The First Post of 2010.

I have been a bit neglectful about posting over the past few weeks, caught up in whirlwind of my own stuff to do; wrapping up the year, starting a new year, and a nice vacation in between. I also started a totally different blog, something that has absolutely nothing to do with the stock market. As far as the markets, I also didn’t have much new to say, since what has been going over the past few weeks (a solid end to the year and a strong start) is pretty much in line with my expectations and thinking. This post has been drafted a few weeks ago, but I just never got around to finishing and publishing it. Thanks to a few free hours during the MLK day off I finally did it.

I'd like to use this first blog post of the year to encapsulate my thought process and anchor my 2010 investment strategy. The readers of this blog would likely remember some of these themes. I don't necessarily view them as predictions, just an outline of where I am at the beginning of the year. As facts change, my thought process and strategies will also change accordingly. While this post is just a brief summary, the next few entries will drill down more into the actual investment ideas.

1) We will end 2010 with high single digit or low double digit return. Most of this return will come in the first half of the year. This puts my year-end target on the SP at around 1215-1250’sh. January will remain a fairly strong month, but I think we will see a pullback (more than your typical profit taking selloff) sometime in late February or March. By then, most of the excitement and new money that comes with it will be invested, and a strong performance caused by these inflows will force many institutional investors to shift to a more market neutral stance from a net long bias at the start of the year.

2) The volatility will gobble up returns and many investors will end up losing money in 2010. Making money this year will be more difficult than in either 2008 or 2009. In both of these years one could've easily achieved decent returns by simply betting on any of the market tracking ETFs, or inverse ETFs as was the case in 2008. This year will require more discipline and understanding of what moves individual stocks and sectors. We will have to grind it out by fine tuning our timing models, focusing on the right themes and picking correct stocks.

3) Fundamentals will matter again. Over the past two years good ole' fundamental analysis was ineffective, given so many macro, technical, and sentiment overrides. Although it will still be very important to understand the impact of macro and TA on stocks, the relative importance of fundamentals will once again become invaluable. I always favored techno-fundamentals as the framework for finding ideas and entry/exit points , and this year will certainly be no different. Other analytical disciplines will remain important, but as the world comes back to some degree of normalcy, even if its the 'new' normalcy, fundamentals will matter again.

4) Inflation will rear its ugly head no matter when the FED decides to raise the rates again. I've been saying for some time that one should be prepared to protect portfolios from an inflationary impact. The prices are going up, quietly. Starbucks just raised the price of its coffee. My neighborhood sandwich place also raised the prices, gasoline is back near $3. Many other stealth price increases are already happening across the country, as the cost of raw materials is forcing companies to pass it along to the end consumers. Small businesses don't have much leverage to raise prices, but will have no choice, if they want to survive. Many people are focused on wage inflation metrics, which are still showing no signs of any inflationary bias. As the economy recovers, very very gradually, we will start seeing these metrics change. The market will eventually force the Fed’s hand. Watch the bond market which will move in advance of the Fed and look for small changes in the Fed speak to telegraph their inevitable intent. My guess is that you will start seeing them in March/April.

5) Emerging Markets will outperform, but stick with BI nor RC. I am focusing more in Brazil and India in my emerging market trade, and avoiding Russia, with small exposure in China. Brazil remains my favorite way to play several themes, including energy, infrastructure, strong economic growth and two major events – 2014 World Cup and 2016 Olympic games will create a strong investment opportunity for the next few years. Russia is mostly about oil and materials, an exposure that I can get from Brazil, Canada or Australia without taking the political risk. China is still a big favorite of mine, but I have seen some many unjustified moves , that it scares me that it is vulnerable to a major hiccup. I might as well wait, although will still buy a few select Chinese stocks here and there.

6) Geopolitics will trump economic concerns this year. It’s hard to believe it, but with Mideast turmoil finally spilling into the front lines, I hate to say it, but I think it is likely that our Nobel Prize winner President will get his will tested. Since we can’t change it, we might as well try to profit from this. Its tough to predict when political issues will flame up, only that it will likely happen sometime this year, whether its Iran, or Afghanistan, or Pakistan.

7) After correction in February/March, the market will likely make the necessary adjustment to account for the eventuality of higher rates, stronger US dollar, and potentially some sooner than expected inflation, the equities should rebound strongly and and continue attract capital flows from bonds, which by then will be publicly neutered as an investment choice. This will be a healthy and necessary pause and adjustment to the investor sentiment, but I don't think this will be a return of the Ursa Major.

8) In 2010 we will see the decoupling of the US dollar and equities, something I have pointed to in late 09, as each asset class will start trading on its own merits again. We are already beginning to see it. The US dollar will most likely rebound, but I am not a dollar bull and see only a slightly higher trading range for the buck. The fiscal irresponsibility of this administration has basically killed any chance of a sustained appreciation of our currency for a long time. Unless, of course I am right about the geopolitical concerns.

9) The regulations and initiatives undertaken over the past few years will finally make alternative energy plays more of an investment reality, but don’t expect to win with broad based ETF bets. Within the space there will be clear haves and have-nots.

10) Healthcare will end the year much stronger than many expect, as the overhang from the Healthcare reform will soon disappear. The changes will prove to be less onerous than investors feared, and as always the clarity beats uncertainty so investors can at least go back to analyzing these investments again albeit with a new set of rules. The discounts priced in many of the quality HC companies reflects this uncertainty and the multiples should soon go back to more historical levels.


As I said in the beginning of this post, over the next few weeks I will try to explore these ideas and drill down into specific investment and trading ideas. Stay tuned and happy trading in 2010!