Byron Wien’s crystal ball

No, that’s not Byron Wien, but it is a crystal ball and Wien, formerly of Morgan Stanley and currently of Blackstone, has peered into his each year since 1986 and come up with his top 10 surprises for the coming year and he has just released his list for 2010. Wien, a respected market strategist, if a bit biased optimistically, sees a strong first half for the stock market followed by a major correction and a year-end looking pretty much like where we are today. Generally speaking, his reasoning and views appear synchronized with the current zeitgeist and are worth considering. While having missed the housing crisis in his 2007 and 2008 surprises, he was nearly perfect last year as chronicled by Edward Harrison of Credit Writedowns here. Harrison’s review of Wien’s surprises for 2007 and 2008 is here.

So, here are Wien’s surprises for 2010:

1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. Exports, inventory building and technology spending lead the way. Standard and Poor’s 500 operating earnings come in above $80
2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end
3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. Banks loan more to corporations and individuals and pull away from the carry trade, thereby reducing demand for Treasuries. Obama says, “The suits are finally listening”
4. In a roller coaster year the Standard and Poor’s 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. Even though the economy is strong and earnings exceed expectations, rising interest rates and full valuations present a problem. Concern about longer term growth and obligations to reduce leverage at both the public and private level unsettle investors
5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted. Longer term prospects remain uncertain
6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000
7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. Arguing that going nuclear is essential for the environment, will create jobs and reduce costs, Congress passes bills providing loans and subsidies for new plants, the first since 1979. Coal accounts for about 50% of electrical power generation, and Obama wants to reduce that to 25% by 2020
8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. In the November Congressional election the Democrats only lose 20 seats, much less than expected
9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. There is greater consumer protection, more transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the regulatory changes for investment bankers and hedge funds are not onerous. Trading volume and merger activity increases; financial service stocks become exceptional performers in the U.S. market
10. Civil unrest in Iran reaches a crescendo. Ayatollah Khameini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe begin but the country remains a nuclear threat. Pakistan becomes the hotspot in the region because of the weak government there, anti-American sentiment, active terrorist groups and concerns about the security of the country’s nuclear arsenal

Sorry for the mixed metaphors but, once again, Wien’s perusal of his crystal ball tends to view the glass as half full. I am beginning to think he may be right, at least in the short term. I tend to hold to my longer term worries and bearish views given the impact of the soaring national debt, state fiscal crises, long term effects of the credit meltdown and housing crisis, and a long term bearish view on the buck, even if it experiences an intermediate strengthening here in 2010. However, there is no doubt at this point that, whether real (looking likelier by the day) or artificial (i.e. stimulus and bargain-induced) that we are experiencing some semblance of economic recovery and it will likely continue during the first half of 2010…or until it ends.