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Kass: 15 Surprises for 2012

Surprise No. 6: The Fed ties monetary policy to the labor market. In order to encourage corporations to invest and to build up consumer and business confidence, the Fed changes its mandate and promises not to tighten monetary policy until the unemployment rate moves below 6.5%, slightly above the level at which wage pressures might emerge (the Non- Accelerating Inflation Rate of Unemployment).

Strategy: Buy high-quality municipal bonds or the iShares S&P National AMT - Free Municipal Bond Fund (MUB).

Surprise No. 7: Sears Holdings declares bankruptcy. In a spectacular fall, Sears Holdings (SHLD) shares are halted at $18 a share during the early spring, as vendors turn away from the retailer, owing to a continued and more pronounced deterioration in cash flow (already down $800 million 2011 over 2010), earnings and sales. With funding and vendor support evaporating, as paper-thin earnings before interest and taxes margins turn negative and cash flow is insufficient to fund inventory growth. The shares reopen at $0.70 after the company declares bankruptcy and its intention to restructure, as we learn, once again, that being No. 3 in an industry has little value -- especially after store improvements were deferred over the past several years. A major hedge fund and a large REIT join forces in taking over the company. Ten to fifteen percent of Sears' 4,000 Kmart and specialty stores are closed. More than 35,000 of the company's 317,000 full-time workers are laid off. As a major anchor tenant in many of the nation's shopping centers and with no logical store replacement, the REIT industry's shares suffer through the balance of the year, and the major market indices suffer their only meaningful correction of the year. Target (TGT) and Wal-Mart's (WMT) shares eventually soar in the second half of 2012.

Strategy: Buy out-of-the-money Sears Holdings puts, go long Target and Wal-Mart, and short the iShares Dow Jones U.S. Real Estate Index Fund (IYR).

Surprise No. 8: Cyberwarfare intensifies. Our country's State Department's defenses are hacked into and compromised by unknown assailants based outside of the U.S. Our armed forces are place on Defcon Three alert.

Strategy: None.

Surprise No. 9: Financial stocks are a leading market sector. After five years of underperformance, the financial stocks rebound dramatically and outperform the markets, as loan demand recovers, multiple takeovers permeate the financial intermediary scene and domestic institutions enjoy market share gains at the expense of flailing European institutions. With profit expectations low, three years of cost-cutting and some revenue upside surprises (from an improving capital markets, a pronounced rise in M&A activity and better loan demand) contribute to better-than-expected industry profits. P/>

Another tough year
To cover this group
Down 40 to 50
And they're still in the soup

Regulation, litigation
And potential mitigation
Time to put it all aside
And enjoy your vacation....

But if Republicans win the White House
It's them I'd like to thank
Cause they'll not only change the top seat
But also the bill of Mr. Dodd and Mr. Frank

So Happy New Year
Hope you found this rap a little clever
And buy some big banks and brokers next year
Don't hide in the regionals forever!

-- "Nomura Securities' Year-End Rap"

Strategy: Buy JPMorgan Chase (JPM), Citigroup and the Financial Select Sector SPDR (XLF).

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