Bonding with the Bond (Rosenberg)

Thursday, July 1st, 2010

This is a guest contribution by David Rosenberg, Gluskin Sheff.

Call it a pre-Canada Day barbeque with Dave. There is no Breakfast tomorrow so we thought we’d put out a primer on our current thoughts.

The U.S. long bond yield is edging lower with each and every passing day, and now stands below 3.90%. At the same time, we cannot help but notice the huge gap that still exists between 10s and 30s — nearly 100 basis points. There is tremendous potential for a narrowing in this spread, as there is between the 115 basis point gap between 5s and 10s. The entire yield curve is primed for a bull flattener. And, if we are right on the deflation theme, then long duration on high-quality bonds would seem to make some sense. (There is still potential for lesser grade corporates, but the higher the risk, the lower the duration in the current economic backdrop.)

Still, we all tend to focus on the 10-year note given its deep liquidity and the fact that the mortgage market is priced off it. We bring this up because the Cleveland Fed just published a report on Estimates of Inflation Expectations, and based on our reading of where their numbers are on inflation expectations, the inflation risk premium and real rates, we stand a very good chance of seeing the yield on the 10-year note ultimately grind down to 1.9%. So, the answer is yes, we are likely to see new lows in U.S. Treasury yields occur across the curve before this bull market is over (after all, we are already there out to the two-year segment of the curve). Moreover, note that the 1.9% level would actually mark a fair-value yield — if this truly morphs into a bubble, we could be talking about market rates heading even lower than that.

We have said time and again that the most important driver of bond yields is the direction of inflation. This is twice as important as fiscal policy, as an aside. U.S. core inflation (which excludes food and energy) is already near-record low rates — at 0.9% year-over-year, it is just 20bps from the all-time low of 0.7% seen in March 1961. Could the core inflation rate head lower?

We took a closer look at what’s behind the 0.9% core rate. Core goods (commodities excluding food and energy) is running at 1.1% while core services (services less energy) is running at 0.9%. It struck us that there is a very real chance that the core goods component could indeed be headed lower given that commodity prices have rolled over, and as we see the lagged impact of the strength in the U.S. dollar dampen import costs.

In fact, if you go back to that “deflationary” period of 2003, core goods were actually deflating at a 2.6% rate, but core services were running at +2.6% and hence the overall core rate of inflation was still in positive terrain, at +1.1%. If we assume that core goods could once again bottom at around this rate, then simple math tells us that core inflation could slip below zero, to 0.1% year-over-year, which would be the first time on record (since the Bureau of Labor Statistics started publishing core CPI statistics in 1957) that core inflation is deflating.

Tags: 100 Basis Points, 10s, Basis Point, Bond Yield, Bond Yields, Breakfast Tomorrow, Canada, Canada Day, Cleveland Fed, Commodities, Core Inflation, David Rosenberg, Economic Backdrop, Fiscal Policy, Inflation Expectations, Inflation Risk, Mortgage Market, Point Gap, Risk Premium, Treasury Yields, U S Treasury, Yield Curve
Posted in Bonds, Canada, Commodities, Markets, US Stocks | No Comments »

Recession Warning (Hussman)

Monday, June 28th, 2010

This article is a guest contribution by John Hussman, Hussman Funds.

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I’ve long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth. Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.

The blue spike at the right of the graph indicates that the U.S. economy is most probably either in, or immediately entering a second phase of contraction. Of course, the evidence could be incorrect in this instance, but the broader economic context provides no strong basis for ignoring the present warning in the hope of a contrary outcome. Indeed, if anything, credit conditions suggest that we should allow for outcomes that are more challenging than we have typically observed in the post-war period.

Unthinkability is Not Evidence

One of the greatest risks to investors here is the temptation to form investment expectations based on the behavior of the U.S. stock market and economy over the past three or four decades. The credit strains and deleveraging risks we currently observe are, from that context, wildly “out of sample.” To form valid expectations of how the economic and financial situation is likely to resolve, it’s necessary to consider data sets that share similar characteristics. Fortunately, the U.S. has not observed a systemic banking crisis of the recent magnitude since the Great Depression. Unfortunately, that also means that we have to broaden our data set in ways that investors currently don’t seem to be contemplating.

Tags: Brink, China, Commodities, Contraction, Correlation, Criterion, David Rosenberg, Downturn, Employment Growth, Gold, Hussman Funds, Ism, John Hussman, Lead Time, National Bureau Of Economic Research, Pmi, Purchasing Managers Index, Recession, Recessions, Red Blocks, Second Phase, Stock Prices, Wli, Yield Curve
Posted in Bonds, China, Commodities, Gold, Markets, US Stocks | No Comments »

Rosenberg: Double Dip, Anyone?

Tuesday, June 15th, 2010

This article is a guest contribution by David Rosenberg, Chief Market Economist, Gluskin Sheff.

The smoothed ECRI leading economic index fell in the opening week in June for the fifth week in a row and now down in nine of the past ten. The index, went from +0.3% to -3.5%, the weakest it has been in a year. After predicting the V-shaped recovery we got briefly in the inventory-led GDP data when the index soared off the bottom in late 2008, at -3.5%, we can safely say that this barometer is now signalling an 80% chance of a double-dip recession. It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data).

Suffice it to say, when the ECRI was drifting lower in 2007, it got to -3.5%, where are we are now, in November and unbeknownst to the consensus at the time that a recession was only one month away. Remember that the economics community did not call for recession until after Lehman collapsed — nine months after it started; and go back to 2001, and the consensus did not call for recession until after 9/11 and again the economy had been in recession for a good six months). We should probably point out here that real M3 has contracted at the fastest rate since the early 1930s, as John Williams has published, and declines in the broad money measured has foreshadowed every recession in the past seven decades.

To be sure, the Fed has not raised rates and the yield curve is steep but there has been a visible tightening in financial market conditions that poses a significant risk for what has been a very fragile recovery in dire need of recurring rounds of policy stimulus. The widening in credit spreads and decline in the stock market represent a sizeable increase in the debt and equity cost of capital. The Fed has stopped expanding its balance sheet (and now we have Fed presidents Hoenig clamoring for rate hikes and Plosser for reducing the size of the Fed’s balance sheet) and end of the housing tax credits implies a major withdrawal of federal government support at a time when restraint is accelerating at the State and local levels (the States have a $127.4 billion aggregate deficit to close for the fiscal year beginning July 1st so right there we have a one-percentage point drag on baseline GDP growth).

The data suggest that we are now seeing the consumer sputter with what looks like a very weak handoff into the third quarter. The housing sector is collapsing again. The export-import data are pointing to a sudden deceleration in two-way trade flows. Commercial real estate is dead in the water. Bank credit is in freefall right now (down 0.3% or $32 billion in the first week of June — the third decline in a row and has now contracted in six of the past seven weeks and at an 11% annual rate. In the last three weeks, bank credit has contracted a total of $119bln, which is the steepest decline since the week of November 19, 2008 when the economy was deep in recession.

There is still something left in the tank as far as capex and inventory investment is concerned, but by the fourth quarter, we could well be looking at a flat or even negative GDP print. This is exactly what happened in the second half of 2002, when by the end of the year real GDP converged in real final sales near the 0% mark after a sharp but truncated mini-inventory cycle. That may not have been classified as a double-dip recession, but it was a growth collapse nonetheless — an aborted recovery for a consensus that went into the second half of that year, much like this one, with a consensus forecast of 3% real economic growth. The lesson, is that expectations had surpassed reality to such an extent that it didn’t even take another recession to take the equity market down to new lows, which happened in October 2002 (not October 2001!), fully 11 months after the downturn officially ended.

Not only are the economists calling for 3% real growth, which would imply something close to 4-5% nominal GDP growth, but the consensus among equity analysts is that we will end up seeing over 30% operating EPS growth to a new high of $95.59 for 2011. But there are a couple of points worth making here. The bottom-up crowd is never that good at predicting where profits are going to be heading at the best of times, but at turning points in the economy it is awful — overestimating earnings by an average of nearly 20%. So we could easily be closer to $75 for next year’s EPS than $95. And, even $75 may be a stretch when you consider that there is not a snowball’s chance in hell that we are going to see earnings outstrip nominal GDP by a factor of six in the coming year. This type of earnings is always possible at the trough in profit margins, but we are coming off the third highest level on record — coming off the trough, historically, corporate earnings jump 17% the next year. At the peak, profits actually tend to decline 6% in the ensuing 12 months — imagine what that number becomes when you come off peak margins and head into a recession at the same time. It’s not a pretty picture.

Tags: Barometer, Chief Market, Credit Spreads, David Rosenberg, Double Dip Recession, Economic Index, Economics Community, Ecri, Equity Co, Fragile Recovery, Gdp Data, Gluskin Sheff, Head Fakes, John Williams, Lehman, Market Economist, Recessions, Stimulus, Yield Curve, Zero Line
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No Double-Dip Recession in Store, but no V either

Monday, May 17th, 2010

Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity. “Today, a substantial body of evidence exists from which various useful stylized facts have emerged,” said the Federal Reserve Bank of New York.

Importantly, this model uses the difference between 10-year and 3-month Treasury yields to calculate the probability of a recession in the U.S. twelve months ahead. The model has just been updated with data through April 11 and shows the probability of a recession for April 2010 and April 2011 to be 0.37% and 0.041% respectively (see table below). The model, in short, indicates an almost zero chance of a double-dip recession.

Source: Federal Reserve Bank of New York (hat tip: Carpe Diem).

Having said this, OECD data (including major developed and six large developing countries) show leading indicators having already peaked for this cycle. As long as the line remains above zero, there will still be positive growth, but not quite the V-shaped recovery forecast by many economists.

Source: Clusterstock – Business Insider, May 13, 2010 (hat tip: The Pragmatic Capitalist).

Are stock markets, being discounting mechanisms, already starting to focus on a less than rosy economic recovery, and thereby also less lofty growth in corporate earnings? Given the full equity valuations, slower economic and earnings growth perhaps argue for a deeper correction than what most market pundits are calling for at the moment. Caution remains!

Tags: Bank Of New York, Body Of Evidence, Business Insider, Corporate Earnings, Double Dip Recession, Earnings Growth, Economic Recovery, Empirical Regularity, Federal Reserve Bank, Federal Reserve Bank Of New York, Hat Tip, Leading Indicators, Market Pundits, Oecd Data, Stock Markets, Substantial Body, Treasury Yields, Yield Curve, York Hat, Zero Chance
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David Rosenberg: “Bonds Have More Fun”

Wednesday, May 5th, 2010

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This article is an excerpt from David Rosenberg, Gluskin Sheff, in today’s Breakfast with Dave, May 5, 2010.

Market Thoughts

Head for the hills! James Paulsen on CNBC today uttered the Bernanke-ism “contained” twice in one sentence to describe his view of the risks in Europe. Yikes! Jason Trennert then went on to describe the positive fallout from all this because the events overseas will keep the Fed on hold for longer (well, the Bear Stearns collapse forced the Fed to actually cut rates — we should have all been extremely bullish in the opening months of 2008 based on that logic).

It was quite the session yesterday. The VIX index soared another 20% to an 11-week high. The equity market suffered its worst pounding in three months (pharmaceuticals was the best performing sector as investors rotate to defensives from cyclicals), though the S&P 500 did find late-day support as it bounced off the key 50-day moving average. We shall see if this technical level holds but investors are now seeing that the market is in fact not a game of straight-up as has been the case for the better part of the past year.

The U.S. bond market has caught fire — just six weeks after receiving a death sentence from the intellectual elite as the yield on the 10-year T-note, back then, made yet another unsuccessful run at the 4% mark (just days after my debate with Jim Grant). Today, the 10-year note is sitting at 3.57% and the long bond is at 4.40%, both setting lows for 2010.

BONDS HAVE MORE FUN

Make no mistake, investors are getting hit far worse on their long-put positions on Treasuries right now than their long-call positions in equities (we haven’t even seen the big short squeeze yet in bond-land — this should get exciting). So far this year, it looks to as though total returns on long Treasuries are bordering on 5% — over 14% in Euro terms too!

Incredibly, in Canada, the yield curve steepened as the front end rallied to levels prevailing before the “hawkish” Bank of Canada policy report last month as two tightenings were taken out of the market (and the Canadian dollar paying the price as it finally heads toward its fair-value estimate of 93-94 cents). The Canadian bond rally got an extra boost from “dovish” comments out of Finance Minister Flaherty regarding stubbornly high unemployment.

Source: David Rosenberg, May 5, 2010

Tags: Bear Stearns, Bond Market, Canada, Cnbc, Collapse, Cyclicals, David Rosenberg, Death Sentence, ETF, Fallout, Gluskin Sheff, Intellectual Elite, Jason Trennert, Jim Grant, Lows, Market Thoughts, Moving Average, Rall, Short squeeze, Treasuries, Vix Index, Yield Curve, Yikes
Posted in Canada, Markets, US Stocks | No Comments »

The Economy and Bond Market Diary (04/18/2010)

Sunday, April 18th, 2010

The Economy and Bond Market Diary (04/18/2010)

Bonds rallied this week as Treasury bond yields fell by 10 basis points or more across the majority of the yield curve.

Most of the change occurred Friday in an apparent flight to quality that boosted Treasuries at the expense of most other assets. We also had Fed Chairman Bernanke in front of Congress and the release of the Fed’s “Beige Book,” both of which hinted at a comfort with current Fed policy and inflation expectations.

Inflation data out this week offered a mixed bag – the consumer price index was more or less as expected and indicates relatively benign inflation, but import prices sent a different signal by rising 11.4 percent on a year-over-year basis. The chart below highlights the directional changes in import prices and CPI tend to trend together and, while inflation expectations remain very low, import prices may be telling a different story. It is important not to be complacent with regard to inflation as perceptions can change quickly.

Strengths

• China’s first-quarter GDP rose 11.9 percent, the latest bit of news to confirm the global economic recovery powers ahead.
• In March, housing starts rose 1.6 percent, while building permits jumped 7.5 percent. This signals some stabilization and modest improvement in the housing market.
• Retail sales for March increased 1.6 percent month over month and 7.6 percent year over year as the consumer appears willing to spend.

Weaknesses

• Contradicting the strong retail sales numbers was weakness in the University of Michigan Confidence report, which fell to the lowest level since November.
• Industrial production rose a modest 0.1 percent, well below expectations. This may be one of the first indicators that inventory rebuilding is coming to an end.
• NFIB Small Business Optimism Index fell to the lowest levels since July. This is another troubling report that contradicts positive reports on jobs and retail sales.

Opportunities

• If financial markets are a good mechanism for discounting the future, the future appears relatively robust. The markets have been able to shake off bad news relatively easily recently, which is probably a good sign for the economic recovery.

Threats

• When governments around the world begin to wind-down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for the economy.

Tags: Beige Book, Bond Market, Business Optimism, China, Confidence Report, Consumer Price Index, Directional Changes, Fed Chairman Bernanke, Fed Policy, Housing Starts, Import Prices, Inflation Data, Inflation Expectations, Market Diary, Nfib, Quarter Gdp, Sales Numbers, Sales Opportunities, Treasury Bond Yields, University Of Michigan Confidence, Yield Curve
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Morgan Stanley On The Mirage Paradox Of Goldilocks (Economic) Strength

Tuesday, April 13th, 2010

Greg Peters, and other strategists from Morgan Stanley are out warning anyone who will listen that what is going on in the economy is a fool’s rush (we would add predicated by momos who know nothing about reading financial statements but everything about following a trend) and that MS’ core advice to clients is to “sell into strength.” Here is how Morgan Stanley differs from the consensus. Also discussed are returns before and after the EPS season, and how to hedge surging implied asset correlations.

• Exit strategy comfort (Fed on perma-hold)
  • A disconnect between ever-firming economic data, steep yield curve, higher back-end yields, a strong equity market with a so-called emergency Fed fund rate
  • Markets are susceptible to perceptions of a “policy mistake”
    Watch inflation expectations very closely

• Greece
  • OPA! We think not
  • Markets see this as idiosyncratic white noise – we fret about systemic risk implications

• Core views remain the same
  • Sell into strength (admittedly it has been much stronger than we thought)
  • Higher rates, steeper curves, weaker EUR, stronger $, buy high quality companies with above average growth, but continue to “buy the junk” in HY

Full presentation

Tags: Attachment Size, Correlations, Curves, Economic Data, Economic Strength, Exit Strategy, Fed Fund Rate, Financial Statements, Gold, Inflation Expectations, Mirage, Momos, Morgan Stanley, Ms Core, Perceptions, Quality Companies, Risk Implications, Strategists, Systemic Risk, White Noise, Yield Curve
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Government Bonds: What’s Up?

Friday, March 19th, 2010

Government bonds have been trading sideways since the middle of last year as market participants wax and wane about the prospects of the nascent economy recovery. Also, it has not quite been the one-way traffic for yields many pundits have been forecasting as seen from the US Treasury being able to sell paper across the yield curve at lower-than-expected yields.

Not subscribing to a meaningful economic recovery under his “new normal” scenario, Bill Gross, the manager of the world’s largest bond fund, last month increased the exposure of the Pimco Total Return Fund to US government debt to 35% from 31% – the first increase since October 2009. Interestingly, $409 billion from a total inflow of $507 billion into US mutual funds over the past year ended up in bond funds.

The chart below, courtesy of the latest Commitment of Traders report (via David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates), shows the net speculative short position in 30-year US Treasury Bonds. The net short position last week was 107,382 contracts (with a face value of $100,000 per contract). This is at the high end of the range and, according to Rosenberg, … /Continue reading

Tags: Bill Gross, Bond Fund, Bond Funds, Chief Economist, Commitment Of Traders, Commitment Of Traders Report, David Rosenberg, Economic Recovery, Face Value, Gluskin Sheff, Government Bonds, Government Debt, Inflow, Market Participants, Pimco Total Return, Pimco Total Return Fund, Short Position, Strategist, Us Treasury Bonds, Yield Curve
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David Rosenberg: How to Play Inflation

Thursday, February 11th, 2010

Here is a reprise of David Rosenberg’s thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

• Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
• An even steeper U.S. yield curve!
• TIPS (or real return bonds) – the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
• Short-term duration corporate bonds (and go out the credit curve).
• Commodity currencies – Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
• Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

Source: Breakfast with Dave, December 15, 2010

Tags: Balance Sheets, Brazil, Brownie Points, Canada, Commodities, Consumer Expectations, Consumer Staples, Corporate Bonds, Credit Creation, David Rosenberg, Food Beverage, Gold, inflation, Investor Interest, Massive Amounts, New Zealand Kiwi, Norwegian Kroner, precious metals, Real Return Bonds, Runup, Stimulus, Term Duration, Three Decades, Yield Curve
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Chart of the Day: Lending Still Shrinking

Tuesday, January 5th, 2010

As shown in the graph below, courtesy of Clusterstock – Business Insider, the latest figures from the St. Louis Fed show that commercial and industrial lending is still declining.

The dilemma is that US banks can borrow for almost nothing and lend money to the government by buying 10-year Treasury Notes and 30-year Treasury Bonds with yields of 3.8% and 4.6% respectively. “Thus, the banks are thriving on the ‘yield curve’ while the poor slob on the street gets nothing for his savings (assuming he has any savings at all). And when you think about it, why should the banks make risky loans to the poor goof on Main Street when they can play the yield curve with almost zero risk?, remarked Richard Russell, author of the Dow Theory Letters.

It goes without saying that lending needs to expand before a decent economic recovery can get under way.

Source: Clusterstock – Business Insider, January 4, 2009.

Tags: 10 Year Treasury Notes, 30 Year Treasury Bonds, Advertisement, Banks, Business Insider, Dilemma, Dow Theory Letters, Economic Recovery, Goof, Graph, January 4, Money, Poor Slob, Richard Russell, risk, Risky Loans, Treasury Yields, Yield Curve
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Keep Your Eyes on the Yield Curve

Thursday, December 24th, 2009

Stocks are trading at or close to 2009 highs, being helped along by a record steepening of the yield curve. Put simply, on Tuesday the gap between 10- and 2-year US government bond yields hit its widest spread ever – 286 basis points, beating last week’s 276 basis points and the previous record set in August 2003 of 274 basis points.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age – to which I will add warnings by Roubiniesque economists. Instead, they are assassinated – usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney

Tags: Anticipation, Basis Points, Bear Market, Bond Yields, Bull Markets, Bullets, Central Banks, David Fuller, Economists, Fullermoney, Gap, Government Bond, Inverts, Last Time, liquidity, Portfolios, Precise Answer, Quantitative Easing, Sentiment, Yield Curve
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Bernstein’s top 10 predictions for 2010

Friday, December 18th, 2009

Richard Bernstein, CEO of Richard Bernstein Capital Management and previously Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch, has just formulated his top 10 predictions for next year. Bernstein’s ideas come courtesy of The Business Insider – The Money Game.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently.

5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.

6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.

7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.

8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks’ outperformance might be the biggest surprise for 2010.

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.

Source: The Business Insider – The Money Game, December 16, 2009.

Tags: Bond Market, Business Insider, Cap Value, Capital Management, Chief Investment Strategist, Consumer Discretionary Stocks, Corporate Profits, Earnings Growth, ETF, Game 1, Hedge Fund Performance, Institutional Investors, Investment Strategy, Merrill Lynch, Money Game, Operating And Financial Leverage, Richard Bernstein, Small Cap, Strategy Group, Treasuries, Yield Curve
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