Last night Doug Kass appeared on CNBC's Fast Money and caught the attention of the few who were watching the show with his gloomy prediction that gold would drop by 25% in the next year. As we noted last night, Kass' "thesis" was nothing more than a recap of the bearish half of the "All that glitters" letter released by Oaktree's Chairman Howard Marks, and not even a mention of the bullish section of the letter. That's fine. In fact, we welcomed this development as it at least partially offset the bullish sentiment on gold espoused by Kass' partner at The Street Jim Cramer, whose glowing recommendation of gold has had us very concerned about the price action in the precious metal into year end: after all there is no surer kiss of death that Cramer liking something. That said, as for Mr. Kass' predictive abilities, we would like to present his prior set of forecasts, specifically his prediction for 2010 issued a year ago almost to the day. With a predictive "hit rate" of about 25%, it is rather safe to assume that gold's path to $2,000 and higher is probably quite safe...
Doug Kass' entertaining set of prediction for 2010.
- There is a glaring
upside to first-quarter 2010 corporate profits (up 100% year
over year) and first-quarter 2010 GDP (up 4.5%).
It grows clear that, owing to continued draconian cost cuts,
coupled with a series of positive economic releases and a long
list of company profit guidance increases in mid to late
January and early February, there is a very large upside to
first-quarter GDP (up 4.5%) and, even more important, to S&P
profit growth (which doubles!). The upside on both counts is in sharp
contrast to more muted growth expectations. While corporate
managers, economists and strategists raise earnings per share,
full-year growth and S&P target estimates, surprisingly,
the U.S. equity market fails to respond positively to the much
better growth dynamic, and the S&P 500 remains tightly
range-bound (between 1,050 and 1,150) into spring 2010.
- Housing and jobs fail to revive.
An outsized first-quarter 2010 GDP (up 4.5.%) print is
achieved despite a still moribund housing market and without
any meaningful improvement in the labor market (excluding the
increase in census workers) as corporations continue to cut costs
and show little commitment to adding permanent employees.
- The U.S. dollar explodes higher.
After dropping by over 40% from 2001 to 2008, the U.S. dollar
continued to spiral lower in the last nine months of 2009. Our
currency's recent strength will persist, however, surprising
most market participants by continuing to rally into first
quarter 2010. In fact, the U.S. dollar will be the strongest
major world currency during the first three or four months of
the new year.
- The price of gold topples.
Gold's price plummets to $900 an ounce by the beginning of
second quarter 2010. Unhedged, publicly held gold companies
report large losses, and the gold sector lies at the bottom of
all major sector performers. Hedge fund manager John Paulson
abandons his plan to bring a new dedicated gold hedge fund to market.
- Central banks tighten earlier than expected.
China, facing reported inflation approaching 5%, tightens
monetary and fiscal policy in March, a month ahead of a Fed tightening of 50 basis points, which, with the benefit of hindsight, is a policy mistake.
- A Middle East peace is upended due to an attack by Israel on Iran.
Israel attacks Iran's nuclear facilities before
midyear. An already comatose U.S. consumer falls back on its
heels, retail spending plummets, and the personal savings rate
approaches 10%. The first-quarter spike in domestic growth is
short-lived as GDP abruptly stalls.
- Stocks drop by 10% in the first half of next year.
In the face of renewed geopolitical tensions and reduced
worldwide growth expectations, stocks drop as the threat of an
economic double-dip grows. Surprisingly, though, the drop in
the major indices is contained, and the U.S. stock
market retreats by less than 10% from year-end 2009 levels.
- Goldman Sachs goes private. Goldman Sachs (GS)
stock drops back to $125 to $130 a share, within $15 of the
warrant exercise price that Warren Buffett received in Berkshire Hathaway's (BRK.A) late 2008 investment
in Goldman Sachs. Sick of the unrelenting compensation outcry,
government jawboning and associated populist pressures, Warren
Buffett teams up with Goldman Sachs to take the investment
firm private. The deal is completed by year-end.
- Second-half 2010 GDP growth turns flat.
The Goldman Sachs transaction stabilizes the markets, which
are stunned by an extended Mideast conflict that continues throughout
the summer and into the early fall. While a diplomatic
initiative led by the U.S. serves to calm Mideast tensions,
flat second-half U.S. GDP growth and a still high 9.5% to 10.0%
unemployment rate caps the U.S. stock market's upside and
leads to a very dull second half, during which share prices
have virtually flatlined (with surprisingly limited rallies and
corrections throughout the entire six-month period). For the
full year, the S&P 500 exhibits a 10% decline vs. the general
consensus of leading strategists for about a 10% rise in the major
- Rate-sensitive stocks outperform; metals underperform.
Utilities are the best performing sector in the U.S.
stock market in 2010; gold stocks are the worst performing group, with
consumer discretionary coming in as a close second.
- Treasury yields fall.
The yield of the 10-year U.S. note drops from 4% at the end of
the first quarter to under 3% by the summer and ends the year
at approximately the same level (3%). Despite the current
consensus that higher inflation and interest rates will weigh
on the fixed-income markets, bonds surprisingly outperform
stocks in 2010. A plethora of specialized domestic and non-U.S.
fixed-income exchange-traded funds are introduced throughout the year,
setting the stage for a vast speculative top in bond prices,
but that is a late 2011 issue.
- Warren Buffett steps down.
Warren Buffett announces that he is handing over the
investment reins to a Berkshire outsider and that he plans to
also announce his in-house successor as chief operating officer
by Berkshire Hathaway annual meeting in 2011.
- Insider trading charges expand. The SEC
alleges, in a broad-ranging sting, the existence of extensive
exchange of information that goes well beyond Galleon's Silicon
Valley executive connections. Several well-known long-only
mutual funds are implicated in the sting, which reveals that
they have consistently received privileged information from
some of the largest public companies over the past decade.
- The SEC launches an assault on mutual fund expenses. The SEC restricts 12b-1 mutual fund fees. In response to the proposal, asset management stocks crater.
- The SEC restricts short-selling. The SEC announces major short-selling bans after stocks sag in the second quarter.
- More hedge fund tumult emerges.
Two of the most successful hedge fund managers extant announce
their retirement and fund closures. One exits based on
performance problems, the other based on legal problems.
- Pandit is out and Cohen is in at Citigroup. Citigroup's Vikram Pandit is replaced by former Shearson Lehman Brothers Chairman Peter Cohen. Cohen replaces a number of senior Citigroup executives with Ramius Partners colleagues. Sandy Weill rejoins Citigroup as a senior consultant.
- A weakened Republican party is in disarray.
Sarah Palin announces that she has separated from her husband,
leaving the Republican party firmly in the hands of former
Massachusetts Governor Mitt Romney. An improving economy in
early 2010 elevates President Obama's popularity back to
pre-inauguration levels, and, despite the market's
second-quarter decline, the country comes together after the Middle
East conflict, producing a tidal wave of populism that moves ever
more dramatically in legislation and spirit. With the
Democratic tsunami (part deux) revived, the party wins November
midterm elections by a landslide.
- Tiger Woods makes a comeback.
Tiger Woods and his wife reconcile in early 2010, and he
returns earlier than expected to the PGA Tour. After announcing
that his wife is pregnant with their third child, both the PGA
Tour's and Tiger Woods' popularity rise to record levels, and
the golfer signs a series of new commercial contracts that
insure him a record $150 million of endorsement income in 2011.
- The New York Yankees are sold to a Jack Welch-led investor group. The Steinbrenner family decides, for estate purposes, to sell the New York Yankees to a group headed by former General Electric (GE) Chairman Jack Welch.