ZorostroMoJo New Year 2010 Predictions

Well well well, the end of the Year of the Drag! Finally - 2007 started the fall, 2008 tried to staunch the bleeding and 2009 just ground on and on and on....With stars in our eyes, we can be cautiously optimistic for 2010 - but it ain't gonna happen immediately. So here are ZorostroMoJo's predictions for 2010 (there aren't a lot so don't worry):

1) Unemployment: Numbers today were that new applications slowed to 22,000 - yeah! Now what about the overhang? Looking at BOL statistics, 10% for November is still higher than any month over the past 10 years. (http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LNS14000000) The difference this go round from 2001 is that that crisis was mainly in the telecom sector and workers could transfer to other sectors such as software programming or other i-services. This recession has hit ALL sectors.

Prediction: The Administration and Congress will enact a new jobs bill to promote tax credits for new hires as well as subsidized loans for SMEs. And they will do it in Q1. There will also be a push to take the TARP money being repaid by "Wall Street" banks to reapply to small community banks to provide SME financing with an interest-rate holiday of the first 6 months.

2) "Wall Street": The argument "too big to fail" has been totally discredited. However, the FDIC would go negative funds if more fail and would have to go to Treasury for funds. Not good.

Prediction: Count on increased oversight, regulation of derivatives and Congressional impatience with the pace of reform. Citibank has effectively turned itself back into "John Reed's" bank by splitting in two. Goldman Sachs, tired of all the publicity, will go private. Hedge, CLO's and Funds of Funds will be regulated and forced to disclose information to the SEC. However, they are too important as a source of funds to disappear. The demise of CLO's is vastly exaggerated.

3) Economy: Mr. Geithner and Mr. Bernanke will come under increased scrutiny and will take the brunt of the blame if the employment doesn't improve.

Prediction: Inflation will be moderated by the recession until mid 2010 when the FED may begin raising rates gradually. The Chinese property bubble may burst 3rd quarter but because it is mainly an exporter, ironically, the resultant wage compression may make their exports even more competitive. The Eurozone will institute a dual tier budget systen as Germany and France power through and Portugal, Ireland, Greece and Spain (figure out the acronym) - start spending heavily to stimulate their economies and avoid collapse.

4) Emerging Markets: The MSCI jumped 72% the past quarter and is set to climb even higher. Russia spiked on the rising price of crude, Brazil powered through and if China can still be considered Emerging Market, it also is increasing it's growth rate.

Prediction: Commodity prices will continue to rise, though at a slower pace from the past four years. This will obviously benefit producers such as Russia, LATAM and Middle East. Paradoxically, it will strain growth for the US and Eurozone. Nonetheless, the degree of intra-Emerging Market trade has increased dramatically. China is rapidly changing the pattern of investment and trade. It continued to invest and trade (at very favourable rate) with African countries, Russia, and ME even during the tough times when the West pulled out. In sum, while there may be some temporary volatility, Emerging Markets will continue the move up and mitigate inflation.

5) Critical Elements: Real Estate will stabilize and begin recovering by Q3. The excesses of the past 4 years are over and people are beginning to really question the true economic value of a Harvard/Yale education vs a top state-school. High end restaurants and wine are all devalued and a bottle of argintinian wine at $15 is just as good as one from Napa at $50 (hello - Malbec anyone?). Tiger Woods will rehabilitate himself as long as he continues to win - while sponsors have dropped him - people are far too focused on their own troubles to care what he does in his off hours.

Happy New Year 2010!

ZorostroMoJo

Post Road Advisors.