December 28, 2010 -- After the traumatic events of 2009, the fact that 2010 was a "year of surprises" is itself a surprise. The number of "Black Swan" surprises this year was simply unprecedented. "Even I was surprised," said hedge fund manager and author Nassim Taleb.
In the spirit of these annual "annual reviews," let us now gape and gasp at the improbable yet possible events that marked the start of this new decade.
Sovereign default in the U.S.
Unable to close a budget deficit that widened to over $25 billion by the summer of 2010, the state of California defaulted on several tranches of general obligation bonds, including some revenue anticipation notes issued just one year earlier.
Bondholders summarily rejected the attempt to make interest payments in the same
issued in the spring of 2009. The default roiled the muni bond market, sending average rates on new offerings up 300 basis points or more over 2009 rates, and causing a new wave of notable breaking-the-buck failures in a few money market and bond mutual funds. (Some are asking if munis are the new collateralized debt obligations.) Offsetting this, however, muni bond investors are finding that they can now garner an attractive yield on new investments, especially in bonds issued by the relatively safer (and no longer boring) Midwestern states.
In reacting to their state's bankruptcy, the people of California became remarkably tolerant of new revenue sources. The
passed with a stunning 89% of the vote in the November election. The California legislature's emergency bill to legalize casino gambling throughout Southern California and in zones ringing the major national parks, such as Yosemite, thus earning it the "Yogi Bear Bill" moniker, passed with no resistance from either party, heralding in what optimists are calling a new era of bipartisanship in Sacramento. The legislature is still hammering out the final details for its anticipated repeal of the historic Proposition 13 limit on property taxes.
The assassination of Mexican president Felipe Calderon by the
sparked the civil war in Mexico. Four separate contenders for power, all cartels funded by illegal U.S. drug sales and armed by various world factions, have staked out centers of control in various Mexican states and are fighting to overthrow the skeleton government forces trying to defend the capital in Mexico City. U.S. troops have massed along the long Mexican border (finally, according to some wags) in order to stanch the flow of refugees and to try to reduce the flow of cash back into the antagonists' war budgets. The flow of Mexican oil to the U.S., however, remains relatively unimpeded.
President Obama so far is avoiding sending peacekeeping troops into Mexico, due to the political issues associated with the perception of supporting any drug cartel. California Governor Schwarzenegger resigned in disgrace a few months before the end of his term, after
revealed secret meetings between Schwarzenegger and the Tijuana cartel to allegedly allow the sale of additional drugs in California beyond the soon-to-be-legal marijuana. Unconfirmed reports indicate that he and wife Maria Shriver have separated over the incident.
barely escaped an impeachment vote in his state for participating in Schwarzenegger's talks, as voters sympathized with his claim that he is only was trying to encourage the
to leave his state.
Al Qaeda strikes again.
In a bizarre twist on geopolitical expectations, oil spiked to $120 a barrel on renewed al Qaeda activity. However, while Iran sat relatively quiet, al Qaeda mobilized new cells in Nigeria, working with local insurgents there to execute a spectacular series of attacks on major oil company well fields, deep water platforms, and refineries. While not creating any massive supply disruptions, the fear that Nigeria will be unable to control the potential havoc from these combined forces has put the risk premium back in the oil price. A number of African leaders, notably Zimbabwe's Robert Mugabe, claimed that these attacks were actually the work of "Western colonial and Zionist powers." The U.N. security council spent the fall debating a resolution that would condemn the attacks and authorize a peacekeeping force, but so far is not able to find language acceptable to all members.
Netanyahu Peace Prize.
In what appears to be an attempt to encourage Israel not to bomb Iranian nuclear facilities, the Nobel Peace prize was awarded to Benjamin Netanyahu. This is the second in what are now being called "Pre-Emptive Nobels." The committee and other Swedish intellectuals were stunned when world opinion embraced the award as recognizing Israel's "peace through strength" strategy. Many now expect Netanyahu to be
Person of the Year for 2010.
Research In Motion
became the subject of an intense bidding war, which resulted in the sale of the smartphone leader to former "dumbphone" leader
. Nokia borrowed a stunning $40 billion to complete the transaction, exploiting the dollar's weakness against its home currency, the euro, to outbid
, which attempted to utilize only its cash hoard. The deal is expected to vault Nokia back into a leadership position in the mobile phone business, as the battleground is now set between
iPhone and Nokia's BlackBerry. Industry analysts initially panned Microsoft's "consolation prize," its acquisition of the assets of
out of bankruptcy, but are now intrigued since Microsoft successfully completed its tender offer for all outstanding shares of
as they continued to roll out their strategy of hardware differentiation underneath the Android OS. Stock analysts are still questioning Motorola's surprise tender offer for the shares of
After a decade of little activity, a surge in IPO activity has investors abuzz that a new paradigm is upon us. The Skype deal last spring initially generated mild interest, but by the time that stock had doubled in midsummer, investment bankers were working overtime. The Linked-In deal was really the catalyst of this next wave, when it popped 50% on the first day of trading. The Twitter deal was the eye opener, as it garnered a $2 billion valuation despite only $50 million of trailing revenue and a novel pitch in which the prospectus outlined four "potential business models," without specifying which would ultimately succeed. Of course, these deals then led to a steady progression of "new media" IPOs, such as game vendor Zynga, etc.
Despite the enthusiasm, the IPO environment had some setbacks. Rumor had Facebook working on a deal all year, but it was unable to justify the $30 billion valuation it sought. The MySpace spinout was a disaster, with the deal getting pulled as investors realized it was a desperation attempt to sell a dying business.
subsequently sold the property to
for stock, causing many pundits to comment on the new "worst deal of the decade" for AOL.
Meanwhile, at least a dozen cleantech/greentech names successfully completed offerings, as $120 oil renewed interest in solar, wind, nuclear and other alternative energy companies.
Raj Rajaratnam acquitted.
When the "new Ivan Boesky" was arrested and indicted in a sweeping insider-trading sting in late 2009, many assumed that justice would finally be served to a hedge fund community that average folks suspect of operating above the law. Instead, commentators howled in disappointment that the U.S. judicial system served up the best justice that money can buy. After spending nearly $100 million in a massive defense effort that involved making his case both in court and in the press, Rajaratnam created the reasonable doubt necessary to be found not guilty. Meanwhile, less financially endowed co-defendants such as Danielle Chiesi and Roomy Khan (among others) were found guilty and sentenced to 20 to 25 years at the same prison in North Carolina where the late Bernard Madoff was incarcerated.
(Conspiracy rumors swirled throughout Hollywood, when Oliver Stone shocked the world by releasing his long-awaited sequel to
in the spring, with the principal character being a corpulent Sri Lankan hedge fund billionaire. Mr. Stone claims that the similarity to actual events is "purely coincidence," but conspiracy theorists are still speaking of a
Wag the Dog
scheme. Michael Douglas had no comment.)
. Apple stock plunged 30% overnight in reaction to Steve Job's sudden passing last summer. The company resisted revealing his death until more than two weeks after it occurred. Although Jobs appeared on the mend, his compromised health took him at a relatively young age. The nation mourned the loss of a true national treasure; several hundred thousand Mac aficionados participated in a memorial walk from Pixar headquarters near Oakland, Calif., across the Bay Bridge to downtown San Francisco. The walk lasted over 12 hours, as the crowds had to cross the bridge in shifts to avoid the chance of structural failure. (At least 400 walkers apparently mistook the walk for the famous Bay-to-Breakers run and were hospitalized for hypothermia after walking for over eight hours completely nude.) In the months since the death, Apple stock recovered most of its loss as new management proved the company's ability to innovate "insanely" great new products.
did not budge upon the news of Charlie Munger's death last winter. Although incredibly respected as one of the great investors of our era, Berkshire Hathaway investors found comfort that Chairman Warren Buffett is still (for the moment) at the helm. Crowd control was strained as over 50,000 mourners appeared for the memorial service in Pasadena, Calif., including several hundred A-list celebrities that caused temporary shortages of limousines throughout Southern California. Investors reported that the mood at the annual Berkshire Hathaway meeting in Omaha in May was "like a wake," rather than the usual carnival atmosphere. Mr. Buffett was visibly shaken by it all. Asked how his own death might affect the company, Buffett, in a particularly oracular pronouncement, said, "I've lived in the same house in Omaha for 40 years, and I don't intend to move."
Finally, the world mourned the passing of England's Queen Elizabeth II after an extended illness. The Royal Family, and all of Great Britain, was shocked to learn that the Queen had placed nearly a third of the royal fortune with the late Bernard Madoff back in 2008.
Stock markets unchanged.
After the extreme volatility of the U.S. stock market in 2008 and 2009, fund managers were shocked when the major averages finished the year within a few points of unchanged. "People are exhausted, companies are exhausted, and the markets are exhausted. We needed a year in which nothing much happened," noted the legendary Fidelity fund manager Peter Lynch, during the tour for his new book
Bond market roller coaster.
In contrast to the equity markets, bond market volatility hit unprecedented levels. The
withdrawal of quantitative easing in the spring was an unmitigated disaster, as fixed-income investors choked on $200 billion a month of new issuance from the federal government alone, on top of failed attempts by a dozen states (including California) to raise $100 billion and the ramp in agency supply as the housing market started to recover. The spike in rates across the yield curve threatened to crush the nascent expansion, sending the Fed back into easing mode to preserve low borrowing rates for both home buyers and the government. Many economists are now questioning how long the Fed can hold short rates near zero, as inflation accelerated throughout the year to the shockingly high annualized rate of 7% reported just this month. The rumored sightings of retired "Bond King" Bill Gross at dinners with financier Jimmy Rogers in Shanghai is further unnerving fixed-income investors.
Jobless in Seattle.
President Obama's landmark State of the Union speech to mobilize a "war on unemployment" unfortunately resulted in few changes to the jobless rolls. The unemployment insurance funds for most states were depleted by midsummer, and the federal government's decision to eliminate extension funding "due to the strength of the recovery" proved premature. As 20% of U.S. workers found themselves with no means of support, consumer spending contracted significantly over the summer, bringing the recovery to a screeching halt. GDP growth of 5% annualized in the first quarter slowed to zero by the third quarter. Some economists are hopeful the resumption of Fed easing will reignite the recovery in the fourth quarter and are calling for this as part of a "W" recovery rather than 2009's "V" recovery.
Washington was roiled in scandal after the firing of Bureau of Labor Statistics Commissioner Keith Hall, for the politically tone deaf initiative to report a new "pro forma" unemployment rate that eliminates some job seekers from the labor force based on the quality of their resumes. The "new" 6.5% unemployment rate found little credibility among economists. The scandal reached a fever pitch in early summer when ex-Commissioner Hall went public with cellphone voicemails and text messages, proving that the "pro forma" initiative was driven by an increasingly nervous White House staff. The Internet buzzed with audio recordings of Rahm Emanuel exhorting, "Hey, it's Rahm. I need you to do me a huge favor..." and "...you got to do this for me. Huge. Quickly. Bye."
Considering the fever pitch reached in the debate on gold by the end of 2009, nearly all observers were surprised to see gold nearly unchanged during the year. "Inflation nearing 7% should have driven gold higher," noted Fred Hickey, the respected writer of the "Golden Bear" (formerly "High Tech Strategist") newsletter. "Much of this year's inflation bump was 'in the price' at year-end 2009," explained celebrated commodity investor Jim Rogers, "but after consolidating for nine months, the 20% rise in price in the fourth quarter indicates that 2011 could be an explosive up year. I am all-in with
SPDR Gold Shares
At the time of publication, Dvorchak was long RIMM and GLD, although positions can change at any time.
Gary Dvorchak is a managing partner of
, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.