Tuesday, January 05, 2010
Following on from yesterday's post marking his 2009 views to market, Macro Man is pleased to unveil the first half of his non-predictions for 2010. Regular readers will by now be familiar with the annual ritual, wherein he differs from the crowd by offering a set of "non-predicitions", identifying ten things that he feels won't happen. And so, with no further ado, on with the show:
1) Oil (defined as second WTI future) will NOT rise as much as it did in 2009. CL2 rallied $31.42 last year, the second-biggest dollar rise ever, and the second-largest percentage gain of at least the past two decades. This reflected a couple of factors that are unlikely to be repeated: an artificially low starting price last year, courtesy of the late-2008 liquidity-driven puke fest, and a massive shift in the delta of economic expectations over the course of the year (from staring into the abyss in January to celebrating the BRICs and contemplating positive payrolls by December.) Put another way, oil prices closed 2009 $31.42 higher than in 2008...despite the fact that Cushing inventories were actually slightly higher. A repeat performance in 2010 therefore seems highly unlikely.
2) G10 FX carry will NOT repeat 2009's stellar performance. The simple "up three, down three" FX carry basket (wherein you go long the three highest yielders in the G10 and go short the three lowest yielders) rallied nearly 28% last year, exceeding the returns on the SPX and retracing virtually all of 2008's losses. This was partially a function of similar drivers to those cited above for the oil rally (particularly the delta of economic expectation), but also of dollar weakness, courtesy of QE and the Fed's promise to not rock the boat in '09. Now, we're left with a situation where the delta of expectation and of monetary policy are more uncertain, and some of the high-yielders look pretty expensive (we're lookin' at you, NZD.) While a passive carry basket may well generate a positive P/L in 2010, returns pushing 30% and a 1.65 ain't gonna happen.
3) The Democrats will NOT lose control of either house of Congress. It's become quite trendy to postulate on the mid-term elections and a potential 1994-style collapse of the Democratic majority. Macro Man sees three problems with that thesis. First, the Republican revolution of 1994 occurred after a lengthy period of Democratic Congressional rule. By 1994, it had been a decade since the GOP controlled the Senate and 48 years since they'd enjoyed a majority in the House. This time around, it's been a scant 4 years since the GOP ceded control. Second, it's the economy, stupid. The first half of the year should see a return to job growth and further impact from last year's stimulus package. At least superficially, therefore, the economic news should get a lot better. Finally, it's not like the Republicans are offering a lot, either. The fact that Sarah Palin is still knocking about is evidence of the dearth of quality in the GOP "brain" trust, and it doesn't seem unreasonable to expect the electorate to recall why they voted the Republicans out of Congress in the first place.
4) True S&P 500 earnings will NOT reach the published consensus forecast level. According to Macro Man's i/B/E/S spreadsheet, the consensus earnings forecast for 2010 is $77 a share. While 2009 isn't in the bag yet (after all, we've got earnings season around the corner), a total of $55-$60 is likely for the headline earnings figure. The problem, of course, is that the headline figure is a work of fantasy worthy of Tolkien. The chart below shows trailing 12m earnings data on a headline basis, as well as the true earnings figures once all the "one off" turds are added back in. While Macro Man is happy to believe that the amount of turds will be lower in 2010 that it has been over the past 18 months, he wasn't born yesterday- comapanies will still
massage their figures lie to pimp and pump their share prices. Sorry, Macro Man isn't buying it. While he's currently small long equities, he believes that at some point, the small print will matter once again.
5) China will NOT meaningfully adjust its exchange rate mechanism in H1. By this, Macro Man means that there will be no step reval, and that the peg at or around 6.8250 will remain intact. He was tempted to indulge in a spot of reverse psychology and forecast no move at all this year (there's a decent chance of that), but he's settled for just non-predicting the first half. What will spur a Chinese exchange rate move? Macro Man is looking at domestic inflation conditions, but also at two external factors. The argument could be made that the authorities will do nothing on the RMB until exports exceed their 2008 peak (they're currently more than $20 billion below, on a monthly basis). Given the exorbitant Chinese whingeing about the US policy mix, Macro Man can also construct a scenario wherein PBOC doesn't let the RMB move until the US starts tightening policy.
Of course, common sense would dicatate that the appropriate response to "why should we tighten until you do?" is "grow a pair! Your nominal GDP growth is 12% higher than ours!" Sadly, however, common sense has little role to play in discussing the likely policy response of the world's great mercantilist power.
So there you have it: the first half of this year's non-predicitions. Tune in tomorrow for the second five.