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Kass: 20 Surprises for 2010

While I failed to surpass our most successful year of surprises in 2008, during which 60% of the year's "possible improbables" were on target, I still had a very successful surprise list in 2009, with approximately half of our predicted surprises actually coming to pass. In fact, over the past three years (since and including 2007), at least 50% of our surprises proved accurate, which is up from one-third in 2006 and from 20% in 2005. Nearly one-half of 2004's prognostications proved prescient, and about one-third came to pass in the first year of our surprises for 2003.

Investing based on some of my outlier events over the past 12 months would have yielded good absolute and relative returns, would have protected investors somewhat from the market's downdraft into early March, and would have helped investors navigate the market's historic recovery over the last eight months.

My surprise list for 2009 hit on a number of important themes that dominated the investment and economic landscape this year. Most important, despite the economic and credit despair that existed 12 months ago, I accurately predicted the surprise that the economy and the housing market would recover well ahead of expectations. On the negative side, I was correct in predicting cascading financial conditions for U.S. municipalities and in the forecast for an abrupt halt in the Middle East infrastructure build. Here is a list of the accurate "surprises" from last year's list:

  • The Russian mafia and Russian oligarchs are found to be large investors with Madoff.
  • Housing stabilizes sooner than expected.
  • The nation's commercial real estate markets experience only a shallow pricing downturn in the first half of 2009.
  • The U.S. economy stabilizes sooner than expected.
  • Capital spending disappoints further.
  • Mutual fund redemptions from 2008 reverse into inflows in 2009.
  • State and municipal imbalances and deficits mushroom.
  • The Internet becomes the tactical nuke of the digital age.
  • A handful of sports franchises file bankruptcy.
  • Old, leveraged media implode.
  • The Middle East's infrastructure build-out is abruptly halted owing to "market conditions."
As outlined in this weekend's Barron's, the 2010 consensus estimates for economic growth, corporate profits, stock price targets and interest rates are grouped in an extraordinarily narrow range. The consensus?
  • 2010 GDP up 3.0% to 4.0%;
  • 2010 S&P 500 profits at $75 to $80 a share;
  • year-end S&P 500 price target at 1,200 to 1,300; and
  • the 2010 closing yield on the U.S.10-year Treasury note at 3.5% to 4.5%.
Looking toward the intermediate term, it appears that the baseline consensus believes that the domestic economy is now likely capable of embarking upon a self-sustaining and normal recovery pattern of over 40 months. The clustering of that consensus suggests that any short- or intermediate-term variant outcomes could be destabilizing to the markets, both to the upside and to the downside.

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