2011 Outlook

Financial analysts and investment bankers love to predict the year coming. They have the illustrious track record of predicting the future correctly less than 20% of the time. This is a very low rate and therefore something that should not be taken too seriously, but the average person on the street listens with intent and then bases their decisions on these guesses.


So why predict? Well you have to have something to base your company growth (or lack there of) on. Furthermore, in the world of investments, your outlook is critical in planning where to allocate investment dollars for the coming year. Now as a trader I tend to hold an outlook only for as long as it takes to find some anecdotal evidence that my views are wrong and then I change gear. But with that said I will give it my best shot and we will see where we end up at the end of 2011.



My first prediction is that Santa will show up again and will place presents under trees all around the world. How many is the question that needs answering? It appears that the season will be relatively strong but for select products. For example, Microsoft's new Kinect video game product is flying off the shelves whereas Blackberry is struggling so be careful which retail stocks you buy.



Prediction two is that the Federal Reserve will blow through its next $600 billion with limited impact other than on stocks and commodities. It appears that even bad news is being rewarded in the stock market. To use one of Yogi Berra's quotes, "It's Deja vu all over again." Apparently any news is good news for the stock market as bad news means more easing and good news is always good! Well this is the same type of hysteria that occurred prior to the 2000 crash and the 2007 crash. Sure the Federal Reserve is printing money and interest rates are still being held artificially low, but the desired effect of lowering unemployment and supporting housing has not happened so in a last ditch effort the Federal Reserve is turning its attention to the markets.



They will create another bubble and they are already doing so. Take Salesforce.com as an example. It is trading at a price to earnings ratio of over 250 and its CEO is selling $1.5 million of stock every day, but the price continues to spiral higher. Does anyone remember CMGI or WorldcCom or any of the other myriad of higher fliers from 1999? I think you get the picture. This will not last and the Federal Reserve is setting us up for the biggest crash the world has ever witnessed.



Prediction three is that the market will continue higher for the first quarter of 2011. This is completely due to the continued printing from the Federal Reserve. This could be offset by the continuous plunge in the price of the long bond, but I believe that the Federal Reserve will soon turn its attention to propping up the price of these bonds. They have to or face the problem of a completely lopsided market where short term rates are at or near zero while 30-year rates move beyond 5%.



Prediction four is that at some point the USD will crater. A loss of faith in the US economy and continued money printing has to result in a weak dollar. This will drive inflation to an uncomfortable level at which point the Federal Reserve will have lost the battle.



Prediction five is that by year-end the market will sell off violently and we will experience a serious correct and maybe a complete collapse as all faith in US policy makers is lost.



What could change this outlook? A more austere government, a Federal Reserve that stops printing money and supports the dollar, a rapidly improving unemployment rate and a bottoming of housing prices. In fact I believe that we will need all of these things to happen to save us. What are the chances of this happening? In my view slim to none, but that is the peril of predicting, no sooner have you thrown your hat into the ring than everything changes. One thing I will say is that while all of this may not happen in 2011 it will occur at some point and delaying the inevitable will only make the drop worse.



Regardless of what happens be prepared to move with the changes, protect your downside and do not get too greedy. As the old axiom of the stock market says, "the bulls make money, the bears make money while the pigs get slaughtered." Happy holidays, see you all next year.