Predictions for 2019

1. The everything bubble unwind is in full swing.  Stocks have their worst year since 2008.

2. The first leg of the bear market culminates with a panic, sometime in the first quarter.

3. The global economy ends the year in recession.  China is a constant source of economic jitters with the Eurozone not far behind.

4. The U.S. budget deficit ends the year over $1 trillion.  State budgets are stretched.  Underfunding of public pensions goes from $5 trillion to over $7 trillion.  Trump’s popularity hits all-time lows.

5. The U.S. dollar weakens against the euro and yen.

6. Global bond markets are a mixed bag.  Eurozone yields rise as the ECB ends its quantitative easing.  Italy’s debt problems become unmanageable.  Yields on Italy’s 10-year (2.77%) rise to over 5%.  Despite its safe haven status, yields on German 10-year (0.25%) break above 1.5%.  U.S. Treasuries are caught in a tug-of-war between safe haven buying and budget concerns.  Yields on the 10-year (2.69%) remain below 3%.

7. Reach-for yield ends in tears. High yields bonds and leveraged loans are severely underwater.

8. Gold and other precious metals rally as financial bubbles deflate, economies weaken, and the omnipotence of central bankers comes into question.  Silver outperforms gold.  Gold stocks finally catch a break; low fuel costs provide an added boost.

9. Active managers outperform passive managers in U.S. equities, as FAANG stocks underperform.

Our favorite longs for 2019:

– pharmaceuticals (Bristol-Myers Squibb, Regeneron Pharmaceuticals)

– discount retailers (Target, Wal-Mart)

– retail roadkill (Bed Bath & Beyond, Dick’s Sporting Goods)

– gun manufacturers (Sturm Ruger)

– poultry producers (Sanderson Farms)

– natural gas E&P (Range Resources)

– fertilizer (CF Industries, PhosAgro)

Our favorite shorts:

– Tesla

– global banks (Deutsche Bank, Westpak Banking, Canadian Imperial Bank)

– domestic banks (Bank of America, JPMorgan Chase)

– Chinese financials (CHIX)

– auto finance (CarMax, AutoNation, Ally Financial)

– municipal bond insurers (Assured Guarantee, MBIA)

– passive investing (BlackRock, MSCI)

– office REITs (Boston Properties, Vornado)

– retail REITs (Simon Property Group, Realty Income)

– technology (XLK)

– industrials (XLI)

– infrastructure (Caterpillar, U.S. Steel, United Rentals).

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