The Brazen Dozen

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 we believe have a 40 percent probability of occurring in 2011. These events skirt the outposts of probability. Frankly, we’d be surprised if half of these happen. But we’d also be surprised if none of these happen.
The objective is to think outside the box with regard to economic activity so that we may better prepare for the 100-year floods that seem to occur so frequently.
 

1. The Dow continues its charge forward and crosses 13,750 (up 20% from today). Due to the many technical demand factors in the market today (and the lack of technical supply factors), the stock market — and risk markets in general — can put in solid gains without facing significant drops.
   
    
2. The Fed leaves interest rates unchanged throughout the year and initiates both a QE2 and a QE3 in increasing sizes. Though the QE activities don’t have much direct affect on market rates, the Fed is pressed into such action to show they are “doing something.”
   
    
3. There are no more stimulus programs initiated as “fiscal responsibility” replaces “job creation” in Washington. Instead, the government finally addresses the true nature of the current crisis and determines which homeowners will receive subsidies and how those subsidies will be structured.
   
    
4. The IPO market heats up but only for companies with solid, sustainable revenue streams north of $100 million. Exit opportunities for smaller entities continue to develop through the M&A markets.
   
    
5. Consolidation in the money market fund industry continues and the year ends with fewer independent money fund managers (measured in assets under management). Increasing homogeneity squeezes fees prohibiting smaller funds from turning a profit for their sponsors.
   
    
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. Preparation for Basel III compliance on the part of the financial industry drives firms to seek longer-term funding sources, even as demand for short-term investments increases due to money fund regulations.
   
    
7. Housing prices remain volatile until Q3 when stability and growth appears on the horizon for 2011. This stability is discounted by consumers and is reflected in growing activity toward the end of the year (see #8).
   
    
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. Late in 2011, activity begins to rise significantly once again and ends the year around the $9.5 trillion mark.
   
    
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.
   
    
10. The Trade Balance deteriorates below -$55 billion in the fourth quarter as consumers return to their buying ways.
    
     
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 on-line.
    
     
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.
•  The plot to the highest grossing movie will be financial-related and will be in 3-D.
• 2011 Champions:

NFL – Chicago Bears
NBA – Oklahoma City Thunder
MLB – Texas Rangers
NHL – San Jose Sharks
 

Key Developments

The confidence index unexpectedly fell to 52.5, lower than the forecast by most economists. Consumers are still very cautious and very nervous about the labor market and weak housing sector.

Claims for jobless benefits dropped last week to the lowest level in two years. Applications declined 34K to 388K, breaking the 400K mark for the first time since July 2008. Continuing claims rose to 4128K.

The Chicago Purchasing Manager Index rose to 68.6 for December, from 62.5 the previous month. It looks like gains in business spending and investment on new equipment will keep factories producing more goods in the coming year.

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

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