This blog post originally appeared on RealMoney Silver on Nov. 30 at 7:39 a.m. EST.
As always, hanging out last night with Melissa Lee, Brian Kelly, Karen Finerman, Joe Terranova and Tim Seymour on "Fast Money" was lots of fun.
Melissa started by asking for my market view and then for a peek at my Surprises No. 3 and No. 4 for 2011. (Last Monday night
on "Fast Money" and I will be dealing out two new Surprises on "Fast Money" every Monday night until year-end.)
As to the U.S. stock market, I cited the
(seen in yesterday's Dallas Federal Reserve Bank manufacturing Index and in the previously reported Richmond PMI and Philadelphia PMI (as well as other key barometers of economic health) as providing an underpinning to the U.S. stock market. Nevertheless, I still believe that the
will not eclipse its high of 1227 by year-end, principally as a result of problems "over there."
Melissa then asked for a peek at my next two Surprises for 2011. She noted a prescient call I made in last year's
made a year ago regarding a wide-ranging
investigation into insider trading, which was
, as well as my "
generational bottom" market call in March 2009.
Again, I framed the answer to her question by saying that every year I take a page out of Byron Wien's playbook. (I have been doing this for seven years, and Byron and I enjoy jousting and seeing whose list is ultimately more accurate.) The real purpose of the exercise is to position a portion of one's portfolio for some outlier events -- or "possible improbables" -- in which we might be getting long odds, in order to generate alpha, or excess returns.
My first surprise discussed last night was a doozy -- move over North and South Korea, we have even larger potential problems -- I even overheard my friend/buddy/pal Tim Seymour question my sanity when we were off air before the show commenced!
Surprise No. 3
Scarcity of water boosts agricultural prices and causes a military confrontation between China and India
. The continued effect of global warming, the resumption of swifter worldwide economic growth in 2011, normal population increases and an accelerated industrialization in emerging markets (and the associated water contamination and pollution that follows) contribute importantly to more droughts and the growing scarcity of water, forcing a continued and almost geometric rise in the price of agricultural commodities (which becomes one of the most important economic and stock market themes in 2011). Increased scarcity of water and higher agricultural commodity prices (corn, wheat, beans, etc.) not only have broad economic consequences, but they become a destabilizing factor and serve as the basis for a developing powder keg in the relations between China and India.
China has about 23% of the world's population but only approximately 7% of the world's fresh water supply. Moreover, China's water resources are not distributed proportionately; the 550 million residents in the more industrialized northern area of the country are supported by only one-fifth of the fresh water and the 700 million in the southern region of China have the other 80% of the country's fresh water supply. The shared resources of water supply have been a focal point of conflict between China and India since the 1962 Indo-China War.
My big surprise is that in early 2011, tension intensifies based on a decision by the Chinese government to materially expand the plans for the diversion of the 1,800-mile long
, which hugs the Chinese border before dipping into India, from the south back up to the water-deprived northern China area in an expansion of the
, original construction plans of which were announced earlier this year. At first, trade sanctions are imposed by India against China. Later in the year, the impoverished northeastern India region is the setting for massive protests aimed at China; ultimately, groups of Indian rebels, fearful of reduced availability of fresh water and the likelihood of flooding, actually invade Southern China in retaliation.
Surprise No. 4
Food and restaurant companies are among the worst performers in the S&P 500 Index
. This Surprise is an extension of Surprise No. 3. Several well-known multinational food companies and a host of domestic restaurant chains face margin and earnings pressures as they are unable to pass on the violent rise in agricultural costs on to the consumer. Profit guidance for 2011 is taken down by
and many other exposed food companies. Publicly traded restaurant chains (
) all take a hit owing to the abrupt contraction in profit margins as product demand swoons in the face of higher prices. As a consequence, food companies and restaurant chains are among the worst performers in the S&P next year.
(and to the
synopsis) of last night's show.
Look for Surprises No. 5 and No. 6 on next Monday night's "Fast Money"!
At the time of publication, Kass and/or his funds were short K, KFT, GIS, DRI, MCD, YUM, EAT and RT, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.