2010: Watch For The Surprises

Stocks are racing for year-end as investors would like to lock in 2009 profits. Earning season is over and Christmas Season is just beginning. It looks like shoppers came out in droves for Black Friday but most customers were focused on bargains and buying necessities. It also looked like online shoppers spent 35% more this year than last on Friday according to web analytics firm Coremetrics. It appears the Internet buying was very focused and pre-planned as shoppers spent less time on-line than last year even though purchase volume increased.



Even with some positive early signs, we still expect Christmas won't be a great season for retail sales. Perhaps revenues will rise but gross margins will be squeezed. Retailers will be primarily relying on overhead cost cuts and limited inventory. This holiday season will likely bring cheer to the most price focused retailers like Amazon and Walmart while bringing frowns to many others.



When 2009 comes to a close, the consumer will still be focused on saving and deleveraging. The stimulus plan will still be the driving force for economic growth;but limited bank lending, a weak job market, soft housing sales and the many other problems emanating from the financial crisis will still be overhanging the markets for 2010.



Although we have been cautious in the markets as we expect the economy to limp along, we are most concerned with what we don't know. We believe there are many unknown obstacles ahead which could be devastating for stocks and in turn become a shock to the financial system. What are the implications for the Dubai Debt Crisis? How about the Russian Terrorist Attack? Iran announced a build up of their Nuclear Sites. Will this lead to Israel attacking Iran in 2010? Any one of these events could be the impetus to some unknown chain reaction that could cripple the global economy and lead to new financial stresses.



China has been the driver of the global economy as it buys commodities around the world and builds its own domestic infrastructure and industrial base. Chinese banks may be overextended and its industrial capacity may be overbuilt. If China's growth slows or its banks face defaults from its aggressive lending, what will happen to the world economy? Will China be a seller of U.S. Treasuries and where will interest rates go?



Oil is much higher than it was a year ago but an Israeli conflict in the Middle East could send it much higher. Higher energy prices will certainly send the economy back into recession and perhaps create another financial meltdown. We are not predicting any of these scenarios for 2010 but we do believe the risks are high for some uncertain event to occur. Investors want to be bullish,as do we,but maintaining ample liquidity and hedging for unforeseen events is the prudent way to invest in this volatile economic environment.