Monday, December 28, 2009

"Look Ahead To 2010": Steve McDonald Isn’t Swallowing the Phony Recovery

Bob Irish Reporting: Delray Beach, FL. Monday December 28, 2009

"We are all interested in the future because that's where we're going to spend the rest of our lives."

This line was delivered by Jeron King Criswell in the 1959 movie Plan 9 From Outer Space. Film critic Michael Medved dubbed director Ed Wood's Plan 9 from Outer Space the "worst movie ever made." Many critics have since agreed.

But there is no denying the brilliance of Criswell's observation. During the '50s and '60s, Criswell was known as the world's most famous predictor. His most famous prediction was made on The Jack Paar Show in 1962. He forecast that President Kennedy would not run for a second term in 1964 because something would happen to him in November 1963. He also predicted the destruction of Denver, the assassination of Castro, and the end of the world.

So it goes with the business of forecasting. One good call can make your reputation.

Joe Granville famously called the top of the market on January 7, 1981. A selling stampede was triggered by the warning. Nearly 93 million shares were traded, making January 7 the busiest day in the Big Board's 188-year history.

Not content to just forecast the market, Granville branched out to earthquake predictions. His overall track record according to Hulbert's Financial Digest is very poor. Over the last 25 years his newsletter produced losses of over 20% per year on an annualized basis.

Granville's fall from grace reminds me of the story of a young investor who went to see the fortune teller about his future.

"Until you are 45 years old, you will be poor and unhappy," she said.

"What will happen then?" The young man asked hopefully.

"By then," she said, "you'll be used to it."

So maybe Granville and his followers just got "used to it."

They say that the secret to keeping your reputation as a forecaster is to give a number and give a date but never give both at the same time.

Over the next several days we're not going to give our IDE analysts that luxury. We're putting their feet to the fire and asking them to forecast 2010. Why bother with these forecasts?

Powerful Long Term Trends Are What Make You Money.

If you can identify those trends, you are halfway there. The other half is taking action.

Imagine in 1996 that you forecast the rising influence of the Internet in American life. How much money could you have made acting on that trend?

Imagine in 2000 you forecast that bonds represented better value than equities. The next three years were glorious.

Imagine in 2005 you saw that the demand for energy was headed skyward. How much fun would that ride have been?

Imagine in 2001 you forecasted the rising price of gold. (I'm sure many of you did, and have profited handsomely.)

I think you get the picture. These powerful long-term trends are what we've asked our analysts to consider as they offer you their predictions over the next few days. Pay attention. The health of your portfolio depends on it.

We'll start with Steve McDonald's insights...

Predict What the Markets Will Do in 2010? Really?

By Steve McDonald, Editor of The Bond Trader

My predictions for 2009 were pretty much right on the money. 10,000 to 11,000 on the DOW… Ford won the auto race… large cap, dividend-paying stocks recovered and did very well… and Obama was not up to the task.


In 2010, here's what I see happening:

5% to 6% inflation.

We have already seen the tip of this iceberg. While there is a lot of slack in the economy, when the banks start easing up on lending – which should happen in '10 – much of the money pumped into the system will actually hit.

Right now, half the money in the system is socked away in bank vaults. When it comes out, we will have the beginning of a long-term problem with inflation.

Unemployment, real unemployment, will be unchanged until late in the year, maybe 2011.

Real unemployment – unemployment the way it used to be measured – is around 17% to 22%, not the 10% Washington is trying to sell. That's a lot of unemployed people, and it's making it even harder for this recovery to shift into high gear. Many people are not spending by choice. But many have no choice, because they don't have money to spend.

The next stimulus package may actually focus on job creation and not on bailing out the states. If it does, we have a shot at getting the unemployment number cut in half by end of 2010.

The DOW will be as low as 8,700, and as high as 12,500.

The psychological 10,000 ceiling on the DOW and 1,200 on the S&P will not be broken with the wishy-washy numbers we saw in 2009. It will take a big shift in sentiment, spending, and year-over-year earnings.

It will be much easier to break through on the downside. Volume has been very light, reflecting the unease most investors feel with the current run-up. Most are renting stocks, not owning them. Dumping is so very easy to do when you don't own.

Expect a challenging ride.

Interest rates will have to be raised at some point.
Look for ¼ point adjustments.

We can't stay at 0%, but don't expect any big jumps in controlled interest rates. The Fed did the last series of rate hikes perfectly – ¼ point at a time. Small incremental changes have little or no effect on the market and are absorbed easily by the economy.

The 10-year and 30-year bond rates are another story. Look for 4.5%+ on the 10-year and a comparable percentage jump on the 30-year. It will make for a steep yield curve, but we can survive that more easily than a ½ or ¾ point jump in the short rates.

Housing prices will flatten nationwide.

Housing prices will level off in all areas except Nevada and Florida. And there will be small increases in the usual hot markets: LA, DC, Boston, San Fran, NYC, and resort areas.

Food and fertilizer stocks will be big.

The so-so to negative feel in the market will drive more people to the all-weather stocks that lagged in 2009: food and fertilizer. Look, too, for a bigger move to dividend stocks as more and more people realize we're in for a longer haul than the 2009 market led them to believe.

Some Quickie Predictions

* Commodities (copper, lithium) have only begun to run.

* The Democrats will lose control of one, maybe two houses.

* Look for a "dump incumbents" movement.

* Oil will kiss $100.

* Increased terrorist activity here at home.

* Serious debt problems for the EU. (Short the euro; own the dollar.)

* Be ready to jump on a China correction – a temporary buying opportunity.

* Gold will dip to about $1,000 on the way to $1,750.

* Orioles pitching will stink again.

* Ravens will discover their defense was actually on vacation for the entire season.

Happy Holidays,


Bob Irish - Investment Director
Andy Gordon - Editor
Jon Herring - Editorial Contributor
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor

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