Mid-2010 Investment Progress Report

Tim Iacono reviews his predictions for 2010, which touch on some of the major issues that investors are watching closely. The dollar has unexpectedly surged while gold prices have failed to rally, net job growth stands at a modest 800,000, and inflation remains low. See the following post from The Mess That Greenspan Made.

Since my “Predictions for 2010″ were exactly 13 days late in January, it seems only fitting that the mid-year review should occur with the same lag, and that’s the subject of this quick look back to what was going through my head six months ago.

As is clear to see below, there is great danger in making predictions that are too specific – they’re much more likely to be wrong. Anyway, off we go…

1. Maybe the Last Really Bad Year for Housing

It’s hard to understand how anyone can really think that the nation’s housing market managed to “stabilize” in 2009 when prices continued to decline on a year-over-year basis even after government support to this sector on a scale never before seen by Mankind.

Homebuyer tax credits, central bank purchases of mortgage-backed-securities, a sharp increase in FHA lending, and a host of other factors have merely “kicked the can down the road” and that road will be “uphill” in 2010. Mounting foreclosures, loan resets, and an increasing number of homeowners who simply “walk away” from underwater mortgages will cause a relapse in housing this year and month-to-month gains will turn back to losses.

As measured by the 20-city S&P Case-Shiller Home Price Index for October 2010 (to be released in late-December), home values will decline by another 8 percent. The U.S. government will extend the homebuyer tax credit again in the summer and late-2010 will be a good time to start looking to buy property in most parts of the country.

The homebuyer tax credits have come and gone and home sales appear to be plunging off a cliff with price declines looking like they’ll accelerate over the summer.

The predicted year-end price decline of 8 percent looks doable considering that the NSA S&P Case-Shiller 20-city Index is now down 2 percent from last October. Don’t bet on another extension to the homebuyer tax credit (but anything’s possible) and my wife and I seem to have jumped the gun on my own advice about when best to buy a home.

2. The Dollar Will Continue its Descent

The dollar fell modestly last year after a surprisingly strong 2008 and it will continue that slow, steady decline in 2010 after a surge of safe-haven buying in the spring after equity markets have another little hiccup, temporarily boosting the greenback’s appeal.

The trade weighted dollar ended 2009 at about 78 but will end 2010 at 72 after briefly dipping into the 60s and scaring the bejeezus out of the entire world as the long-anticipated “global currency crisis” once again looks like it is at the world’s doorstep.

The dollar weakness will be driven primarily by concerns about funding the U.S. budget deficit as traditional buyers become more scarce and the entire world begins to realize that the economic recovery in the U.S. will be very long and very slow.

We’ve certainly had a surge of safe-haven buying – from 78 to 88 on the U.S. Dollar Index – and now it looks like the greenback is headed back down. How far it goes is anyone’s guess but, so far, it doesn’t look as though anyone’s really tiring of lending us money. The bad news is that this sort of thing can change very quickly.

3. Stocks Will End the Year Lower

Broad equity markets in the U.S. will advance early in the year and then, peering into the future of the domestic economy and not liking what they see, have a relapse right along with the housing market.

Retail investors will continue to pull money out of stocks, in the process muttering Will Rogers’ famous words about the relative concern for the words “of” and “on” when they are placed between the words “return” and “principle”. Whatever or whoever drove stocks higher in 2009 will have much less success doing so in 2010, however, it won’t be a complete washout as the Dow will lose 10 percent and the Nasdaq 15 percent.

Stocks in China will get about half-way back to their 2007 highs before reversing and ending the year only modestly higher. Gold and silver mining stocks will fall in sympathy with other equity markets but will rebound faster and end higher than most other sectors.

The surge in prices and the relapse have both come for stocks – now it’s a question of whether the recent rebound has any staying power as we get closer to the stock market’s favorite months of September and October. The Dow is down about one percent for the year as I write this – down 10 percent at year-end seems like as good a guess as any as Mom and Pop investors continue to head for the hills.

4. Short-Term Interest Rates Will Stay at Zero … Again

Like last year, short-term interest rates in the U.S. will end where they began – at zero – but the central bank will tack another $1 trillion onto its balance sheet.

Chairman Ben Bernanke will be re-confirmed for another four-year term as Fed chief but will receive the highest number of ‘No’ votes in history and many elected officials voting ‘Yes’ will regret their decision by summer as the economy sours and the mid-term election nears.

The Fed will stop buying mortgage backed securities in March and the housing market swoon will intensify. Bernanke and crew will then resume their purchases in May because no one else was willing to buy at anywhere near what the central bank was paying.

Predicting the Fed funds rates a year out is as easy as shooting fish in a barrel. I got a good chuckle during all that talk in March in April about whether the Fed was going to start raising rates before they began selling the $1+ trillion in mortgage related debt or vice-versa. As I recall, Bernanke did receive a record number of ‘No’ votes, but we can thank the European crisis for making mortgage-backed securities from Fannie and Freddie look safe by comparison.

5. Energy Prices Will Go Up and Then Down

After rising to $95 a barrel during the spring, the price of crude oil will dip to as low as $45 and then end the year at $65 a barrel. Peak oil will have to wait until global growth begins to post much bigger numbers and that won’t happen this year.

The price at the pump will rise from their current $2.70 a gallon to more than $3 a gallon early in the year and then retreat back to the low $2 range. Gasoline was one of best commodity investments last year, this year it will be one of the worst.

None of the green energy job initiatives will amount to anything and that’s just sad.

We almost hit $90 a barrel back in late-April before the wheels began falling off over in Europe and then prices briefly dipped into the $60 range before moving back up into the $70 to $80 trading range, from which there now appears to be no escape. Gasoline prices only made it to $2.90 a gallon in May and have since dropped about 20 cents. My guess is that we’re going to get a good whiff of de-flation this summer and, absent more problems in the Gulf of Mexico, we’ll see much lower prices at the pump, hopefully in time for our fall vacation.

As for green energy jobs… Hey, we’re going to make car batteries in the Rust Belt!

6. Gold and Silver Will Soar … Again

The end of 2010 will mark ten straight years that gold bullion has ended higher than it began and most Americans still won’t own it, continuing to put their trust in the mainstream financial media that, for the most part, still doesn’t understand it or recommend it.

The yellow metal will make new all-time highs at just over $1,400 an ounce in March and then begin its every-other-year 18 month consolidation, ending 2010 at $1,300 an ounce. Silver will rise to $24 an ounce in the spring and end the year at $21 an ounce.

An increasing number of retail investors will eschew the advice of Money Magazine and buy gold and silver anyway, but a good number of them will sell it over the summer when metal prices correct. They’ll be back in 2011.

People will start talking about junior mining stocks at cocktail parties – just like internet stocks in 1997. (As noted the last couple years, I’m going to keep saying this until it’s true).

I think the 10th straight year of gains is pretty likely but, obviously, the spring peak didn’t pan out as expected, the gold price reaching only $1,265 an ounce instead of the desired $1,400. Since the spring rally proved so disappointing, the yellow metal may feel that it needs to make up for that performance this fall in what would be a break from the every-other-year pattern of the last decade. Yes, Money Magazine is still clueless about gold…

7. The U.S. Economy will Barely Avoid a Double-Dip

Economic growth will stall by the second quarter as Congress finds it politically difficult to make additional stimulus funds available during an election year. Following an impressive growth rate during the fourth quarter of 2009, the first two quarters of the year will see rates of between zero and one percent with the economy posting a small negative number in the third quarter.

The overriding theme in the economy during 2010 will be the continuing revival of a more frugal lifestyle following the credit and consumption binge of recent decades and the savings rate will continue to rise, from about 4 percent in 2009 to 7 percent by year-end, still well below the pre-Reagan administration average of about 10 percent.

Slowing growth for the U.S. economy is certainly the hot topic amongst economists these days with ‘how much’ and ‘how long’ being the most important questions. The growth rate went from 5.6 percent in Q4-2009 to 2.7 percent in Q1-2010 (well above my year-end guess) with the data for Q2 set to be released in a couple weeks. Congress not providing additional stimulus money seems a near certainty between now and early-November as people don’t seem to like the results that have been produced so far. As for a more frugal lifestyle and higher savings, we’ll see…

8. Inflation will Surprise to the Upside

Consumer prices will rise much more than most economists expect early in the year driven higher by continuing unfavorable year-over-year energy price comparisons and the government’s “official” annual inflation rate will reach a peak at over three percent as the grass starts turning green.

Then commodity prices will plunge and we’ll start hearing about de-flation again.

The official measure of annual inflation rose as high as 2.7 percent early in the year and now it’s looking like it might be headed to minus 2.7 percent as the big year-over-year energy price increases have fully worked their way through the data. At current levels, energy prices will be a non-factor in the government’s measure of inflation, but if energy prices tumble from here, then we’ll get de-flation in the in-flation data in a big enough dose that the Federal Reserve will be scared silly and probably do something really stupid.

9. Only a Few Jobs will be Created

Next month’s benchmark revisions to the Labor Department nonfarm payrolls data will show an additional loss of 1.2 million jobs during the early-2008 to early-2009 period (greater than the currently estimated 840,000 loss) and there will be only modest net job growth in 2010 of about 500,000 jobs, all of it in health care.

The unemployment rate will reach a peak at 11 percent early in the year and remain above the 10 percent mark during all of 2010, save for a two-month dip in late-summer as millions of jobless become discouraged and stop looking for work

Wow. I thought I missed this one by a mile but in early February I wrote for the investment newsletter that, “Benchmark revisions to prior data and updated seasonal adjustment factors resulted in an additional decline of 1.2 million in payrolls, bringing the total job loss for the recession to 8.4 million”. Nice work!

As for 2010, net job growth now stands at about 880,000, but there are a few hundred thousand Census worker yet to be see their last paycheck, so, my guess looks like it will probably be off by a fair amount by year-end.

10. The 2010 Elections will Be Shocking

As the economy turns from weak to bad again over the summer, there will be some surprising developments leading up to the fall elections as young and old alike express their displeasure with the status quo, namely, the cozy relationship between elected officials and the leaders of the FIRE (Finance, Insurance, and Real Estate) economy.

A record number of independents will run for and be elected to office and Washington will start to get the message, but Wall Street won’t.

The fall elections are certainly shaping up to be something fun to watch, the White House noting over the weekend that the Democrats could lose control of the House of Representative given the “throw the bums out” sentiment expressed by the public. The Tea-Party seems to have merged with the Republican Party – for better or worse – so, any hope of a third party or independent movement seems to have already been dashed.

Not too bad so far…

In another five-and-a-half months I’ll have another look back at these when there’s snow on the ground here in Montana and see how these prediction and the Bozeman weather look then.
This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.