Bespoke Q&A for 2011
by David Urban

1) Looking back on 2010, what were your best and worst calls?

Being long Gold and equities for the first quarter then going short thereafter which was a great call.

Worst call was underestimating the strength of the rally after Bernanke announced QE2.

2) What surprised you the most and least about financial markets in 2010?

QE2 which really propelled the markets back up and probably stopped 2010 from being a down year.

3) What is the one thing that you think has contributed the most to the market rally we’ve
seen off the March 2009 lows?

The sheer amount of dollars the Federal Reserve has unnecessarily pumped into the market.

4) What will be the biggest surprise of 2011?

The continued rally of the stock market, at least for the first half of the year.

5) How long will the current bull market continue?

Very hard to say. The banking sector is not healthy and employment growth is weak. Offsetting that is the Federal Reserve being an elephant in the bond market. If employment growth picks up the bull market will gain more traction.

6) What are the various indicators that you follow closely telling you right now about where
the stock market is headed in the near term (next couple of months)?

We should be cautious because when the market turns it will turn quickly and without much warning. I believe we will see a selloff in January with a rally starting in mid-February.

7) Many of you noted that cloud computing would be a popular area of the market in 2010,
which turned out to be correct. What areas of the market or themes will gain more
popularity in 2011?

Gold and Silver based on the lack of political will to tackle the deficit and spending problems in the US. I think Agriculture will become more of a ‘Main Street’ investment.

8) What do you believe is the contrarian call on equities right now? The economy? Is
investor sentiment currently misplaced?

Aluminum which has high inventories, lots of idled production, and has almost universal bearishness yet is a great substitute for copper in electrical wiring.

If you look at the stock price of Alcoa the smart money seems to be buying into this story.

9) There has been a lot of commentary about the US entering into a “lost decade” similar to
Japan in the 90s. What is your take on this?

The Lost Decade was from 2000 to 2010. If you go back and look at various economic statistics ranging from employment to personal income, amongst others you see that as a whole we really went nowhere. It was a false sense of gains based on cheap and easy credit.

10) In what ways have you had to change your investment strategies over the past couple
of years?

More depth in commodities. I used to be nipping around the edges in agriculture but now have found solid stocks in obscure areas which can be the beneficiary of food inflation globally.

11) What sectors do you believe will perform the best and worst in 2011?

Agriculture will do the best. By agriculture I mean companies that actually grow and harvest their own crops.

Certain technology sectors will outperform and investors need to be selective. Companies that can piggyback off of Google’s Android operating system should do well. In this space I like Qualcomm.

I think Financials will continue to underperform. Looking back after the tech bubble many companies never saw their stock prices recover (Cisco, Intel, Dell, Yahoo, and Microsoft are examples). There are still a number of questions concerning foreclosures and a black swan in terms of the balance sheet pricing from the FASB/IFRS.

To give you an understanding of how opaque some of the proposals are the FASB is considering making the banks give loans and deposits valuations. That would create a complete mess if implemented.

It is possible that financials begin to outperform but investors need to pick through the sector with care. Do not think that just because the stock is beat up it represents great value. Underperforming stocks are generally underperforming for a reason.

12) Financials have been lagging the market for much of 2010. Do you expect this to
continue into 2011? Can the market rally without the Financials?

As long as commodities and profit growth stay strong the market rally should continue into the new year.

13) What’s in store for the US economy in 2011?

Continued slow growth. I think 4% is too high of an estimate for 2011 unless there is significant across the board hiring in the private sector.

14) The consensus seems to think that the employment picture will get better in 2011, albeit
slowly. Do you agree or disagree with this call?

I think employment will slowly improve in 2011. The 2010 numbers were fudged with the government distorting the available for work numbers.

U-6 is a much more relevant statistic.

15) What are the biggest problems that could emerge in the coming year that could derail
the recovery, and how likely are they to occur?

Another terrorist attack of major proportions or the collapse of a government like North Korea. In the event that happens it will take a major socioeconomic effort from Asian countries to reintegrate North Korea into the world. South Korea and China would get a boost from access to cheap labor help which should cool inflation but at the same time there is a massive socioeconomic cost to be paid in terms of reprogramming the population. I think that is unlikely but nonetheless investors should be concerned.

16) Are Ben Bernanke and the Fed helping or hurting the recovery?

Definitely hurting.

Continued regulatory uncertainty from the US Government is not going to win any private sector friends.

The best thing the Federal Reserve could do right now is get out of the way and be a more vocal proponent for business.

The best judge of QE2’s effectiveness is the bond market which has voted by selling Treasuries and raising yields, the opposite effect the Federal Reserve intended.

17) When will the Fed begin to raise rates, and will this be too early, late, or just about
right? (We asked this question last year as well, and rates have yet to change!)

Probably in 2013. I cannot see them restricting credit in 2011 and risk a political backlash if there is a rate hike in 2012.

They will at least wait until the bulk of the problem mortgage resets have occurred which points towards 2012 at the earliest.

18) After a bounce off the lows, home prices and sales have begun to dip again. What is
the reason for this and what’s in store for real estate in 2011?

There is a tremendous aversion by consumers to leveraging up. If you were foreclosed on and went back to renting it is unlikely that you have 20% for a downpayment after losing a house purchased with no downpayment.

We will continue to see problems and the grey market overhang will continue to depress prices.

There will be isolated pockets for growth but that is more driven by vulture buying.

19) Will the Dollar (US Dollar Index) be up or down in 2011 and why? Is there a serious
threat to the Dollar as the world’s reserve currency?

I think the US Dollar will be up for 2011. Europe will need a weaker Euro in order to help the PIIGS and that means a stronger US Dollar since the Euro makes up more than 50% of the index.

The problem with a weaker Euro is that it feeds the German export engine which pushes up German economic growth numbers which will increase calls for removing excess stimulus.

We are already seeing this in China encouraging domestic firms to write overseas contracts in the Yuan instead of Dollars. This is a trend that started about 5 years ago and has been picking up speed. It is mostly off the radar but is important in that global firms, not just Chinese firms, are feeling more and more comfortable dealing in currencies other than the US Dollar.

20) What are your current thoughts on gold – bubble, just the beginning, or fairly valued?

Gold is fairly valued and I think we are in store for another up year. We may see a push towards $1500 before a significant correction happens then the price recovers for an up 2011. But as of now $1265 is an absolute floor for Gold.

21) Oil doesn’t get nearly the attention it got back in 2006-2008, and it seems to be losing
steam as an asset class that investors want to be in even though it has slightly
outperformed stocks in 2010. What is your take on oil as an asset class in 2011?

So long as Chindia continue their economic buildout oil demand will rise. We have already passed the point of peak oil and in order to fund the capital programs for the new offshore discoveries oil will need to move much higher.

Investors would be well served to pick up oil producers and service companies with solid dividend yields.

22) Which alternative energy sources do you expect to gain the most market share over the
next decade, and what are some of the best ways to invest in these areas?

Sugar. Khon Kaen Sugar in Thailand. They use the entire sugarcane plant to make everything from sugar to electricity to ethanol to fertilizer. So far ahead of the curve globally that it is not funny.

They were caught hedging too early last year and learned their lessons.

23) What is your take on the automobile sector in both the US and abroad? Will the new
GM stock be up or down in 2011? What is your favorite auto play?

Ford is amazing in terms of what they have accomplished without any help from the US Government.

In terms of the automobile sector Asia will provide almost all of the growth and the US will continue to lag.

Ford is my favorite play followed by Thai Stanley Electric who makes headlights for Toyota, Ford, Chrysler, Honda, and others. Slow and steady growth but a great way to play the Asia automobile market.

24) How will the new Congress impact the stock market and the economy in 2011?

Lots of bluster and backpeddling. Notice how the Republicans are already going back on the earmarks promise before taking office. That will be something major to consider for the 2012 election.

25) What is your take on the political environment in the country right now and what
changes, if any, need to occur to make it better? Will politics play a larger or smaller role
in the year ahead?

Worse. The political environment in the US is not very good right now.

I expect a lot of gridlock and political noise will increase as the year goes on as candidates toss their hats into the Presidential ring.

26) Is the country finally serious about the deficit problem and ready to take steps to
reduce it, or are we just seeing more posturing?

I see more posturing. Good economic growth will help tax receipts but I do not see any strong impetus to get spending under control. A great way to slow economic growth and help the Federal Reserve put off increasing interest rates would be to combine an increase in tax receipts (lower capital gains and dividend rates) with decreased spending. That would show the world that we are taking our budget deficit problem seriously.

If that happened as businesses and employment began to gain traction the government would be creating a drag to ensure we do not grow to fast and let inflation get out of control.

BTW, I am not a Keynesian. The above policy just makes sense to me.

27) What are the biggest global threats to the stock market right now, and how much of a
threat are they?

The market getting too accustomed to QE and cheap money.

28) Which countries/regions are you the most bullish or bearish on at the moment?

Bullish on SE Asia based on their role as a producer and supplier of food to the Chindia.

Bearish on Argentina. CDS spreads are pricing in a default, elections coming this year, out of control inflation, and a government that will do whatever is necessary to stay in power.

Last year they raided their Central Bank to pay the bills. That is never a good sign.

Bearish on Australia as well. There are a number of mixed signals being sent out by the economy and they may have a brief recession.

29) China’s stock market has underperformed most of the world in 2010. Will we see
outperformance or underperformance from China in 2011? How do you expect other
emerging markets to perform in 2011?

Difficult to say with respect to China. What is needed is a strong local equity and bond market to soak up the excess liquidity. Historically, a house is seen as a store of value and safety which explains why people are rushing into the housing market. The government needs the Chinese people to view the equity and bond markets with the same safety level as housing. That would allow people to diversify their wealth into other areas than real estate.

30) Will the following be up or down (positive or negative) in 2011? Where noted, what are
your 2011 year-end price targets? The price targets are meant to obtain a “wisdom of
crowds” consensus number from all Roundtable participants.

10% for the S&P and Gold. I am not into market numbers as much as I am individual stocks.

31) Please provide readers with any stocks that you really like right now and for 2011 and
beyond (and why).

Alcoa as a substitution play on Copper and Teck Resources as a substitution play on Tin.

Khon Kaen Sugar and Thai Stanley Electric are stocks I mentioned earlier.

Qualcomm is a great stock to play the growth in Android without having to pay up for Google.

Note: I am long Khon Kaen Sugar, Thai Stanley Electric, Qualcomm, Teck Resources and Alcoa.

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