The Brazen Dozen – 2011 Review

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.  

The Brazen Dozen is a list of twelve events that I believe have a 40 percent probability of occurring during the year. These events skirt the outposts of probability. The objective is to think outside the box with regard to economic, market and political activity so that we may better prepare for the 100-year floods that seem to occur so frequently.

In this month's article, I share my self-scored report card on last year's Brazen Dozen.  My 2012 version will come out in February.

1. The Dow continues its charge forward and crosses 13,750 (up 20% from 12/31/10). The Dow did indeed lead a charge upward until Euro-scares developed over the summer.  At its peak in April, it was up 10.6 percent at 12,811.  I would rate this A + for direction, but admit I got this one incorrect.
    
2. The Fed leaves interest rates unchanged throughout the year and initiates both a QE2 and a QE3 in increasing sizes. While we did get QE2, we did not exactly get QE3 as the Fed opted instead to institute Operation Twist.  Some called this QE2.5 at the time, so I rate this one correct as 1 ½ out of 2 is not bad.
    
3. There are no more stimulus programs initiated as "fiscal responsibility" replaces "job creation" in Washington. Given the August debt ceiling fiasco along with the downgrade of U.S. debt by S&P, I think I can safely say I get a correct score on this one.
    
4. The IPO market heats up but only for companies with solid, sustainable revenue streams north of $100 million. Perhaps "only" was too strong of a word here, but considering there was an 88 percent leap in S-1 filings and a slight increase in issues priced, I'm going to rate this one "correct."  Issuers intentions were in line with my expectations, anyway.
    
5. Consolidation in the money market fund industry continues and the year ends with fewer independent money fund managers (measured in assets under management).  Instead, continued debate around increasing regulations of the industry are driving scare articles in the press from time to time.  Perhaps I haven't given investors enough credit for seeing through these ginned up concerns.  In any case, I still believe there will be significant consolidation, but it didn't happen in 2012.  Incorrect.  
6. Commercial paper outstandings drop below the $700 billion mark for the first time since 1996 as short-term investors scramble for higher yielding exposure to the non-government sector.  Instead, commercial paper ended the year unchanged at $960 billion after growing to more than $1.2 trillion.  What was I thinking?  Super-incorrect.
7. Housing prices remain volatile until Q3 when stability and growth appears on the horizon for 2011. After decreasing 2.9 percent in the first quarter, home prices rose 1.2 percent in the second and then were flat for the rest of the year (through October where data is available), according to the FHFA house price index.  The Case-Schiller Index was not so kind returning consistent monthly declines through October for a grand total drop of 3.6 percent. The FHFA index is broad-based, covering 13 more states than the Case-Schiller Index which focuses on large urban areas.  I'm going to lean toward the FHFA index as it affects more home-owners and give myself a "correct" score here. 
8. PCE consumption, after reaching a new, all-time high in late 2010, levels off until the fourth quarter of 2011 as the absence of stimulus programs becomes a drag on consumer activity. Consumption growth averaged 0.2 percent per month until the fourth quarter which looks to be 0.1 percent or lower.  Though we did reach a new high (seasonally adjusted consumption stands at an annual rate of $10.865 trillion as of November), I will have to rate this incorrect given I had the pace throughout the year exactly wrong.
    
9. The unemployment rate falls below 9 percent in the second half of the year but the U-6 measure (which includes total unemployed, marginally attached workers, and workers employed part-time for economic reasons) remains inflated around 17 percent as more job-seekers become discouraged.  The unemployment rate fell below 9 percent briefly early in the year and then regained the 8-handle in the fourth quarter and now stands at 8.5 percent.  The U-6 measure also dropped significantly and, in fact, did not spend even one month within a half percent of 17.  I was incorrect due to employment's broader measure outperformance during the year. 
10. The Trade Balance deteriorates below -$55 billion in the fourth quarter as consumers return to their buying ways.  The trade deficit did rise into the summer reaching a peak of $52 billion, but came back late in the year to end at $43.4 billion.  Incorrect. 
11. Non-U.S. growth deteriorates throughout the year but is poised to return in 2012 as the U.S. consumer looks to come back online. Emerging markets picked up the baton left by developed economies to drive global growth in 2012.  For the year ended in the third quarter, global growth was 3.2 percent while US growth was just 1.5 percent.  Given the continued issues in Europe, I would not expect strong growth in 2012 for the developed markets. Incorrect. 
12. Other:

• The honeymoon period is short for Republicans as voters become disaffected by both parties as the year comes to a close, setting up for a confusing and historic election in 2012. Three words: Occupy Wall Street.
• The plot to the highest grossing movie will be financial-related and will be in 3-D. Harry Potter beat me here with over $1.3 billion.
• 2011 Champions:
  • NFL – Chicago Bears.  Actual winner: Green Bay Packers.
  • NBA – Oklahoma City Thunder. Actual winner: Dallas Mavericks.
  • MLB – Texas Rangers.  Actual winner: St. Louis Cardinals.
  • NHL – San Jose Sharks  Actual winner: Boston Bruins.
   

Definitely an incorrect here.

Altogether, it looks like I was four for twelve, putting me at 33 percent.  For an initial goal of 40 percent, I guess that wasn't too bad!