Sunday, January 03, 2010

And now for the 2010 financial markets

There is little consensus on what the financial markets will bring in 2010. The one widely held view is that interest rates on Treasuries beyond the 2 year will rise, prices will decline. It is generally a longer term view that commodities must also escalate in price but there are few that are so precise as to guarantee that for this year. While there is widespread skepticism about the resiliency of the dollar there is a countervailing view that the U.S. currency will strengthen at least in the near term as the economy gets off its back. The view on equities is all over the map. There are those who look for another collapse as a result of interest rate spikes, a continued liquidity squeeze, and the expectation that financial market troubles are far from being over. A majority of equity investors and prognosticators are cautious to the point of having nothing of consequence to say, hedging their words with the trauma of the last two years hanging over them. Those that are viewed as the most bullish look for modest gains after the robust rebound of the last nine months, gains for 2010 in the 10 to 15% area. If there are market mavens that are bold enough to be as optimistic as the bears are pessimistic, they are keeping that thought to themselves.

A few might say that this is the perfect scenario for continued equity gains in 2010 that go well beyond any broad expectations. How could that happen? First,there will be no near term relief for savers who have massive amounts of money in accounts that pay almost no interest, still on the sidelines. Some of that dead money can be pulled back in with any continued optimism. Second, the U.S. over the last 20 years has become much much more of an export economy. That's not just limited to the obvious multinationals. Many mid-caps and even small-caps have taken the plunge into the global market as compared to their postion in the last major real estate driven recession of 1990-91. With the dollar's relative weakness and the ingenuity of many American businesses, 2010 could see a lift in corporate America that is not dependent on the U.S. consumer having a wallet of credit cards to max out. Third, forward multiples are conservative and do not reflect the sustainable competitive advantage that many U.S. companies have over a multiple year time frame, meaning future cash flows are being discounted back into a stock price for abbreviated time frames. Fourth, for the many successful surviving companies(sorry auto companies, Citi, and AIG among others) that are still trading well below their levels before the debacle, with any economic wind at their back managements will begin to do anything legal to work back to those levels. Fifth, in technology and telecommunications the U.S., despite ever growing global competition, remains at the forefront.

That may be far too optimistic but it is a scenario that is worth entertaining simply because so few do. Why so few? There remains a disturbing lack of broad credit availability that Congress, the Administration, and the general public view as unacceptable, but they act as if they are blind to the fact that barely functioning securitization markets have handcuffed financial intermediaries. This will not be solved quickly and will need supportive government rhetoric if not action if it is to be solved at all. Unemployment is high and that too is not a quick turnaround. The expectation for higher interest rates is traditionally a red flag. Nascent global sovereign debt issues are a concern as the CDS vultures can make small problems go viral. Additionally global political issues are far from looking placid. Plainly speaking, there's plenty to worry about.

There is no conclusion to this commentary, no smart forecast or conclusive insight. Few market participants sleep as soundly as they did prior to August 2007 and the beginning of the great unwinding. But hey, the Jets are in the playoffs so anything can happen.


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