2009 Scoreboard

December 24, 2009

 

The great thing about markets is they trade everyday and thus allow us to easily see our performance measured daily. At the beginning of every year I publish my list of best bets and at the end of each year disclose the results of these forecasts. The 2009 scoreboard shows A+, B+ and one NR (no result) as one recommendation never made it to our buy point.

The January 9th issue  listed three potentially high reward/low risk plays for the year and #1 was a bet on the Japanese yield curve (10yr.-2 yr.) widening from the 92 basis point level. The yield curve is currently trading at 110 basis points with the 2 year JGB at 0.17% and the 10 year at 1.27%. The trade resulted in a slight 20bp profit but clearly did NOT move as much as expected. The grade given will be a B+. The good news is 2010 should see a further widening of the curve as the Bank of Japan is determined to print yen at a record fast pace to halt the decade long period of deflation. I’m not sure Japan can create inflation but excess money growth should push the value of the Japanese yen lower.

The 2nd best bet for year was a home run – a higher Australian dollar. On January 9 the Aussie dollar was trading at 70.38 cents and my forecast was for “a move back to at least 80 cents” and was hit in July before peaking in November at 92.5 cents. The grade given will be an A+. The Australian economy is one of the strongest in the world due to a disciplined fiscal and tight monetary policy. They also possess abundant natural resources and in a world where consumption is sure to increase in the next decade this will give them a steady source of demand for their exports. The Aussie also was an excellent leading indicator for the US stock market until it decoupled early in December. Interest rates have risen in Australia as the RBA has tried to stay ahead of the curve in it’s never ending inflation fight. It is interesting to note the Canadian dollar has been relatively strong in December despite US dollar strength as the Canadian and Australian currencies were locked together for most of the year. Is the Aussie leading the Canadian or the other way around? We should have a better answer in the first quarter of next year.

The 3rd and final best bet never reached its preferred entry point. It was the most conservative of the three recommendations and was a purchase of 10 year US Treasury TIPS (inflation protected securities). These bonds pay a fixed interest rate but adjust upward each year to cover the annual inflation rate. I wrote “these are a great buy at a 3.00% or greater yield for newly issued bonds with 10 year maturities” but the high for the year was set on March 10 (stock market bottom) at 2.10%. The grade will be NR because the trade didn’t reach the entry point. The current rate on these bonds is 1.29% as investors appear to making a bigger bet today on a future rise in inflation than the US economy bouncing back to pre-recession levels. Normally the rate on TIPS rises due to expectations of a rising “real” growth rate in the economy but due to the massive supply of Treasuries being issued this rate may increase in 2010 because foreign investors desire for a premium to offset the potential risk of a US default. It is something to remember as rates don’t always rise because of an increase in inflationary expectations.

There were many other recommendations during the year with only especially profitable “back up the truck” trade regarding gold that was sent to daily update subscribers. Five nights a week (Sunday-Thurs.) I send an e-mail with my thoughts on interest rates, the economy and markets with a few special recommendations when they offer high reward/low risk.

Best wishes for a happy holiday and healthy new year. My 2010 forecast issue will be published the week of January 4, 2010.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.