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Kass: Grading My Surprises for 2011

This blog post originally appeared on RealMoney Silver on June 27 at 8:51 a.m. EDT.

"To predict the behavior of ordinary people in advance, you only have to assume that they will always try to escape a disagreeable situation with the smallest possible expenditure of intelligence."

-- Friedrich Nietzsche
We are now almost six months through 2011.

The past two months in the U.S. stock market as well as the drama on the world's economic stage (especially in the eurozone) have formed the backdrop for one of the more difficult market environments in a while. The sanguine backdrop over the first four months of the year has been supplanted by pain and uncertainty over the past eight weeks.

What does the balance of 2011 hold? How do we profit? For some possible answers, it's time to grade my 2011 surprise list.
"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."

-- Woody Allen
For those new to RealMoney Silver, a little background.

In late December over the past nine years, I have taken a page from the book of former Morgan Stanley strategist/now Vice Chairman of Blackstone Advisory Services Byron Wien and prepared a list of possible surprises for the coming year in late December.

Byron "Brontosaurus Rex" Wien has had a remarkable (and almost uncanny) record of his surprises becoming reality ever since he started this exercise back in 1986. His picks in 2009 were particularly accurate, but his surprises for 2010 were considered by some to be off the mark. Thus far in 2011, many of his more important economic and investment forecasts -- a 1500 S&P 500 target by midyear (we are now 230 points below that forecast); rising interest rates, with 5% yield on the 10-year U.S. note (we are now at a 2.88% yield); an improving domestic economy, with 5% GDP growth (the first-half GDP run rate was likely under 2%); and an expected resolution of the eurozone sovereign debt crisis -- have not panned out well. But to be fair, there are still another six months to go. To his credit, though, he has been very right on the price of gold and agricultural commodities this year.

My surprise list is not intended to consist of predictions or forecasts but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long.

I call these "possible improbable" events.

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs, and to disprove Nietzsche, who said that we live the same life over and over again. Wall Street research is still very much conventional, almost universally bullish and consisting of nonvariant "groupstink" despite the attempts of reform over the past decade. Mainstream and consensus expectations are just that, and, in most cases, they are deeply embedded into today's stock prices.
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