NEW YORK (
) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with
readers in "The Edge," his daily trading diary.
This week, he wrote in detail about two more of his predictions for 2011.
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Two More Surprises Are in Store for 2011
Originally published on Dec. 6 at 9:20 a.m. EST.
Through the balance of the year, I will be issuing two more of my 20 Surprises for 2011 on
"Fast Money" every Monday at 5:00 p.m. EST.
from the last two Mondays in which I submitted my first four surprises.
Surprise No. 1:
I expect a series of populist initiatives by the current administration beginning by a frontal assault on mutual fund 12b-1 fees. The asset managers --
T. Rowe Price
Waddell & Reed
-- are exposed, and I am short all three of them.
Surprise No. 2:
The Internet becomes the tactical nuke of the digital age. Cybercrime likely explodes exponentially as the Web is invaded by hackers. A specific target next year will be the
, and I predict an attack that causes a week-long hiatus in trading and an abrupt slowdown in domestic business activity.
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.
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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
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.
To do the right thing for our
subscribers, I plan to release my new surprises on "The Edge" in advance of my "Fast Money" appearance.
So, here you go -- my next two surprises for 2011, which I will be discussing on tonight's "Fast Money" show with Melissa and the gang:
Surprise No. 5:
launches a tender offer for
at $21.50 a share. With the company tee'd up,
follows with a competing and higher bid. The private equity community joins the fray. Microsoft ultimately prevails and pays $24 a share for Yahoo!.
Currently, Yahoo! is universally viewed as a dysfunctional company, and few expect that Microsoft has an interest in the company. But a deal could be profitable and advantageous (more critical mass and immediate exposure to the rapidly growing Chinese market) to Microsoft:
- Microsoft is hemorrhaging cash in its Internet operations (estimated $2.5 billion of losses in the last 12 months). Yahoo! will immediately contribute $1.25 billion-plus of cash flow. (Applying a normal multiple, 6x to 9x creates $8.5 billion of value to Microsoft from Yahoo!'s current earnings before interest, taxes, depreciation and amortization).
- Yahoo! boasts net cash of $3.4 billion.
- Yahoo!'s public holdings total $9.5 billion of value (AliBaba.com and Yahoo! Japan).
- Yahoo!'s private holdings total $6.0 billion.Yahoo owns 40% of private AliBaba through two assets:
- A call option on Chinese search via Microsoft joint venture. Based on the value of Baidu (BIDU) - Get Report, if Yahoo gets a 10% share of $50 billion Chinese search market the value is $5 billion -- the value to Yahoo is about $1 billion for each 10% of search share (40% of 50%).
- 40% of AliPay. This is the elephant in the room. Current AliPay payments are about two thirds of PayPal, but the company is growing much faster than PayPal and its market potential is far greater. PayPal is currently worth $18 billion -- making AliPay valued at $12 billion. Yahoo!'s 40% is worth $5 billion now but will easily be $10 billion in three years.
By means of background, on Feb. 1, 2008, Microsoft
$31 a share, or $45 billion, to acquire Yahoo! in an unsolicited bid that included a combination of stock and cash. At that time, Yahoo!'s shares stood at $19 a share, and Microsoft was trading at $32 a share. (Today Microsoft trades at $27 a share, and Yahoo! trades at $16 a share.)
Yahoo! rejected the bid, claiming that it "substantially undervalued" the company and was not in the interest of its shareholders. In January 2009, Carol Bartz
Yahoo! cofounder Jerry Yang, and six months later Microsoft and Yahoo! entered into a search joint venture.
Surprise No. 6:
Vice President Joe Biden and Secretary of State Hillary Clinton switch jobs by midyear 2011, 18 months before the 2012 Presidential election.
It is generally recognized that President Obama has been seriously weakened politically, but the situation gets worse early next year. A sustained and high level of unemployment and a quiescent housing market fail to revive, forcing the administration to consider some radical changes in order to survive in the Presidential election of 2012. (While such a switch is unconventional, this move can be accomplished as the twenty-fifth amendment sets out that the majorities in both houses of Congress would have to confirm Vice President Clinton and Secretary of State Biden would only have to be confirmed by the Senate.)
The other benefits to the switcheroo:
- Hillary Clinton would have almost a year and a half of experience and credibility in the Vice President's office.
- She would be well-prepared to campaign for a Democratic ticket.
- An Obama/Clinton ticket would be viewed by many as unbeatable. Clinton is a relentless campaigner and she would be a far more effective drawer of votes than Biden. (Consider how many votes Obama and Clinton combined received in the 2008 Presidential primary campaign.)
- Clinton will be seen as very capable of deflecting the women's vote from Sarah Palin in 2012.
- Clinton still likely harbors dreams of the White House. She would immediately become the overwhelming favorite to garner the Democratic Party's Presidential nomination in 2016. She will only be 69 years old at that time.
- On experience alone, Clinton would be considered far more qualified than most of the other Republicans now being considered (e.g., Bobby Jindal, Mitt Romney and Tim Pawlenty)
- Fears of former President interference in the White House have dissipated. Bill Clinton has stayed out of the limelight and has been discreet with regard to his private life.
At the time of publication, Kass was long PIO, PHO, CGW, MSFT and YHOO and short BEN, TROW, WDR, K, KFT, GIS, DRI, MCD, YUM, EAT and RT.
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.