1-11-10

2010 Forecast Edition

The tea leaves have never seemed muddier and I've never seen such diverging views on the year ahead. Nevertheless, I will give you my forecast this week. This is a toughie, and if I'm just half as right as I was for 2009 I'll be delighted.

A warning: this is simply an intelligent guess as to where things will be one year from now. I can't predict the timing of these events during the year (though I give it a go, don't read too much into it). If I say the stock market will go down, I'm talking about where it will be in 12 months time, NOT that it won't rise along the way first.

Next caveat: what I say now is based on the facts I have at hand NOW. The reason this is a hard year to forecast is because the situation is highly fluid and it's impossible to predict with any certainty anymore over what crazy acts politicians will do next. If the facts change, I will change this forecast.

Okay? Alright then, let's get started.

In many ways, I see the position now an inversion of what it was a year ago. End of 2008 saw extreme pessimism so as a contrarian I predicted a better year for stocks and commodities amid all the doom and gloom as well as a spike in gold and a sinking dollar.

End of 2009 saw great optimism with a belief it is all blue skies ahead. Following the contrarian logic again, I would now be inclined to predict a bad year for stocks, commodities and a rise in the dollar. The fly in the ointment of this prediction though is the mid-term elections ahead; governments will throw money at it, manipulate the markets, lie about statistics and fight tooth and nail to retain control of the bear. But this will merely delay the inevitable; by late 2010/early 2011 will see the fireworks if we don't get them sooner.

I note that in Barron's latest roundup of analysts' opinions, all those interviewed believed that the S&P would be higher in 2010. Another contrarian indicator.

A compilation of strategic forecasts for 2010 reveals the average prediction is a 10% rise in the stock market and a positive GDP growth of 3.1%. This is because every general fights the last war; pundits are assuming this is a normal recession; an 'inventory-led' recession where it's just a question of cooling down a while before getting back to growth. This recession is more of a major reset and people are in for a surprise this year.

Many bulls continually cite the Fed's determination to keep interest rates low to make their case. Again, were this a normal recession this would be justified. Interest rates can be as low as they like, but if nobody's borrowing so what? Unemployment is more of a key indicator and even with government blatantly fiddling the figures it's still bad and getting worse. This is a REAL prosperity indicator.

There is ONE economic indicator that cuts through all the manipulations and opinions: Sales Tax Receipts. This one cannot lie if you think about it! And it's not good news; credit card lending dropped in December (of all months) the largest in history.

Because of this violent tug of war between dawning realities, opinions and interests this year, 2010 will be summarized in one word: volatility. Cracks in the thin ice the global recovery is built on will emerge. There will be a big scare from the Japanese economy and Middle-Eastern friction, plus many earnings disappointments. China, fledgling economic savior, will most likely have a correction in its big boom, perhaps a scary one. Expect an escalation in protectionism between US and China which will only exacerbate China's correction. The bond market buckling could be another scare-catalyst as the ludicrous level of US debt finally sinks in to investors. The list of potential triggers for volatility are numerous. Expect the VIX index to fluctuate wildly between 18 and 40/50 (you can profit by trading this).

World governments fired a lot of bullets at the 2009 economic challenge in an attempt to buy time and buy a recovery and they're critically low on ammo as a result. Now they're patting themselves on the back for saving the world. The world has different ideas. That's what happens when you whip a band-aid out instead of fixing the real problem: correcting the overspending by governments and citizens.

The day of reckoning has arrived for the quick-fix and instant gratification culture.

Stock Market.

Big shocks from places like Japan will cause wild swings (see earlier section on volatility). Conveniently, things will recover in the build up to the elections, but after that, we could see a swift, continued drop at the end of the year and into 2011. This is and always has been a bear market rally and it's on borrowed time now- the correction could start any day but would be deceptive due to violent upswings along the way to keep giving you hope. Stock market at end of 2010: DOWN.

Economy.

Unless banks start lending all the money that's been thrown at them, the economy will continue to struggle. Even if they were lending, who would borrow? The big mistake being made currently and last year is assuming this recession was like all past recessions. It isn't. A huge debt-elimination cycle is underway. Look at it from your own point of view: are you taking on more debt or paying it off? Are you feeling confident to get more loans? You're not alone. Now think what this does to the economy. People haven't briefly drawn their horns in; they've cut them off completely. It's a complete change in consumer psyche.

Real Estate.

The huge tide of foreclosures about to hit the market is simply too overwhelming to foresee any significant rebound; if anything, a further drift downwards or at a level depending on what type of property. Condos are death. This is the year the commercial property time-bomb finally goes off as owners simply can't/won't refinance (commercial mortgages have to be refinanced about every 5 years).

Currencies.

The US Dollar ended 2009 with extreme pessimism and I've been commentating on this for a while. Being contrarian, I said this would correct and it's just begun. Dollar: UP.

Japan is a time-bomb for a number of reasons, specifically, debt. Japanese Yen: Down.

Europe's banking crisis will get uglier. Euro: Down.

Note how it all fits; an appreciating dollar would match a depreciating Yen and Euro.

Commodities.

Very volatile indeed for oil. Weakness on any deflation scares will be good opportunities to load up for the inevitable shocks from the Middle-East in 2010. It's the perfect storm brewing in the oil patch: Iran is a total wild card, Israel is prepared to act unilaterally and meanwhile Russia is deliberately fanning the flames to keep the US occupied while it secures its borders and reasserts control in its old provinces. Expect a trading range between $50 and $100 (!).

Gold.

Gold is a tricky one this year. You could hardly complain if gold treaded water or even sank a little after being the ONLY asset to rise every year for the last 10 years! Deflationary scares will hit gold in 2010 and we could see that last classic correction of long-term bull market where the bull has one last vicious attempt to scare people off (a bull wants to take the least amount of people along for the ride, and a bear vice versa). It could correct as low as $800 and that would be your last time in this lifetime to buy at those levels. BUT, what puts a floor in this correction is governments becoming net BUYERS of gold instead of the customary sellers (hmmm, do they know something we don't? Maybe that this big experiment with paper money off a gold standard is doomed just like every other attempt in history?). Plus, in a deflationary scare uncertainty makes gold attractive. In short, expect a correction in gold but it will be short-lived.

Let me finish this somewhat gloomy forecast by adding that it will end (if governments stop meddling and let nature take its course!) eventually and when it does, we'll be even stronger for it. Stronger as individuals, as a country, and economically. You can never experience joy if you've never known suffering.

There are many reasons to be optimistic about the future- developments, in biotech alone they are mind-boggling.

MOST OF ALL, and I keep saying this hoping you're hearing me, a League of Power Member's mouth waters at such a forecast because they make money no matter what- you can trade ANYTHING up OR DOWN.

I officially declare these 2010 games open!

Best Regards,

Mark Patricks

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