Sunday, December 19, 2010

Just for fun: 2011 Predictions

Well, Bespoke got a cute little round-table thing going on and they forgot to consult me. It's OK, I'm used to it.

We'll review these again next year, along with a review of other people's too and see if the "wisdom of crowds" is for real. I suspect most of us will do no better than a dart-board.
  • Fed funds: Flat. Benny Bernanny wouldn't dare and he'll err in the inflation side, just like the  King of Knifecrime Island did. I truly believe he cares more about achieving full-employment than price stability and he his hell-bent on weakening the dollar, supporting asset prices and holding short-term real rates negative at all costs.
  • Dollar: Mixed, but generally flat. General downtrend with high spikes up if Portugal is forced to go to the EFSF or if haircuts for Euro debt happen, although I doubt that will happen. I haven't had a chance to update the maturity schedule for the PIIGS because, being unemployed, I can't afford decent health insurance, much less Bloomberg, but I'll try to sneak in somewhere when I get back home--currently on vacation
  • Long bond: Up. Right now I think it's oversold, but I could see it oscillating in this space, although I think the downtrend in interest rates is going to keep going (thank Europe!). The 2-30 curve is already at historical wides and I really don't see it getting much wider, especially because I think recovery hopes are a dash too high. In August I bet a trader at my old job that by next August we'd see the 2-30 spread around 200bp. In retrospect, that was too aggressive.
  • Munis: Definitely up. Conviction buy. In fact, if you follow me on twitter, you would have seen me ranting all last week about buying Munis and selling Tsys if you wanted to hedge the curve. Default fears are way overdone and I think that they are definitely undervalued on a relative basis. My preferred play here is lightly levered CEFs selling at a discount.
  • S&P: Up. I got my money on a range bound market with an upwards trend. Slower earnings growth. The story here is going to be multiples. I wouldn't be surprised to see PEG compression. So I think companies will be in better shape, but I think valuation won't keep up. Overall I like corp bonds, convertibles and HY (although I think upside here is limited). I think "Wall of Maturity" fears are way over-done. Best places to play are are CEFs with 20-40% of leverage and selling at decent discounts (> 7%). Good opportunities to trade in and out.
  • Light Vehicle Sales: 13.5M total, but steady and steep uptrend in SAAR. (Previously)
  • Euro crisis: Mostly unch. I expect upward creep on spreads. I think that the catalyst for Portugal to go to the EFSF is going to be really high rates on a refinance, not high rates on current-year deficit financing. 2012 is when I see that happening, the fund-raising necessary in 2011 is limited enough that Portugal could probably stomach the pain, so if they go to the EFSF it will be because of political pressure from peers to stop contagion fears and volatility, not market pressure. I think Italy is going to see the biggest widening (in % terms), followed by Spain. If Portugal front-loads and can pull-off a successful auction in Q1, I doubt anything drastic will happen.
  • UK: There is so much sad face to be had there. I expect continued weakness in the Sterling vs Euro combined with high inflation and a limited recovery. The VAT rise is fucking asinine. The only thing Brits are getting for Christmas is lowered standards of living. Banking exposure to Ireland is big and they still have their own housing issue to deal with. I see little probability of a recovery in UK housing and in fact expect significant further weakening. I wouldn't be surprised by additional write-downs, buuuut there is an upside. Banks that have deposits (liabilities) in Sterling and hold assets with Euro exposure will benefit from said weakness as losses in Euro denominated assets are partially offset by movement in the Sterling. I suspect this is deliberate.
  • Spain: Increase in spreads, banking problems no EFSF assistance necessary, but expect the FORB to get plenty of use.
  • Latin America: Continued boom. Inflation leading to central bank tightening will be a theme, at least in Brazil. Argentina up (PEOPLE ARE RETARDED!!!!). Increasing interest rates risk attracting more hot money and further aggravating the situation. Brazil's bond-tax was a great idea, in my opinion, I hope to see it elsewhere. I think the Automotive recovery will be a nice tailwind for Mexico. (I'll update with production graphs when I'm back home)
  • International Economics: I expect capital controls to be a continuing theme, particularly in the form of taxes similar to Brazil's. It makes perfect sense to me, curbing funding local assets with foreign liabilities and vice-versa will increase currency stability by creating "speed-humps" for capital and limiting the volatility caused by hot money flows.
  • China: Pettis already did it, so I'm not going to bother. My only prediction is continued inflation. Just look at the money supply growth. You can also look at all those Chinese IPOs happening recently. If that's not hot money, I don't know what is. Expect price inflation to lead to wage inflation which will lead to some exporters and manufacturing moving inland, South and possibly abroad. This is a good thing. Expansion outside of the currently-urbanized centers could maintain investment expenditure high, which would be good for nat. resource producers. The whole issue of Yuan appreciation might go away as a consequence of price inflation.
  • Housing: Mixed. Suburban McMansions down, multi-family up. Expect people to avoid big suburban houses in gated communities with expensive fees. Foreclosures will keep putting downward pressure on prices and there will be a lack of demand as people look for smaller, cheaper housing. Community Association fees got to outrageous levels and the upkeep on big houses is likely to be a deterrent to people in debt, or getting out of debt. Apartment rents up. I think a solid investment would be non-luxury condos to rent out. In South Florida, you could can definitely find properties that have positive carry. (rent > taxes + mortgage + fees).
We'll see how I fare next year!

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