Stuff To Watch For In 2010....

Broadly, I think this year will be dictated by the transition from a world where stocks only rise as the US dollar falls to a market where dollar strength becomes supportive of US stock prices (as well as China, Australia, and select emerging markets).

Much of the media and negative pundits will continue to say that various financial government stimulus packages are the main reason that stocks and certain economic indicators/measures are rising, and until this prevailing sentiment shifts, the stock market bulls will likely be rewarded.

I see GDP growth and jobs improvement well above consensus.

Interestingly, many government work programs will be put into existence and more real stimulus money will be infused into the economy than in 2009. Certain sectors are poised to benefit even more compared to the prior year and finding spillover-effect stock plays will provide notable alpha.

Finally, web-based video (3-D TV?), bandwidth, and touch-screen technologies will come to the fore again as the promise of 2000 will become realized in 2010....

1. Starting the themes with a master of the obvious call. I see extremely low rates through 2011 -- with my range being 0 bps to 75 bps of tightening and my gut feel that we see the Federal Reserve remove its 0 bps to 25 bps funds rate and replace it with either a 25 bps or 50 bps (or a 25 bps to 50bps floating) funds rate.

This should continue to spur stronger-than-expected economic activity, so I’m sticking with my highly variant view (through 2009) of a stronger recovery and GDP growth than commonly expected while inflation remains benign.

2. Even though we’ve seen strong stock performance out of the networking and data storage, I'm essentially repeating myself:


We already have approved a $45 billion to $50 billion government broadband and security infrastructure package that's ready to roll over the next few years. Networking, security, and strong ERP and data storage firms will benefit most.


The only changes I'll make are emphasizing networking and data storage firms and deemphasizing security and ERP firms as they materially outperformed during 2009.

I think Cisco (CSCO), Broadcom (BRCM), EZchip Semiconductor (EZCH), and VMware (VMW) are names to note and reasonably priced, but there are a host of others that will benefit greatly.

3. Dogs of the Dow. I think this strategy will make a comeback and start beating the Dow again. I also like stocks that resume solid dividend payouts and/or exhibit strong dividend growth rates. This should be one of the factors helping banks produce sizable upside in 2010.

4. Alternative Energy: Solar has been an interest of mine for some time, and I'm expanding it this year to include battery technology, grid technology, and more efficient lighting/energy technology. It has strengthening investment flows as I believe this is a secular theme that actually started in 2008 and should continue to gain ground. I continue to favor A123 Systems (AONE), best of breed solar plays, and selected semiconductors.

5. The IPO market isn't dead, and in 2010 the pace picks up meaningfully. Facebook should be the deal of the year -- I think it will use its massive infusion of capital to buy parts, if not all, of AOL (AOL).

Moreover, technology mergers and acquisitions continue to exhibit strong activity with further consolidation across the sub-sectors. Underperforming stocks with superb balance sheets like Electronic Arts (ERTS), Dell (DELL), MKS Instruments (MKSI), and ADTRAN (ADTN) will garner increased attention.

6. Contrary to consensus opinion, I see the labor and housing markets improving markedly. As I said last year, we’ll start seeing job gains versus losses earlier than expected, and I’d be surprised if we don’t print jobs gains in the first quarter (possibly even December’s final numbers).

Additionally, I think shrewd buyers will be rewarded in the formerly distressed real estate markets.

7. Banks, banks, and more banks. I think banks simply have a huge upside year and this may be my favorite sector.....

EPS will continue to be strong, primarily led by continued record net interest margins. Helping the case will be continued strong trading, surging merger-and-acquisition growth, and improving asset management books coupled with shrinking writedowns.

In fact, for some banks, writedowns may become writeups late in the year (but probably 2011) due to improved real estate activity, less stringent rules related to mark to market (FAS 157 amended last March), and the reluctance for banks to dump inventory given they now have the earnings power, thus giving them more time to hold non-performing assets.

Note: The caveat to this call is if Financial Accounting Standards Board retracts and proceeds to make another huge mistake related to mark-to-market accounting. And I believe they are due to review this subject again sometime during the middle of the year.

8. The Apple (AAPL) Tablet will be another game-changing product and the next great extension of the iPhone platform. This product will be the first fully functional touch-screen computer and will usher in a new era of innovation (for Apple and certain chip companies). Apple will follow suit in the coming months/quarters with Macbooks using their proprietary touch-screen interface, which allows the company to further accelerate computing market share gains. I see Apple surpassing my low- to mid-$300s target and I have moved my target to the low $400s.....

9. As I alluded to in my intro, I think dollar bears will be disappointed and the dollar will be a strong currency, possibly one of the best performing around the globe for the bulk of the year.

10. Given the dollar strength and better-than-expected GDP growth, Gold will also prove to be an underperforming asset class as Gold prices I think fall below $785 at some point during the year.

11. I’m not making a prediction about Yahoo (YHOO) this year. Therefore, how ironic would it be if… I’m just not saying another word.

12. I think the combo technology/defense stocks -- such as L-3 Communications Holdings (LLL) and Comtech Telecommunications (CMTL) -- will be talked about with increasing fervor because geopolitical tensions haven’t materially eased, intelligence gathering is coming to the fore again, and the fact that many of these stocks were, at best, market performers during 2009.

13. Regression to the mean. This may be the most profound theme, and if it comes to fruition to any degree, 2009-2010 should produce materially higher returns than expected. We're currently at record levels for the worst rolling 10-year period in the stock market and worst calendar year by a long shot. To put it plainly, we need earth-shattering returns to completely close the gap and get back to the S&P's 9% plus long-term average.

To compound on this a bit further -- while we put in one good year, we’re still pacing near record decade-long returns. These sorts of anomalies don’t rectify with one good year. I suspect 2010’s returns -- as well as in the next decade -- will be higher than normal, though contain above-average volatility.

14. Growth stocks outperform value stocks. I think this cycle just started last year and should last four to six years in total.

My view is that we’re still in the early days of a growth cycle in EPS. I forecast 23% to 25% 2010 EPS (broad market) growth and I’m hoping that includes some UPOD. So while the S&P 500 seems to be fairly valued by many accounts, from my perch those views are still using EPS results that are far closer to trough levels than normalized levels.

In short, during periods of renewed EPS growth and after a trough low in the Federal funds cycle, growth stocks tend to outperform.

15. The US stock market rises by 16% or more as measured by the S&P 500. Like last year, I forecast the NASDAQ to do better but with less outperformance versus 2009. As stated earlier, I see the financials being the markets best performing sector in 2010 -- particularly the top bank and brokerage names like JPM and GS, etc. My bullishness on the financials aside, I still see tech doing very well; in fact, it’s in my top three leadership categories along with health care.....

long GS; AAPL