Top 10 lists galore!

Location Date: 
January 6, 2012

It’s that time of year when we get all those forecasts for what lies ahead in 2012 for financial markets.  The proverbial Top Ten lists are appearing everywhere.  What makes the exercise so interesting is that there is no shortage of both ideas and opinions given the tremendous uncertainty in financial and geopolitical forces currently in play. 

I thought I would pick out three popular lists to give you a flavour.

First up is Saxo Bank, a Forex dealer based in Copenhagen, Denmark.  Typically, the Europeans have a broader base of global views predicated on “fat tails” or outliers than U.S. commentators.  Their “outrageous” ideas are as follows (Click here for details): 

  1. The stock of Apple plummets 50% from 2011 high
  2. EU declares extended bank holidays in 2012
  3. A yet unannounced candidate takes the White House
  4. Australia goes into recession
  5. Basel III & Regulation force 50 Bank Nationalizations in Europe
  6. Sweden & Norway replace Switzerland as safe havens
  7. SNB wins and catapults EUR/CHF to 1.50
  8. USD/CNY rises 10% to 7
  9. Baltic Dry Index rises 100%
  10. Wheat prices double in 2012

From these guesses, I like #4 the best because it covers the possibility that a “command economy” like China gets it “wrong” and property prices, bad debt and social unrest lead to a longer slowdown than expected – shorting Australia is the perfect option on that outcome – you also get an indebted Aussie consumer ,“bubbly” Aussie property prices and mean reversion i.e. Australia has not had a recession since 2000!  I also like #8.  This is a corollary to #4 in that the Chinese government will step in to support their exporters.  Can you imagine how this would after the U.S. election!  OBAMA!  On point 7 if true, then Kashya Hildebrand (wife of the head of the SNB) will make a few bucks!  Point #10 is interesting – massive short interest in wheat, wild climatic conditions and potential political problems in Russia – not a bad idea!  But Apple falling 50% when it will have $100BN of cash on its balance sheet?  Maybe the analyst was overindulging in his Carlsberg beers!

Let’s move on to hedge fund manager Doug Kass – I am a fan of Mr. Kass and enjoy the way he thinks – he puts out a list of 15 Surprises each year – a bit too long and some of his ideas are duplicative but here they are in summary form.

  1. S&P 500 hits all time high in summer/fall
  2. U.S. economy accelerates through the year; S&P earnings > $105 for 2012
  3. Clinton/Bush bipartisan agreement on addressing fiscal imbalances
  4. Romney wins Presidency
  5. Sloppy start to fixing Euro debt crisis – only mild recession in Europe; QE from ECB
  6. FED ties monetary policy to labour markets – no tightening
  7. Sears (SHLD) goes bust
  8. Cyber warfare intensifies
  9. Financial stocks are leading market sector
  10. High beta stocks underperform (except AAPL!)
  11. Mutual fund inflows return in force
  12. Merger mania
  13. ETF bubble explodes
  14. China has a soft landing
  15. Israel attacks Iran – oil spikes to $125

As you can see, Kass is leaning towards bullish surprises.  In part, this is viewed as contrarian.  In terms of “trades”, I like #7 – this firm looks to be DOA – Lampert’s hedge fund is leaking badly and clearly he has no clue about retailing.  Given the economic environment, I doubt closing stores will solve much – this company needs a real pro and fast.  Stick with Walmart!  On point 13, I doubt if ETF’s are done just yet -if markets do better like he suggests, then won’t people just buy the XLF for financial exposure?  On point #1, I agree with his logic that if the U.S. financials come back, then the S&P 500 profits will rise and the index will hit new highs.  BUT this is a very big “IF”!  I can buy into the idea that select regional banks can do better if real estate values are truly bottoming, but the big money centre banks have regulatory burdens (capital requirements, Dodd Frank, European exposures etc.) – it will take a true global economic recovery to get them materially higher (so far this year they are looking very strong).  I could buy major U.S. financials if they were hedged with a short on Canadian financials – valuation wise this makes sense.

Kass makes an interesting point in that retail investors and many hedge funds have little net exposure to equity markets.  They have been selling and redeeming en masse.  He likes mutual fund companies and other non bank financials as a contrarian call.  I hope he is right – it is an interesting trade but I would not bet the farm!  The last call, an attack on Iran, is possible but highly unlikely – as long as the Strait of Hormuz remains open and uncontested, all of the current news is just noise.  That being said, if sanctions truly hurt Iran materially, then closing the Strait is a real possibility – push anyone angry and hungry far enough, then watch out.  In this case, spot oil goes much, much higher than $125.

The final list is from Blackstone’s Bryron Wien – the originator of the Top 10 list of surprises some 27 years ago when he toiled for Morgan Stanley.  He defines “surprise” as an event the average investor thinks has a 1 in 3 chance of happening, relative to his probability that it is a 50/50 chance.  His surprises, like those of Mr. Kass, are very optimistic.

  1. Oil prices fall to $85 – shale extraction is a game changer
  2. S&P 500 moves above 1400 on higher earnings
  3. European debt crisis is solved by a broad plan – a meltdown of Euro banks is avoided
  4. U.S. election will see Dems winning the House and GOP the Senate (anti-incumbent wave)
  5. European recession
  6. Cyber war on financial institutions
  7. Currencies of economies managed “sensibly” appreciate – Sing, Aussie, Won & Scandies look good
  8. Congress acts before November election to reduce the budget deficit by $1.2 trillion over 10 years via cuts to defence and Medicare
  9. Arab Spring finally overcomes Bashar al-Assad who is over thrown
  10. China, India and Brazil equity indices appreciate 15%-20%

Both Kass and Wien are optimistic on S&P 500 earnings.  Given the strength of the dollar, recession in Europe, continued consumer/government deleveraging, potentially peak margins etc., and I have a hard time buying into this thesis.  Perhaps the multiple, which has been shrinking, turns up?  Last year Wien thought the S&P would be at 1500 and the 10 year at 5% - wow – were they ever big misses.  Wien’s #10 surprise is aggressive, but I see that as a corollary of #2, and I would not include India in that list.

It is amazing how simply turning the calendar year leads to so much prognostication.  My belief is one has to be very nimble in these markets and selectively choose those ideas that offer the best risk/reward within a time frame that allows you not to turn a losing trade into a long term investment.

Good luck out there!

Jim McGovern