Reflections

3 Jan

2010 was a challenging year in many aspects. There were a ton of things I got wrong (don’t worry bond_math, I’ll get to the egg on my face moment soon) – and there were a few things that I did manage to get right. Here’s the 2010 review:

Double Dip Recession

Clearly this was wrong and I failed to adapt in a timely manner to the sentiment in the markets. I believe my focus was too narrow in some aspects, I put too much of an emphasis on the US employment situation and not enough emphasis on other data points that were beginning to show a shift – not a drastic, “V” shaped shift – but a shift in the right direction nonetheless. Prime example – I called for 950 SPX: it ended the year at the highs.

10Y 220bps before 300 bps

Heading into December, I strongly believed that we would see 2.20 on the 10Y. The main reason why I believed that statement at the time was that I underestimated the full effects that QE2 would have not just on the entire yield curve, but the equity market. We hit 3.00 and haven’t looked back since (currently around 3.33)

We Are Greece

The jury is still out. While we have the power of the printing press here (see above), we have a lot of structural problems that make us in some ways similar to that nation:

  • Looming pension timebombs
  • Entitlement spending (and the proposed cuts to cure the problem, namely increasing the retirement age)
  • A brewing class war between the rich and poor

This isn’t by all means a complete list, however it sorta explains why I’m still holding on to the original premise somewhat. While we may not exactly be Greece, I doubt that ramping up the printing presses will get us out of the (admittedly) short list above alone.

Curve Steepeners in Q2

I got shaken out when we flattened in mid/late 2010 in 2s30s and subsequently went roaring back to set new record levels. Pretty simple.

Banking Sector Recovery

A small bright spot: I did mention that the banking sector would continue to recover. Even without the broad participation of most of Main Street, Bank Of America has managed to roar back to life and in 2011 I expect that this bank will continue on to $20. The wikileaks “thing” doesn’t concern me much due to these factors:

  • Ken Lewis has already done so much damage to the bank (Countrywide, Merrill, “I’ve had enough of investment banking” on a conference call in 2007)
  • Bryan Moynihan has come out of the gate in 2011 swinging. This news to get the GSEs out of their hair is very positive.
  • Foreclosure messes are not just confined to BAC: JPM, etc. all have made gaffes in foreclosing on the “wrong” home, etc.

Goldman is another bank that took a PR beating but kept on ticking. People may want to hate Goldman, but they are by and large still a formidable money making machine. I believe we could see $200 by Q2.

MBB Article

I made a mistake that in hindsight I should have never made. Comparing the MBB ETF to that of the actual underlying mortgage market and actually trying to come up with a strategy around it. That post is still here on the site in it’s original form, albeit back in the “draft” bin (no, I didn’t delete/alter it after the fact).

So, Mr. bond_math – I apologize. It was a pretty bad mistake on my part and you were right. However, if I may make one small request: don’t resort to ad-hominem attacks. I’ll respond to (some of) them there:

  • No, I don’t have a “Free Trial” Bloomberg terminal
  • The “shitty” charts have been fixed, it took a while to get the correct graphics packages configured in R. I hope you like the new clarity, which you will notice especially in the PDF’s
  • You’re right – I need to “go back and learn more” – I’m definitely no Bill Gross or Gundlach

I’ll make you one prediction that is certain in 2011: I will not let that type of mistake happen again and I won’t “overreach”. All I ask in return, in the sayings of Rodney King: “why can’t we all just get along!” – If there’s something you’d like to see more of in 2011, let me know.

On 2011

Right now, I am starting out the new year cautious again. Here’s some of the things I mentioned earlier to recap that I have ideas on:

  • Bank Stocks will continue to improve: BAC $20 (year end target), GS ($200, 2Q), Citi $8 (year end)
  • Interest Rates will rise, with 30Y above 5.00 at year end, 10Y at 3.75-4.00 (I like TBT above $38-40 range)
  • The need for adapting to a “tactical” approach to trading fixed income will remain prevalent throughout the entire year
  • Rate volatility will remain elevated in 1H’11 and then slowly begin to taper off after QE2 is completed.

I realize this list is short. I’ll be posting more of what I think will happen in 2011 in a more “comprehensive” post (or series of) later in the week. I wish everyone a good start to 2011. Make the most of it.

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