Welcome to the 2010 AlphaKing forecast issue. As always, we believe strongly that the only opinion traders and investors should be listening to when it comes to their trading and investment decisions is that of the stock market. We go long as intermediate rallies unfold and short as intermediate bear corrective phases land. So please keep that in mind as you read our thoughts on what we expect to see in 2010, as following the trends is the optimal and safest way to make money over the long term.
2010 should be a tumultuous year as the great bear returns. We see the action of 2009 as a bear market partial recovery bounce after the first down-leg of the great bear ended in March, 2009. Once the current rally exhausts itself, we expect the second down-leg of the great bear to land, and one that should be of equal length, or longer than, the brutal swoon of October 2007-March 2009. The technical action during the recovery bounce run-up - the post March 2009 rally - speaks strongly of the rally being nothing more than a sucker advance designed to trap the unwary into believing the bear was over and a new bull move underway. Such action is the classic set-up to a brutal reversal of fortunes that few are expecting. There are also a couple of major fundamental reasons why we believe the bull case to be all bull.
1) The debt de-leveraging process is for real, persistent, and no where near complete. For the economic recovery to stick we would need to see not only an end to the de-leveraging process, but also a return to debt expansion, and such a nirvana turnaround is a very long way from happening. Banks remain unwilling to lend; the economy continues to provide too much supply; which should all lead to more bankruptcies, more unemployment, and falling prices till the de-leveraging process completes and the economy reaches a balance of supply matching demand.
2) Aging baby-boomers, like banks, continue to hoard cash as they increase savings, and remain very picky consumers, avoiding big ticket items like the plague. Since consumers are 70% of the economy, and large ticket industries such as automakers and homebuilders need a resumption of past buying frenzies just to be able to stay in business, they are hardly likely to step forward to borrow and spend on mass debt, which means, yes, it is different this time around and the financial day of reckoning is here now that the financial musical chair song has ended.
3) Taxes are going up next year, and way up in 2011 and beyond, while government deficit spending increases dramatically as money is shifted from the haves to the have nots. Rising taxes in the face of rising unemployment, along with increased in trade protections, were hallmark of past depressions, and repeating things over and over while expecting a different outcome is the definition of insanity. Those who forget history are destined to repeat it.
4) Government control of the economy never works, as the 1930s US/Europe, post 1989 Japan, and entire Soviet experience can attest to. Raw capitalism where winners can climb on the backs of the losers is the best way to grow the economy as a whole, and if we want to be all the same then we can be, for we can all be poor and unemployed. We live in a world where losers are not allowed to exist, thus winners will diminish in numbers as their money is whisked away to help the growing numbers of have nots. Since politics is a numbers game, the dwindling number of winners will be outvoted by such a wide margin that I’m afraid our economic fate is sealed, or soon will be, on the backs of unintended consequences of good intentions.
So for our expectations in 2010:
1) The stock market should see a major life-changing peak, somewhere between Dow 10,500 (here) and 12,000, and then crash and crash and crash as the March 2009 lows get taken out in a big way.
2) We should see a complete unwinding of the USD carry-trade, which we aptly call the lemming trade. While selling US dollars to buy gold and other commodities, as well as stocks and all things China were the major trends of 2009, next year should see the exact opposite, as the race begins to grab dollars as the imploding debt bubble leaves too many individuals, corporations, institutions, and countries swimming naked and overexposed to debt backed by too little capital as the economic tide goes out. Gold should get cut in half. Oil should revisit and surpass the $35 per barrel area. China will implode, leading stock markets around the world into a crashing retest of the March lows, which will likely be breached by a significant margin.
3) 2010 should be the year of currency crises, with the British Pound the crown jewel of pending disasters, with the EURO not far behind in the race to the bottom.
4) Unemployment will rise to the very unexpected 12-14% range, creating an “off with their heads” mentality among voters as we head into the mid-term elections later in the year.
5) Voters will - eventually - balk at governments giving money to failing institutions, which means some very big name financial companies will go the way of the Dodo. AIG, Citibank, Chrysler, are sure to be in the crosshairs of such former too-big-to-fail companies who run out of money and time, though they will likely be the tip of a very large financial iceberg. Once one goes, all of them will suffer a collapse as investors shoot first and ask questions later, leaving each company struggling to show they have the means to survive.
I could go on, but basically what we are facing is the reality of what was threatened by the 2007-2009 bear market collapse, only this time no one will be fooled into believing anyone can save us, as the FED and government lose all credibility as all attempts to stem the financial blood-letting fail. A dark prediction, yes, though the good news is that eventually, once the winners have been separated from the losers and the debt de-leveraging problem gets defaulted away, the economy can start to grow again and the future can once again be expected to be brighter than the past.
If the economy and financial markets want to prove this analysis flawed, and dead wrong - which given the dark nature of our expectation we BETTER be wrong - then we have no problem making money on the long side as we follow the stock markets higher. As we always say, and we repeat here again, the only opinion one should listen to is that of the stock market. Just keep in mind the potential severity of the situation facing us I’ve just outlined if indeed the stock market begins to slide, as failing to follow those trends could have life changing consequences, and I don’t want any of us following those lemmings over the day of reckoning cliff.
Now try and have a great weekend and stay away from ledges and knives!
401K investors should be invested in money market funds.
Kevin Wilde, Chief Trading Strategist, AlphaKing.com
