IB Net Payout Yields Model

Bearish Bernstien Becomes Berry Bullish

Ok, that's my best attempt at being creative. Richard Bernstien appeared on Fast Money last night to talk about some of his bullish calls for 2010. I'll take their word for his bearish stance earlier this year, but I'm not sure all of his calls are so bullish. At least, he is more bullish now and we're agreeable with that switch.

Stone Fox Capital definitely agrees with the points that stocks will be positive because of higher profits and that small caps are likely to outperform. We're not so agreeable that the dollar will rally and end the carry trade with the massive government spending and debt planned.

Below we give out opinions of his points.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise. [When they do rise it'll be long after most other countries and the rate will be much lower. We just don't see the dollar rising against most currencies unless that country is exceptionally weak]

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently. [The curve can't get much larger so by nature it'll be flatter, but that doesn't mean that it'll be flat. Moving the Fed Funds rate to 2% isn't bearish just because its a higher short term rate. 2% is still historically low]

5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits. [This is where we completely agree. Investors are underestimating corporate profits as evidenced by NKE, ORCL, and RIMM last night. In the worst economy in 70 years, corporations are still generating significant profits and margins. That should only soar as the weakness of last year is left behind]

6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors. [True. The economy will likely add jobs beginning at least January. Don't be surprised by a weak December as corporations look at one final cleansing before the new year. Consumer Discretionary stocks will likely rally strong, but then look for years of underperformance like the techs in the mid 2000s. A stock like LIZ could easily double or triple this year and still be down 50% from recent highs]

7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified. [Rates can only go up from these low levels. Treasuries should be avoided]

8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks outperformance might be the biggest surprise for 2010. [100% agree that small cap financials and other value plays are still down 50-75% from highs. It won't even take a good company for the stock to double. AER trades at 4x expected 2010 earnings so doubling to 8x would only be expected in a normal markt]

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010. [We're more concerned about other new regulations like healthcare and cap and trade and especially increases to capital gains taxes. Taxes that Democrats will likely justify if the market remains strong]

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works. [Maybe if the job market improves by then. If not, the Dems would be mangled for focusing on new regulation that has clearly hurt jobs in the small business area]

Below are the results of the poll attached to the article on CNBC. Its still very interesting to note how bearish the people sophisticated enough to follow CNBC are these days. 57% of the people reading that post don't agree with him. All these polls seems to smack against the conventional wisdom of most polls that suggest people are bullish about the stock market.

Do you share Richard Bernstein's bullish outlook for 2010? * 5071 responses
Yes, we're out of the woods and stocks are going higher.
No, the economy is weak and trouble overseas will send markets tumbling.
Not a Scientific Survey. Results may not total 100% due to rounding.


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