid. 
    
    The strong market performance in 2009 will lay the foundation for 2010, but since 2009 was exceptional, 2010 will not be.

 

All in all, not bad predicting.  I added up a total of 24 predictions of which

11 were Bulls-eyes, 8 were accurate, 5 were wrong

I have been thinking about my predictions for 2010 and getting ready for my fourth year in a row of published predictions on the markets and global economy.  The next post will be an evaluation of my 2009 predictions which I know I nailed a couple.

Good expectations and predictions are built on a couple of fundamental building blocks:  A knowledge of history (especially recent history) and knowing that it will not be what it just was.  Who would think cause would beget identical cause?  No, cause creates effect or affect (is there a difference?) anyway look at history and predict the reaction to that cause with a time lag. 

So in the effort, time for a history lesson. 



That is the SP 500 against the sector funds.  I added a new one, MOO.  It is in some accounts and I have not looked at it in this context before.  Needless to say, I am a bit surprised how well it has performed. 

At this point, XLU looks kind of attractive with a dividend of nearly 4 percent and the worst performing sector for the past twelve months.  Our focus is forward and extreme performance - good or bad is more predictable going forward if you accept mean reversion.

Dear Congress,

I was watching Bloomberg News and someone was interviewing Senator Bernie Sanders, VT who sits on the Senate Finance committee and they were discussing whether Chairman Bernanke should be confirmed and whether the Federal Reserve should disclose who the lent money too.

At that moment a lighting bolt struck me. 

The American taxpayer is borrowing money from China at 2 - 2.5 percent, lending it to Bank of America, Citibank and Wells Fargo at 0 percent so they can lend back to the American taxpayer at 28%. 

If this is too complex for you to understand, then Robert Rubin (Clinton Secretary of the Treasury, Vice Chair CitiGroup) was right in a recent speech, "the problem is an uninformed electorate".

Wake up America and let us take back our Country, take back control of America's finances.

Every now and then you should look at your fixed income portfolio and see where the market has been and if there are any obvious opportunities?  I offer this three year chart comparing the components of the domestic fixed income markets.