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.

The new year begins today. With the Christmas and New Year holidays on Fridays this past year, and their respective eves on Thursdays, the calendar set up for the perfect holiday break this year and it seems many availed themselves of it. I know I did. What a great break and a rejuvenating time to recharge the batteries after a tough 2009 and what, for many, was a decadus horriblius, to paraphrase QEII.

Well, that is behind us and today marks the official start of the new year. I hope it is a good one for all. OK, platitudes behind us now as well, a quick review:

The Washington Post carried this reminder of just how bad the last decade was:

The lost decade for the economy
The U.S. economy has expanded at a healthy clip for most of the last 70 years, but by a wide range of measures, it stagnated in the first decade of the new millennium. Job growth was essentially zero, as modest job creation from 2003 to 2007 wasn’t enough to make up for two recessions in the decade. Rises in the nation’s economic output, as measured by gross domestic product, was weak. And household net worth, when adjusted for inflation, fell as stock prices stagnated, home prices declined in the second half of the decade and consumer debt skyrocketed.

SOURCES: Bureau of Labor Statistics; Bureau of Economic Analysis; Federal Reserve | GRAPHIC BY NEIL IRWIN, CRISTINA RIVERO AND TODD LINDEMAN / THE WASHINGTON POST

Decadus horriblius indeed.

But that was then, this is now. Lets hope we aren’t a copy of Japan which is sailing through its second consecutive lost decade.

On the hopeful front, the University of Michigan’s Mark Perry brings us news of an impending sonic boom at his Carpe Diem blog:

“WALL STREET JOURNAL — The big idea behind [Greg Easterbrook's new book] “Sonic Boom: Globalization at Mach Speed” is that globalization—celebrated, reviled and analyzed for at least a decade now—has hardly begun. The world, Mr. Easterbrook believes, is on the verge of a period of pell-mell integration that will dwarf anything before now, and a good thing too: The coming age of global integration, he argues, will produce riches that none of us can imagine and scatter them more widely than ever before.

AMAZON.COM REVIEW — Probably the international recession is ending–so what comes next? A Sonic Boom is what comes next. Dramatic global economy growth is likely to resume, especially in the developing world, where growth is needed most. Prosperity should start back upward. Goods and service will continue getting better and cheaper. That’s the boom part. But job anxiety and economic insecurity will accelerate, too. Even as the global economy recovers, we may not feel especially good, because economic change will keep coming faster. That’s the sonic part. A sonic boom is powerful, but also nerve-shattering.

History teaches that when some crisis interrupts larger trends, as soon as the crisis concludes, the larger trends resume. Before the international economic crisis that began in late 2007, the larger trends were robust global growth and rising economic insecurity. Look for both trends to resume in a Sonic Boom world.

Many aspects of a Sonic Boom world will be wonderful. Faster, cheaper communication; easy global access to information and knowledge; rapid innovation, including for green energy; increasing freedom, especially women’s freedom; greater awareness of other cultures. Women’s freedom will itself double the world’s supply of ideas! And the more we know about each other, the less nations and cultures will fear each other, meaning militarism should decline.

Bottom Line: Given a long enough time period for some perspective, the recent financial and economic troubles will probably look rather insignificant in comparison to the long-term positive trends in global output, measured by world real GDP growth rates and real world GDP per-capita. It’s been said that “the media constantly dwell on minor problems without celebrating the broader, more upbeat context in which they exist.” The trends outlined by Easterbrook and those shown in the graphs above are definitely part of the broader, more upbeat context of an unprecedented period of global wealth creation, increased prosperity, and significant reductions in poverty. “

Let’s hope that he and Mr. Easterbrook are correct. That sounds like a wonderful world, to paraphrase Satchmo. Yes, I’m skeptical, but more open-minded than ever and certainly a fan of such positive prognostications.

Here are some major things to watch as we move into the new year and decade:

Jobs, jobs, jobs – With healthcare legislation nearly moving into the outbox and immigration reform and card check moving to the forefront, the real action in Washington will be watching the jobs numbers. Without robust growth expect another round of stimulus. Oh, and don’t expect robust job growth. Hence, expect more stimulus. Jobs will be the true measure of the recovery and health of our economy and the picture is not likely to be pretty.

Mid-term elections – Watch for the Dems to promote more stimulus in an effort to save their seats come November. Card check will likely get nailed onto some bill at midnight the eve of passage as a way to appease the half billion dollar donor to last term’s elections, organized labor. It will likely be for naught as Sens. Dodd, Boxer and Reid are sent packing, stalwarts of the left, all. Holding onto the majorities in the House and Senate, President Obama will likely move to the center, where he campaigned, in an effort to hold his own seat two years later. Bad news for conservatives is that this will likely work ala Clinton after the mid term upset during his first term. And so it goes.

China – Mysterious land of the East, the global economic engine, China may become less of a mystery going forward. If so, we may find some bad news behind the magic as deeper scrutiny is paid to its reported growth and the underlying demand equation. Record car sales with no increase in gasoline sales in 2009 is just one mystery we may have explained. Is the government reporting real numbers, if not what does it mean for the true growth of the global economy. Sadly, a lot rides on the answers, for us and the world’s other major and developing economies. Also, watch potential currency moves (or lack thereof) out of Beijing for potential market moves.

Iran – Iran has increased the tension and level of its rhetoric over the New Year holiday, delivering an ultimatum regarding talks with the UN relative to its uranium enrichment plans. Yes, it delivered an ultimatum in response to the UN’s ultimatum. Clearly, Tehran is looking to continue playing a game of chicken with Obama and the international community. At the same time growing unrest among the people signals the fragility of the regime. The New Standard’s Bill Kristol predicted its fall in 2010 on one of the Sunday chat shows yesterday, predicting the rise of a democratic government, that while perhaps not friendly, will play better with the rest of the world. Let’s hope he’s right…and that it happens before Israel takes matters into its own hands.

The Fed – What is next? Many foresee no Fed action in 2010. They include the camp that foresees slow economic recovery and very slow jobs growth. The other camp, foreseeing strong economic recovery, perhaps even in the face of slower-than-average-recovery jobs growth, has another worry. That worry involves the Fed acting early to cut off inflation in the face of strong economic activity and raising interest rates in 2010. The fear is that rising rates will take the air out of the stock market, and so it may, if such a scenario comes to pass. Another fear involving the Fed is what happens when the Fed ends its mortgage-backed securities buying program sometime in the first half of 2010. This program has kept interest rates artificially low and has made for some orderliness in the unwind of the toxic MBS marketplace that was in early 2008. Its cessation will likely bring higher rates but the magnitude of its impact is unknown, with estimates ranging from 50 to 250 basis points higher. Finally, Calculated Risk quotes PIMCO’s Paul McCulley as stating that another Fed-related risk and uncertainty is:

“any change in the Fed’s pre-commitment language, which is currently committed to keeping the fed funds rate exceptionally low for an “extended period.” We don’t think the Fed is going to tighten any time in 2010, but long before the FOMC (Federal Open Market Committee) actually does the deed, it will have to change its language. That could very well happen in 2010, and there is genuine uncertainty over how quickly and strongly the market will anticipate a tightening process. Our gut feeling is that the moment the Fed changes any one of its words, it’s going to be a very unpleasant experience, because the marketplace has very little patience and a very big imagination.“

These are just a few of the things to keep an eye on in 2010. The year is likely to be as action-packed as its predecessor. While many expect the positive market momentum to continue for a while, history tells us that the returns of last year, especially from the March lows, are not likely to be matched. Caution and vigilance remain the order of the day as surprises are almost to be expected.

Anyone remember that from the blockbuster Steve Martin album of the late ’70s. Never thought I’d get to use it but here we are. The epicenter of the financial crisis has moved to Austria, where Austrian bank Hypo Groupe Alpe Adria (HGAA) has been declared insolvent and taken over by the government there. Many European banks are haunted by aggressive lending into Eastern Europe at the top of the market. Asset values in Eastern Europe have since plunged…no surprise there…except to the banks that poured billions of euros in at the peak.

While HGAA is not a household name here, (I’d never heard of it) it is a significant story. As Edward Harrison states at Credit Writedowns:

“The financial institution, which has 40 billion Euros in assets, is the country’s sixth largest bank. But, in relative terms, this is a very large bankruptcy – using GDP at purchasing power parity, an American HGAA would have assets of $2.5 trillion, larger than any of the American banks. So, this is a very big deal and it points to renewed risks in banking and the possibility of contagion.”

Check out his piece here for more details. We will be hearing a lot more about these country-specific lending issues in 2010 and they are likely to be at least one source of an exogenous shock to the markets next year.

These are (not) a few of my favorite things.

After a steady decline, the dollar continues its rally of the past week this morning. The common measure of the “dollar” is an index of other currencies valued against the dollar known as the U.S. Dollar Index (Ticker:DXY). After peaking at nearly 90 in March at the height of the financial panic (flight to safety) the DXY had fallen to 74 and is now hovering near 77.

Today, not only do we have the corrective action associated with what had been an extremely oversold dollar but we have some flight to safety as a whiff of crisis blows across Europe. The PIGS (Portugal, Ireland, Greece, and Spain), those junior EU countries, are each in the throes of or approaching the brink of financial crisis. The immediate concern continues to be Greece, where Prime Minister Papandreou took an aggressively socialist stance yesterday with his critics, when he defiantly pledged to solve the country’s problems by raising taxes on the rich and not doing much to lower the government’s populist spending campaigns. This puts him in decent stead with the electorates but a pariah in the international investment community. That approach is becoming familiar the world over. Ireland, on the other hand is given some credit for making the hard decisions to reduce spending materially while increasing taxes only modestly.

The new bet, as made yesterday by one of the market mavens we follow closely, Dennis Gartman, is that the falling dollar/rising stocks relationship is now giving way to a rising dollar/rising stocks play. The lock step inverse relationship of lower dollar/higher stocks was bound to give way at some point and some believe it has happened. Gartman is buying the UUP (long dollar ETF) and the QQQQs (long NASDAQ) as one of many plays he is pursuing.

Well, either these large investment houses have something to gain by being very bullish about the new year or they really are that bullish. There are clearly signs of a recovery all around us these days as the ranks of the newly unemployed thin, consumers and companies repair balance sheets, industrial production picks up every where, and retail sales show life. On the other hand, this is all happening amidst both the greatest stimulus ever and troubling aftershocks of a brutal recession (Dubai, Greece, etc.).

While the dollar has firmed in recent sessions and may be in for a bit of a corrective rebound, it would appear that the continuing spending plans coming out of Washington point to a longer term continuation of the greenback’s decline. As we’ve seen, that can be good for equities, not so much because of renewed hopes of explosive exports from the U.S. due to its cheap currency but moreso because stocks are priced in dollars and as the value of the dollar and interest rates go down it is easier/cheaper to bid them up. These Wall Street strategists do cite near-zero interest rates as one reason for the continuation of the rally but also seem to, in some cases, believe in the underlying fundamentals to the economy when they tout a continued run in stocks in 2010.

It seems like the real debate is about relativity or degree of both the downturn and the recovery. The stock market has run up over 60% since the March lows. That is a huge move and certainly more than the scale of this early recovery can justify. However, were the panic-induced March lows so overshot to the downside that this rally has brought us to a place that is justified or even cheap based on conditions today and reasonable expectations for this recovery. The consensus view of the recovery has been that it would be an anemic recovery when compared to other post-WWII recoveries, and so far it has been.

Even after this 60% run it is hard to find an outright bear on the street these days. That may be troubling in itself, and comfort to the contrarians. The Street strategists either believe in a continuing bull market or a continuation of the bull rally in the near term (3-6 months) followed by fed tightening of interest rates to put off inflation and overheating which will bring a 20-30% correction in the second half of 2010. Over at The Pragmatic Capitalist they have been running a series on the 2010 market calls of the big Street houses. Today they feature Merrill Lynch which says the “bubble of pessimism” (of which I may be one of the bubble blowers…err, well you know what I mean) is about to burst and the bull run will continue. This goes to show that while you can take the bull out of the ads you can’t take the…again, you know what I mean.

Their summary of Merrill’s bullish call is here, and RBC’s bullish call is here.

Credit Suisse’s call is here, and Morgan Stanley’s is here. CS and Morgan Stanley both see tough sledding in the second half of 2010 after a continuation of the bull in the early part of 2010. This comports somewhat with Goldman’s view of a strong H1 and a more defensive H2, albeit Goldman is not as negative on H2 as MS and CS appear.

These links are worth checking out as they are one page summaries of lengthy documents that give ahandful of institutional views on the coming year. A real 50,000 foot view, which we can appreciate, plus who doesn’t love a pragmatic capitalist.

Morgan Stanley includes in their analysis this neat graphic for the diagram of the four stages of a typical market and its aftermath:

If the run after the downturn is expected to be 71%, on average, then MS postulates we may have another 10% move up in our markets before the year long corrective phase brought on by expectations of Fed tightening. This can take the market down 25%. After that the expectation is for a sideways market for 5-6 years with about a 50% range, meaning a 25% cap on the upside and 25% on the downside but a lot of churning in between with perhaps a 0-25% total return over 5-6 years. That’s not the kind of environment you want for saving into retirement if you are in your late 40s or older today. But, if it occurs, we’ll have to play the hand we’re dealt and make the most of it.