A Scorecard of Our "20 Investment Themes For 2010"

As the year end fast approaches, we are in the process of completing the ritual of hammering out our 2011 global economic forecast, investment strategy and list of “20 Investment Themes for 2011.” Before we do…time to see how our “20 investment Themes for 2010” did. Not too bad.

1. The negative impact of the global recession continues to wreak economic havoc into the new decade…the risk of the double dip scenario rises…G2 (China/USA) caused secular deflation and the failure of policy makers to address global trade imbalances remains a dominant theme as private sector de-leveraging continues and increased government sector leveraging is deployed to compensate…disturbingly, it ramps up even more (yet another stimulus?) …sovereign CDS spreads continue to widen. CHECK!

2. US economic growth remains uneven…with a stronger first half…followed by a lackluster/weak second half…at some point in the year, media speculation begins to focus on the perception that the Fed is out of bullets and “pushing on a string.” CHECK!

3. The Federal Reserve…facing pressure from the false economic growth signal of a steepening yield curve…begins to remove highly accommodative QE and ZIRP crisis based monetary policies in the first half…markets learn the true definition of “extended period.” In the first half the yield curve did steepen in response to “green shoot” growth signs in the economy and the Fed did show signs of reversing policy…pressure increased on them from the bond vigilantes throughout the year.

4. Core inflation remains subdued; unemployment remains high; the savings rate continues to climb; capacity utilization remains in the doldrums; real estate continues to falter throughout the year. CHECK, CHECK. CHECK, CHECK, AND CHECK!

5. As GDP per capita rises to $4,000 and the economy continues to grow over 8%, China does a large one-off revaluation to stem hot money inflows and to battle rising inflation. As predicted, the PRC economy is hot, inflation is rising and the pressure, both external and internal, remains to revalue the RMB…a work in process!

6. China’s banks, after a failure of the US consumer to come back as the world’s consumer of last resort and spending on even more export capacity that the world doesn’t need…late in the year experiences a dangerous increase in NPL’s. CHECK!…why do you think that they are raising bank capital requirements? It’s not just to cool red-hot economic growth.

7. The dollar continues to rally through the year, initially on the false hope of a stronger US economy and later on a flight to quality trade…10-year Treasury yields fall from their early year highs of 5%…the gold run is over done and falls back to $850…10-year Treasury yields end the year pretty much where they started. CHECK! On the dollar — as it is up on year despite continued talk of it being replaced as the world’s reserve currency. CHECK! On the important bond call…the 10-year started 2010 at approx 3.75%…got as high as 4%….and currently around 3.27%…after a volatile year when many experts (eg. Mr. Wien) expected rates to rise on faster growth….CHECK! On interest rates…close enough. Gold? Can’t win them all!

8. The uncertain future of the Euro, ECB and EU becomes a big story and questions about the future of the 10-year-old common currency experiment increase…the lack of equality in the ECB one size fits all monetary policy relative to the faltering PIIGS is the catalyst. BIG CHECK!

9. The Club Med countries experience a continued rise of terrorism via economically disenfranchised anarchists and extremists…fuelled by high levels of youth unemployment…this regional violence blows back into old Europe. CHECK!…Have you seen the video of rioting folks from Euro land and GB lately?…The British Royals experienced it first hand last night on the way to the theatre! Who were those rioters with the masks on?

10. The fragility of the European banking system vis-a-vis loans to overextended emerging markets in the Baltics, Balkans and South America becomes a worrisome lingering headline. Early…a work in progress.

11. Israel, with tacit US approval, preemptively attacks Iran’s nuclear facilities early in the summer. Despite the greasing of the skids by their Saudi neighbours (they cleared their airspace for them) the Israelis chose to either punt or postpone this one. Nevertheless it remains a flash point.

12. Japan’s continued deflation battle escalates to the point that its ability to continue to fund its deficit becomes problematic in a world where the consumer of last resort (the US) becomes more insular. Yes, the US consumer continues to de-lever…yes, Japanese exports have been negatively impacted…yes, they are still in serious deflation mode…and yes, they continue to be the biggest victim of the global competitive currency devaluation scenario…a work in progress.

13. Protectionism continues to rise as “beggar thy neighbour” policies continue to be the weapon of last resort for faltering surplus economies. Check!

14. Emerging market equity returns don’t meet the high expectations of the majority of market strategists. WRONG…underestimated the impact of massive Fed intervention in emerging market inflows.

15. The US Treasury has a close call with a near failed Treasury auction. We have come close and have witnessed the deterioration of important foreign buying at recent auctions. CHECK!

16. President Obama…in the face of a rising tide of faltering free trade…pulls a Nixon and goes to China. Totally abandons and alienates his liberal base and initiates free trade negotiations with the PRC. Overall, he discovers that it’s easier (and better from a polling perspective) to be a POTUS governing from the centre. Well…counter to the liberal, pro- union, anti-free trade platform he ran on (recall he campaigned saying he wanted to renegotiate NAFTA!)…He did get a free trade deal in the region with South Korea…and has succeeded in alienating his liberal base…so…Half a Check!…I can always hope re China as that would go along way toward resolving our trade imbalances with the Middle Kingdom.

17. After being stuck in a trading range in a year very reminiscent to 1994…the S&P 500 gains traction following the November midterm elections, the results of which lead to divided, “gridlock is good” government…and gains 12% for the year. BIG CHECK!…Yes. Like in 1994, the market has seesawed back and forth all year…up 9% early on…down 10% through spring and summer and now?…Looks like we will close out the year on a total return basis of around 12%…Currently 11.9%…Right on target!

18. After an unprecedented Democrat Congress led spendathon, the rising US political tide of the Tea Party forces the GOP back to its fiscally conservative roots and reintroduces the “Contract with America…Part Deux”…Liberal politicians, after being thrown under the bus by a “re-centered” POTUS, learn the hard way that failed Keynesian-inspired spending programs come with a high price…ie. voter revolt and lost seats!…Big CHECK!..Boy…did we get this right!

19. Iceland was the canary in the coalmine for the emerging markets in 2008, Dubai was it in 2009. In 2010?…How about the four countries that have come to symbolise all that was right in the global markets in the double 0’s and are now loved and over owned by every global money manager. The new canary?..the BRICs…In 2010 the bloom will come off the BRIC story. Returns for the BRICs have not lived up to the high expectations that most global strategists had for them at the beginning of the year…in fact the S&P has outperformed them YTD (11.9 vs. 8.7% respectively)…we expect this trend will continue. CHECK!

20. Utilities and Telecom stocks are the two best performing sectors in the US equity market. Well…We got this one half right, as Telecom stocks have outperformed the broad market this year…half a Check!

So, there you have it – not a bad performance in a very shaky year. The overwhelming themes of a delevering US consumer coupled with a deflation exporting China led to lackluster growth coupled with low inflation and interest rates. We have a long way to go to get back to trend line growth and we hope to capture some of main investment themes that we will encounter on our way there in our “20 Investment Themes for 2011″…which we will share with you soon.

Peter Stock
Stock Investment Management
Manchester, Vermont

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