Dead on tar­get at the begin­ning of the new year, 76-year-old Byron Wien again pub­lished his annual list of sur­prises to expect in 2010. Wien, Vice Chair­man of Black­stone Advi­sory Ser­vices and one of Wall Street’s best known vet­er­ans, has been pub­lish­ing his list of eco­nomic, mar­ket and polit­i­cal sur­prises since 1986.

Review­ing Wien’s 2009 list, he was very accu­rate with the direc­tion of most of his predictions.

He fore­saw a second-half recov­ery in the US econ­omy, and the S&P 500 Index ris­ing to 1,200 (up from 903 at the end of 2008 to 1,115 by Decem­ber 31, 2009). He also pre­dicted: “The ten-year US Trea­sury yield climbs to 4% [up from 2.24% to 3.84%]. Later in the year, as the econ­omy shows signs of recov­ery, econ­o­mists and investors shift their mood from con­cern about defla­tion to wor­ries about infla­tion. A weak dol­lar, rapid growth in money sup­ply and record-setting deficits (over $1 tril­lion) are behind the change.” Spot on.

Wien also expected the gold and oil prices to climb to $1,200 and $80 respec­tively — a feat accom­plised in December.

He believes his ten sur­prises have at least a 50% chance of occur­ring at some point dur­ing the year. Although this is not a very high prob­a­bil­ity, his pre­dic­tions nev­er­the­less make for stim­u­lat­ing read­ing. His list for 2010 fol­lows below.

1. The United States econ­omy grows at a stronger than expected 5% real rate dur­ing the year and the unem­ploy­ment level drops below 9%. Exports, inven­tory build­ing and tech­nol­ogy spend­ing lead the way. Stan­dard and Poor’s 500 oper­at­ing earn­ings come in above $80.

2. The Fed­eral Reserve decides the econ­omy is strong enough for them to move away from zero inter­est rate pol­icy. In a series of suc­ces­sive hikes begin­ning in the sec­ond quar­ter the Fed­eral funds rate reaches 2% by year-end.

3. Heavy bor­row­ing by the US Trea­sury and some reluc­tance by for­eign cen­tral banks to keep buy­ing notes and bonds dri­ves the yield on the 10-year Trea­sury above 5.5%. Banks loan more to cor­po­ra­tions and indi­vid­u­als and pull away from the carry trade, thereby reduc­ing demand for Trea­suries. Obama says, “The suits are finally listening”.

4. In a roller coaster year the Stan­dard and Poor’s 500 ral­lies to 1,300 in the first half and then runs out of steam and declines to 1,000, end­ing where it started at 1115.10. Even though the econ­omy is strong and earn­ings exceed expec­ta­tions, ris­ing inter­est rates and full val­u­a­tions present a prob­lem. Con­cern about longer term growth and oblig­a­tions to reduce lever­age at both the pub­lic and pri­vate level unset­tle investors.

5. Because it is sig­nif­i­cantly under­val­ued on a pur­chas­ing power par­ity basis, the dol­lar ral­lies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the green­back is inter­rupted. Longer term prospects remain uncertain.

6. Japan stands out as the best per­form­ing major indus­tri­al­ized mar­ket in the world as its cur­rency weak­ens and its exports improve. Investors focus on the attrac­tive val­u­a­tions of dozens of medium sized com­pa­nies in a mar­ket sell­ing at one quar­ter of its 1989 high. The Nikkei 225 rises above 12,000.

7. Believ­ing he must be a leader in cli­mate con­trol ini­tia­tives, Pres­i­dent Obama endorses leg­is­la­tion favor­able for nuclear power devel­op­ment. Argu­ing that going nuclear is essen­tial for the envi­ron­ment, will cre­ate jobs and reduce costs, Con­gress passes bills pro­vid­ing loans and sub­si­dies for new plants, the first since 1979. Coal accounts for about 50% of elec­tri­cal power gen­er­a­tion, and Obama wants to reduce that to 25% by 2020.

8. The improve­ment in the US econ­omy ener­gizes the Obama admin­is­tra­tion. The White House under­goes some reor­ga­ni­za­tion and regains its momen­tum. In the Novem­ber Con­gres­sional elec­tion the Democ­rats only lose 20 seats, much less than expected.

9. When it finally passes, finan­cial ser­vice leg­is­la­tion, like the health care bill, proves to be softer on the indus­try than orig­i­nally feared. There is greater con­sumer pro­tec­tion, more trans­parency, tighter restric­tion of lever­age and increased scrutiny of deriv­a­tives, but the reg­u­la­tory changes for invest­ment bankers and hedge funds are not oner­ous. Trad­ing vol­ume and merger activ­ity increases; finan­cial ser­vice stocks become excep­tional per­form­ers in the US market.

10. Civil unrest in Iran reaches a crescendo. Aya­tol­lah Khameini pushes out Mah­moud Ahmadine­jad in favor of a more pub­lic rela­tions adept leader. Eco­nomic improve­ment becomes the key issue and anti-Israel rhetoric sub­sides. Talks with the US and Europe begin but the coun­try remains a nuclear threat. Pak­istan becomes the hotspot in the region because of the weak gov­ern­ment there, anti-American sen­ti­ment, active ter­ror­ist groups and con­cerns about the secu­rity of the country’s nuclear arsenal.

Source: PR-inside.com, Jan­u­ary 4, 2009.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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