It's that time of year where we reflect on the year that has past and gaze upon what the next 12 months might bring. Last year at this time, I wrote My 5 Predictions for 2010, and I would like to review those before we get into 2011. Last year's predictions:
Commercial Real Estate Continues to Drop: As a Commercial Banker that finances commercial real estate, that prediction was kind of a lay up. First, commercial real estate tends to lag residential real estate and it was well over due for a correction. Plus, when I looked at rental rates, vacancy and demand trends they were all screamingly negative relative to values a year ago. Commercial real estate in retail, light industrial and office have all seen sharp declines and what's interesting is the declines matched in steepness in most part to the decline in residential real estate in each location. The areas with the steepest decline in residential values are seeing the steepest decline in commercial real estate values.
High-End Homes Decline: Here's another easy prediction for a banker like myself who deals mostly with affluent clients who own high end homes. This sub-segment had lagged the greater residential correction just like commercial space. The affluent have stronger incomes and reserves to wait out issues, so the reality of lower values was stalled in relationship to low and middle market residential segments.
However, as I've seen clients and even Board of Directors of my employer having their homes appraised in 2010, the decline in value has been eye opening. In addition, we use internet based software to gauge the value of homes of clients just to understand their overall net worth and the trend of high end homes has been decidedly lower in 2010.
A Lot More Bank Closures: Again, as a banker this was an easy prediction for 2010 based on the number of closings in 2009 compared to the number of problem banks at the FDIC plus the expected erosion in real estate values and lagging recognition of loan problems by many banks, which I expected would increase the total of problem banks at the FDIC during 2010, which indeed happened.
We Will See Some Cities, Counties, or Municipalities File for Bankruptcy: We had a couple of muni BKs last year, but that was it. Even in my prediction last year I cautioned it might be a tad early for that prediction: "I think I might be a tad early in this call, maybe by 1-2 years, but the time is very ripe for some municipalities to file bankruptcy." That supports the thought that I didn't think we would see massive numbers of muni BKs, in fact 2 were filed.
The U.S. Treasury Bond Market Finally Breaks Down Below It's Channel!!! For the second year in a row, the only prediction failure was the forecast of a correction in the long bond.
Ironically, I have the exact same summary comments this year as I did at the end of 2009, "I'm very comfortable with the results of My 5 Predictions for 2009. The only big surprise was the bond market did not break down further, especially given the advance in stocks." Ditto for 2010.
Now let's look forward into 2011 and see what's likely to come to fruition. Here are My 5 Predictions for 2011.
The Stock Market: The stock market will suffer a correction greater than 15% and possibly retest the lows of June/July 2010. The market is massively over bought and it's due for a substantive correction. We have insiders selling stock at a torrid pace the past several months while investment sentiment reaches extreme levels. In addition, the weekly chart below shows price is reaching over bought with a possible divergence forming on the MACD.
I've been personally calling for some kind of top in December 2010 and/or January 2011, and preferring the January 2011 time frame. December is the Fibonacci 21st month from the March 2009 low, but often the cycle of 21 will push into 22, which is January 2011. Given the weekly MACD and the time it can take to roll it over in a topping process, the 1st quarter 2011 is my larger time window for this topping process. For now, I still like January 2011, but I'm watching the MACD for clues.
Could this be the massive wave 3 or C down that so many Elliott Wave bears are calling for? Sure, but it's really one of many potential wave patterns and it would be inappropriate to say anything other than we are very due for some significant corrective behavior. I think we put in a near term top in early 2011 and have a sizable correction.
FDIC Bank Closures: The FDIC has averaged 146 closures the past 2 years with 157 in 2010. The only reason the total was not more in 2010 has to be the lack of human resources needed to accomplish that task. That being said, the number of ailing banks is still at an elevated level. The FDIC will easily close more banks in 2011 than the average (146) of the past two years. The number of problem banks is more than 5 times that number, so it should be an easy task.
Municipal Bankruptcy: 2011 will see municipal bankruptcy come to the forefront in part because local leaders are out of financial gimmicks and tricks and in part because the GOP may push the issue. We will either see several more municipal bankruptcies than 2010 or we will see the largest muni BK in recent history, I expect both.
Unemployment: The national unemployment rate will push above 10%. With the Muni deficits requiring large layoffs of muni workers, it's very conceivable unemployment is going higher in 2011. There are roughly 20,000,000 muni workers nationally and a simple 5% reduction in employment across the country in this segment equals another 1,000,000 unemployed. That figure wouldn't even begin to cure budget deficits so it could be a conservative figure. Any employment gains in the private sector next year could get trumped by public employee layoffs. As such, the current unemployment rate of 9.8% could easily push past 10%, a psychological level that could put consumer confidence and spending in the dumper.
Treasury Yields: The yield on the 10 Year Treasury Yield trades above 4%. Below is the monthly chart on the 10 year Treasury Yield. In 3 of the last 4 times the MACD bottomed and turned up, the yield tested the down trend line. The only failure was the late 2008 bottom. But once again, we are on the verge of a monthly bottom and turn up on the MACD. The yield could easily shoot up in 2011 and test the down trend line, which is currently at 4.5%.
SUMMARY: I started doing "My 5 Predictions" with the start of the 2009 year, and in each of the last two years I've been right 4 out of 5 times and I'll take that batting average to the bank all day long. In both the past two years, the only failed prediction was the expectation of a correction of the bond bubble.
Additional Thoughts for 2011:
Real Estate: If I had to look outside of the top five predictions, I still think high end homes, vacation real estate, and commercial real estate are too pricey and need to come down. There are still too many vacant homes in some real estate markets and we might see more press about bull dozing some of these homes. And don't forget the bulge in foreclosures next year.
Gold: I think gold could have another leg higher but I also think it could form a significant top at that point, but should hold up better than stocks if both go through correctional phases. I'm looking at the monthly MACD to confirm a longer term correctional period and it hasn't rolled over yet.
PIIGS: And of course, the PIIGS roll around in their own POOH all 2011, which at any time could create bouts of instability.
California: California should be the state in the news more than any other state with the largest budget deficit and some of the biggest cities in affect bankrupt with pressure for higher taxes and fees and possibly the beginning of an intense exodus of boomers leaving for retirement friendly states.
GOP: I look for the GOP to play hard ball next year on many fronts including QE, state and local bankruptcy, and Obamacare, among other things. Their actions could spark implications.
Hope all is well.