No trades today.

Every year I provide some also eligible surprises (or also-rans as Byron Wien calls them) - events that didn't make My Top 15 Surprises (but were close to making the list!).
Here are my six runners-up Surprises:
1. Netanyahu wins his fourth term.
2. Venice, Italy is drowning (from frequent floods and rising tides) and Australia is burning. Environmental concerns intensify around the world. A coalition of non-U.S. countries embark on the most ambitious attempt to counter climate change in history.
3. Gold hits a record high.
4. Stocks experience four separate declines of -10% during the year.
5. Apple's (AAPL) launch of 5G iPhones encounters some technical problems and is delayed into late 2021/early 2022.
6. Jim Cramer replaces Larry Kudlow as the Director of the National Economic Council.

* In 2019 equities rose far faster and interest rates fell sharper than the consensus expected
* 2020 could be a year of out-of-the-VIX thinking and mean reversion in valuations/stock prices as profits, politics, geopolitical events and other uncertainties weigh on global markets
* The S&P Index peaks in the month of January - at far lower levels than consensus (sell side) year-end consensus price targets
* The year's high in the S&P Index is made in the first month of the year (at under 3350), the 2020 low in the S&P Index is 2550 and the close is about 2700.
* The S&P Index declines by -17% in 2020
* Interest rates rise in 2020
* U.S. energy stocks climb by +20% this year
* European bank stocks are a high note - advancing by +30% to +40%

Like Diogenes with his lantern, I am, again in 2020, a cynic looking for truth (and an honest investor) - as I engage in my annual assault on the consensus and "Group Stink." More than any year in the last decade, the contour of the U.S. stock market will likely be importantly influenced and shaped by politics and profits in 2020. Surprises in the political arena and in corporate profitability are my first two and most important deviations from the consensus.2020 could be the year of mean reversion - a year of the vanishing Fed (and global central banker) put and a surprising turn in central bank policy (by the ECB), weakening global economic growth and less than expected corporate profits (again), political upsets (again), rising geopolitical risks (and global conflicts), a general recognition of the risks associated with untamed deficits and large debt loads and general market instability.
Remember, my Surprise List is not a set of forecasts. Rather, the List represents events that the consensus views as having a low probability of happening (20% or less) but, in my judgment, have a better than 50% chance of occurrence. In betting parlance this is called an "overlay."
__________

Surprise #5WithDraghi Gone, ECB Monetary Policy Abruptly Changes and Interest Rates Are Increased

With no more Draghi, the ECB figures out negative rates are a hindrance to growth and has gutted the European banking industry - it normalizes policy. While long term positive, it ends up creating a major disruption in the global bond markets and yields around the world spike. Most European government debt returns to a positive yield. European equity markets rise +20% (compared to a -20% drop in the U.S. indices)
European bank stocks rise by +30% to +40%.
Surprise #4 Watch Out Below!Automobile Industry Sales Plummet and Threaten the Domestic and Global Economies... Ford Is Bailed Out
"Peak Autos" remains in place and the problems facing the industry reverberate in 2020.
At every level there is a ton of automobile loan and securitized debt leverage. A record share of trade-ins last year were upside down on their loans - representing a mirror image of mortgages that existed in 2007.
Retail sales of new vehicles were down by -7% in December, 2019, leading to a retail SAAR of only 14.3 million cars (down from 15 million a year ago and from November, 2019's 14.8 million rate).
The auto industry falls into a tailspin in 2020 - fueled by burgeoning inventories, record cars going off lease (and entering the used car market), record new car prices (according to J.D. Power and LMC Automotive, the average new care price is now over $35,000), a decline in used car prices, growing and record purchase incentives (of nearly $4,600/unit, a +12% increase from last year), and rising auto loan delinquencies (which hit an all-time high in 3Q2019) causes a substantial amount of damage to the sub-prime auto asset backed securities market in 2020).
The automobile's sizable role in the domestic economy causes collateral damage to U.S. consumer confidence and spending.
Late in the year, Ford Motor (F) company teeters operationally and financially and the shares fall to under $5/share. The loss-ridden manufacturer is acquired by Volkswagen (VLKAF) .
Surprise #3 The China Trade Deal Falls Apart, China's Patience With Hong Kong Runs Out and There Is a Global Shortage of Protein
China doesn't comply with "Phase One" of the trade deal which offers little more than purchasing needed agriculture products and fails to protect U.S. intellectual property.
China's patience in Hong Kong runs out and it takes action that sets off both a geopolitical and stock market crisis. China's aggression ends any chance for a "Phase Two" trade deal.
The trade war is reignited and tariffs are reimposed on China.
Capital spending, consumer and business confidence falters.
Speaking of China, the effects of African Swine Fever Virus cause a global shortage of protein. The immediate impact a year ago was wholesale slaughtering, which created a short term surplus. But, now there aren't enough pigs. Pork prices soar with beef, chicken and fish prices rising in sympathy.
Surprise #2 Disappointing Global Growth, Weakening Corporate Profits, a Fed Pivot and Political and Geopolitcal Instability Produce a "Garden Variety" Bear Market in 2020

As we entered 2020 the almost universal view is that liquidity and the central banks' put, at the very least, provides a market floor and at the best, will contribute to the next speculative leg of the decade old Bull Market as the market train is supported by the Fed trestle.
As I finished My15 Surprises for 2020 over the weekend and reviewed the extraordinary nature of the 2019 market -- I marvel at the Bull Market in Complacency that seems almost at the polar opposite of the doom and gloom that existed on December 26, 2018, a bit more than 12 months ago. As an example, the CNN Fear and Greed Index was around 2 (!) a year ago compared to 91 (!) this morning. The same applies to the flip flop in AAII sentiment (from very bearish to very bullish - and with the gap between the two moving to over 40).
I would be less concerned with the outlook if the market's 2019 advance was earnings derived. It was not - like in 2013 it was entirely based on a reset of higher valuations (from a PE of 14.5x at year-end 2018 to approximately 19.0x at year-end 2019). Indeed, consensus 2019 S&P EPS forecasts stood at about $178/share 12 months ago - they are likely to fall in the $163-$164/share level range. As to the 2020 S&P EPS consensus estimates, they, not surprisingly, stand at the same $178/share today! They will likely miss (by an unusually) wide mark, again.
And I would be far less concerned if a changing market structure (the proliferation and popularity of ETFs and the dominance of risk parity and quant products and strategies) coupled with the death of active investing had not served to exaggerate upside price momentum - foiling the natural price discovery many of us "old timers" yearn for.
Meanwhile, as the year concludes, precious metals have made a very "quiet" stealth rally - just look at (GLD) 's chart over the last seven weeks. (What are the gold traders seeing that we are not?)
The majority of "talking heads" who hated stocks a year ago are uber bullish on equities this year. (Didn't we learn from the wrong-footed consensus interest rate forecasts of last December, that self confidently called for a 3.5%+ 10 year U.S. note yield at 2019 year-end?)
Am I concerned? Should investors be concerned? You are damn right. Nevertheless, the consensus remains positive - and the consensus projections shine today with their typical +8% to +10% advance anticipated for the S&P Index.
My view is that next year's surprise will be a year of mean reversion, but unlike most, I make this surprise without forecast certainty as I recognize that central bankers have lost their collective minds. And so may have many traders and investors.
In 2020, the surprise would be that the "everything bubble" (in which every asset class advanced) is pierced and the notion of mean reversion of returns finally surfaces (just when no one is looking).
Though the third year of the Presidential cycle (2019) was a good one - not so much for the last year of the Presidential cycle (2020).

Despite easing money and an abundance of global liquidity, the rate of growth of the U.S. economy fails to accelerate this year - "The Fed Is Pushing On A String." Domestic GDP growth slows to under +1% in real terms. Core inflation sits at 2% (but headline inflation is much higher due to rising energy prices). Company share buybacks are sharply diminished as corporate profits disappoint and corporations begin to balk at high stock prices (another surprise)
Though economic growth is slow, interest rates begin to rise in 2020 as the growing U.S. debt load begins to matter. The bond vigilantes slowly return out of hibernation. Higher rates trips up levered corporations and levered consumers. Foreign buyers of credit and Treasuries lose interest in the U.S. debt markets and start selling.
The Fed is stuck and, not wanting to be political, ends its balance sheet expansion and makes no move on interest rates until after the election.
Higher wages and other input costs pressure corporate profits in a backdrop of slowing revenues and domestic growth.
The consensus expectation for 2020 S&P EPS of about $178/share is, for the second year in a row, way off mark as EPS growth falls for the second year in a row because of a continued decline in profit margins that +3% revenue growth can't overcome. 2020 S&P EPS per share falls to modestly below the $163-$165/share recorded in 2019.
Investors, realizing that corporate profits have essentially been flat since 2014, begin to panic at the "new normal" of subpar economic growth. Another year in which earnings growth fails to recover reverses the valuation upwards reset (so conspicuous last year) as market participants grow increasingly concerned about the real economy's secular growth prospects.
Much of the more than +25% 2019 reset (higher) of valuations is reversed in 2020 - as price earnings multiples decline by about -15%, producing a modestly larger full year decline (-17%) in the S&P Index. 2020's market drop is the worst since 2002's fall of -23%. The S&P Index closed at 3265 on Friday. The year's high is made in the first month of the year (at under 3350), the 2020 low in the S&P Index is 2550, and the close is about 2700.
Besides the failure of corporate profits to revive the equity market is burdened by a number of other factors outlined in My 15 Surprises For 2020. and now...

Surprise #1 Trump Popularity Falters Badly, the Progressive Wing of the Democratic Party Fails to Catalyze Voters, Biden Easily Wins the Presidency and Democrats Have a Clean Election Sweep (As Women and Millennials Show Up in Droves)

According to PredictIt and most of the other polls, the general expectation is that President Trump will narrowly win the November election, the Republicans will retain control of the Senate and the Democrats will keep control of the House.

As in 2016, the (political) consensus proves to be mistaken in 2020.

To summarize, several trends become apparent early in the year, leading to Senator Biden eventually being named the Democratic party's Presidential nominee. Biden's lead in the polls climbs and Trump trails by a surprisingly large percentage by early summer. In another surprising election result (much like four years ago) - its a clean sweep for the Democrats - Biden easily wins the November election, Democrats narrowly regain control of the Senate and the Democrats maintain control of the House.

Here is how this and the other surprising political events leading up and into the November election could go down:

Democratic Progressive Presidential Hopefuls Fail and Fall Early - Biden Is The Nominee

* Advertising money proves to be a major force in producing candidate support and votes. Both Bloomberg and Steyer climb into the top five Democratic candidates in the national polling as Senator Warren's popularity wanes.
* In the belief that only a centrist candidate can defeat President Trump in November, a surprisingly high number of Democratic voters move to the center (and to the support of non-progressive candidates) during the multiple state primaries on March 3rd.
* The progressive left of the Democratic Party moves much lower in the polls and the electability of Senators Sanders and Warren comes into question. Sanders' "hard ceiling" becomes reality as he finishes in only a weak second or third position in the early February Iowa and New Hampshire primaries. By the end of February, a surging Mayor Pete Buttigieg moves into a virtual tie for second with Sanders (and behind Senator Biden) in the national polls. Warren, seen as talking from both sides of the mouth on campaign financing, after releasing what many consider to be poorly constructed tax recommendations and following modification of some other extreme positions, falters and falls out of the top five behind Biden, Sanders, Buttigieg, Bloomberg and Steyer.
* Warren, fearful of a further fall (out of contention), approaches Sanders (who essentially shares the same positions that drags down the Senator from Massachusetts - both are fighting a "rigged system", "Medicare for all", tax the wealthy, etc.). She proposes a "prepackaged" progressive ticket and political contract (with Sanders as President and Warren as Vice Presidential candidates - with some shared "Presidential" duties). U.S. stocks briefly tank in response to the possibility of a progressive Democratic Presidential nominee. Sanders initially considers Warren's offer but rejects it and the contract unravels. Warren, with little money left in her campaign till, falls back further in the polls into seventh place (behind Andrew Yang) and drops out of the race. Surprisingly, many of Warren's supporters fail to lean towards Sanders and move to the other, more centrist candidates.
* Biden never falls behind and maintains his front running status throughout all of the primaries and into the Democratic convention.
* Late in the race, Bloomberg and Steyer, recognizing the value of a unified Democratic party against Trump transcend their own personal interests and throw their support towards Biden. Stocks start a steady descent lower as investors view the rising probability of a Democratic President as market unfriendly.
* Bloomberg (who is worth $58 billion and is the sixth wealthiest person in the U.S. and 14th in the world) commits "whatever it takes" to help Senator Biden defeat President Trump. In total, Bloomberg eventually spends over $2.5 billion on his Presidential run and later on Senator Biden's campaign and on the key Senate election contests.
* In an uncontested convention Biden is named the Democratic nominee. He selects Amy Klobuchar over Stacey Abrams as his Vice Presidential running mate.
* Stacey Abrams delivers a riveting keynote convention address and Pete Buttigieg introduces Senator Biden on the convention's final day.
* The day after his nomination, Republican Senator Mitt Romney endorses Senator Joe Biden .

Trump's Popularity Slumps Under the Weight of Impeachment and Revelations

* In the first half of 2020, just as the impeachment hearings percolate, a New York Times investigation uncovers that President Trump directed the purchase of stock futures by the Fed, the Treasury and other parties (over a lengthy period of months) to buoy the U.S. stock markets and with the stated intent (later disclosed in emails) to improve the chances of his reelection. The discovery and publicity associated with stock futures buying policy (which began to be implemented in late summer, 2019) causes an uproar politically (as leaders of both parties are critical) and Congressional hearings are scheduled - sending markets abruptly lower as there was apparently less to the bull market run than meets the eye.
* Though Republicans have a 53-47 majority in the Senate, Senator Susan Collins and four other Republican Senators demand the appearance of witnesses and more than 51 Senators vote to call witnesses in the impeachment hearings despite the threat of Executive Privilege by President Trump. The heated impeachment hearings (which includes Bolton's explosive testimony which is recounted vividly in his NY Times best selling book), are extended all the way into March, hurting Trump's popularity.
* President Trump avoids being removed from office by impeachment by only one vote in the Senate
* Consternation as to the President's rationale regarding the Iraq military base attack intensifies - further dampening the President's popularity. Over the past weekend in an interview on "Face The Nation", the Secretary of the Defense Mike Esper seemed to contradict the President's statement that there was an imminent threat to four American embassies, saying the justification for killing Soleimani was that it was "probably my expectation" that an attack was imminent. No wonder Republican Senator Mike Lee said Esper's briefing to Congress was insulting. Pushback that the Administration called for the killing of a foreign leader because it is "probably my expectation" draws increased alarm of both Democrats and Republicans and the voting electorate. Based on testimony and uncovered emails, the evidence mounts that the President's motivation for the attack was to distract attention from the impeachment trial and because some of the (Republican Senator) jurors in that trial pressured him to do so. (h/t Robert Hubbell) As written in a recent Wall Street Journal column, which chronicles the events leading up to the Iraq attack, the lede is buried deep (30 paragraphs into the analysis). "Mr. Trump, after the strike, told associates he was under pressure to deal with Gen. Soleimani from GOP senators he views as important supporters in his coming impeachment trial in the Senate, associates said."
* The Supreme Court reviews Trump's assertion that the Supremacy Clause of the Constitution means he doesn't have to reveal his tax returns. After oral arguments are heard in March, the Court rejects the petition for a writ of certiorari and orders the release of the President's tax returns. The release of his tax returns clearly shows "questionable" transfers and a significant Russian involvement in his financial affairs (and in those of Jared Kushner and Ivanka Trump).
* Jared Kushner and Ivanka Trump return to private life in New York City.
* A Washington Post report discloses that Melania Trump and the President have essentially lived in separate quarters since late 2018. The Trumps separate.
* Meanwhile, a slowing domestic economy and weakening stock market continue to adversely influence Trump's polling against the Democratic opponent.
* Under the weight of the pressure of running for reelection, a hectic travelling schedule and poor eating habits, President Trump's health catches up to him. A significant health problem is disclosed in the spring forcing the President to curtail his political appearances for more than a month.

Faced with a unified and financially fortified Democratic Party, extended impeachment hearings, the release of Trump's tax returns, the stock futures controversy, Russian business disclosures (providing a large amount of loans to Trump and buying inflated homes and condominiums from The Trump Organization), health and marital problems, a weakening stock market and slowing domestic economy - Trump continues to suffer badly in the polls.

Attracted to her recent pro-Trump support which culminated last Monday in a charge that "leading Democrats were mourning the loss of Soleimani" (See Peggy Noonan's Wall Street Journal story this past weekend and desperate to revive his popularity, Trump dumps Vice President Michael Pence for former ambassador to the United Nations Nikki Haley. (PredictIt has a 90% probability that Pence will be Trump's running mate).

Voter Turnout Rises Dramatically and Biden Easily Wins the Presidential Election and the Democratic Party Sweeps the Congressional Elections

Voter Turnout rises by over +6% (from 2016) - most of the incremental change is captured by Biden who wins 50.7% of the popular vote compared with 46.3% for Trump - a plurality of over 6 million votes. (That compares to 48% for Secretary Clinton and 46% for President Trump in 2016 - a difference of 2.9 million votes).

Senator Biden also wins a surprisingly large majority in the electoral college (304 to 234).

Though the Republican Party was a huge favorite to retain control of the Senate - the Democrats regain control of the Senate on the coattails of Senator Biden and the widening voter turnout.

Upon winning in November, Biden makes first move and nominates Kamala Harris to the Supreme Court to replace Justice Ruth Bader Ginsberg (who agrees to step down). Stacey Abrams is enlisted to become Attorney General . Pete Buttigieg becomes Secretary of Veteran Affairs. Michael Bloomberg is named Secretary of the Treasury. And, in a move of bipartisanship, Senator Mitt Romney is nominated to the post of Secretary of State.

After the election, there are violent demonstrations around the country by Trump supporters in mid- to late- November. Trump does little to squash or calm down the protests and instead holds a number of rallies against Democrats and the election results.

In December, 2020, President Trump announces his plans to launch Trump TV. Sean Hannity leaves Fox News - assuming a duel role as CEO of Trump TV as well as the station's chief commentator. Rush Limbaugh and several Fox News commentators join Trump TV.

__________

Long GLD (small), FDX (large), TWTR (large), AMZN (small), GOOGL (small), European Banks, VIAC (large), GE, XLE.
Short SPY (small), NFLX (small), F (small).

* In 2019 equities rose far faster and interest rates fell sharper than the consensus expected
* 2020 could be a year of out-of-the-VIX thinking and mean reversion in valuations/stock prices as profits, politics, geopolitical events and other uncertainties weigh on global markets
* The S&P Index peaks in the month of January - at far lower levels than consensus (sell side) year-end consensus price targets
* The year's high in the S&P Index is made in the first month of the year (at under 3350), the 2020 low in the S&P Index is 2550 and the close is about 2700.
* The S&P Index declines by -17% in 2020
* Interest rates rise in 2020
* U.S. energy stocks climb by +20% this year
* European bank stocks are a high note - advancing by +30% to +40%

Like Diogenes with his lantern, I am, again in 2020, a cynic looking for truth (and an honest investor) - as I engage in my annual assault on the consensus and "Group Stink." More than any year in the last decade, the contour of the U.S. stock market will likely be importantly influenced and shaped by politics and profits in 2020. Surprises in the political arena and in corporate profitability are my first two and most important deviations from the consensus.2020 could be the year of mean reversion - a year of the vanishing Fed (and global central banker) put and a surprising turn in central bank policy (by the ECB), weakening global economic growth and less than expected corporate profits (again), political upsets (again), rising geopolitical risks (and global conflicts), a general recognition of the risks associated with untamed deficits and large debt loads and general market instability.

Remember, my Surprise List is not a set of forecasts. Rather, the List represents events that the consensus views as having a low probability of happening (20% or less) but, in my judgment, have a better than 50% chance of occurrence. In betting parlance this is called an "overlay."
__________

Surprise #10 The SoftBank Unraveling Spreads to Sand Hill Road
WeWork isn't the last failed unicorn that tries to IPO itself. The private values on a basket of money losing unicorns falls by over 30%.
Venture capital becomes scarce. There are negative knock on effects throughout the Northern California economy. Late in the year Facebook FB , Alphabet (GOOGL) and Amazon (AMZN) begin to show the signs that a chunk of their revenue comes from venture based start-ups - their share prices suffer.
Private equity does not escape the turmoil in venture capital.

Surprise #9 Stock Surprises Abound - Boeing, General Electric, Tesla, ViacomCBS, Comcast, Google, Facebook, Kohl's, Ford, Square,Twitter, Federal Express, European Banks, U.S. Pharma/Healthcare and U.S. Energy

Boeing's  (BA) shares experience a one day rally of nearly +10% - not because of an earlier than expected return of Max 737 production but because Airbus (EADSY) encounters its own set of major safety issues and problems.

General Electric's (GE) shares climb to $20/share as the company's makeover succeeds faster than expected. (Stan Druckenmiller reports that he made $200 million personally on his investment in GE and commits his $0.2 billion personal gain to expanding the reach of Harlem's Children Zone - Stan is Board Chairman of HCZ).

Tesla's  (TSLA) shares rise to $600/share before it poops out. Elon Musk marries Grimes, his pregnant girlfriend. The couple divorces by year-end.

Old media outperforms new media - ViacomCBS (VIAC) and Comcast's (CMCSA) shares surprisingly outperform Facebook and Google's common stock.

European bank stocks are global stock winners - rising by +30% to +40%.

With Democrats gaining control of the Congress and Presidency - healthcare and pharmaceutical stocks are global losers and drop by more than -30%.

Iran waits until the summer and then unleashes physical attacks (through sleeper cells) and cyber attacks in the Middle East, Europe and the U.S. President Trump retaliates. The Strait of Hormuz is closed. The price of oil spikes to over $80/barrel (and stays high through most of the year). Energy stocks run counter to the market's losses and surprise to the upside in 2020 - with gains of nearly 20%. Several, low-priced energy companies' share price doubles in price.

A large Enron-like fraud is uncovered (and shocks the markets).

In takeover activity:
* Amazon acquires Kohl's (KSS) .
* Berkshire (BRK.A) (BRK.B) acquires FedEx (FDX) (see Surprise #7 below).
* Jack Dorsey decides to live full time in Africa: In an attempt to improve its position in payments and social media, Google acquires both Square (SQ) and Twitter (TWTR) (beating out Salesforce (CRM) in the process).
* Volkswagen (VLKAF) acquires Ford (F) (see upcoming Surprise #4).

Surprise #8 Goldman Sachs (In An Attempt To Expand Its Retail Presence) Acquires The Vanguard Group (with over $5.3 trillion of assets under management) 

Surprise #7 Berkshire Hathaway and Warren Buffett Surprise the Markets - On Several Fronts

Berkshire Hathaway, with over $130 billion of cash, acquires FedEx (for $55 billion) in a spirited bidding contest against Walmart (WMT) . There are several important catalysts to the transaction - Buffett understands FDX's business and the deal would expand his scale in transportation - where he already enjoys a stronghold in rails with subsidiary Burlington Northern. Moreover, despite the recent Amazon issue, FedEx has a wide business moat with a vast distribution presence and a large fleet of vehicles. Finally, FedEx' shares have been pummeled (-20%) because of a difficulty in adopting to digital commerce and the company could be purchased on the cheap at under 20x earnings.

Berkshire makes two more large acquisitions - reducing its cash position by $100 billion to $30 billion.

Fires in California grow entirely out of control, shutting down much of the power grid in California - and hobbling the state's economy. President Trump does not come to the aid of the state until too much damage is done. But Buffett helps and provides bankruptcy financing by Pacific Gas and Electric (PCG) . While it is normally impossible to buy a regulated utility, at the request of regulators Berkshire ultimately takes control of the company.

Contrary to being a "forever holding," Berkshire unloads a portion of its Apple (AAPL) long investment after the stock becomes too large a percentage of its portfolio.

At the May, 2020 Berkshire Hathaway annual meeting in Omaha, Nebraska, Warren Buffett surprises his shareholders and announces that Ajit Jain will be his successor .

The Oracle of Omaha invites me back to the 2021 Berkshire Hathaway Annual Meeting to ply him and Charlie Munger with tough questions.

Surprise #6 Despite Weakening Economic and Profit Growth the Federal Reserve Does Not Lower Interest Rates This Year

Instead of waiting until the end of Q2 as they currently have planned, the Fed ends the expansion in their balance sheet by February or March. The liquidity spark helping stocks thus ends early.

Foreigners lose their appetite for U.S. corporate debt and government securities and, despite disappointing U.S. economic growth, the 10 year U.S. note yield climbs to over 2.50%.
__________

Long GLD (small), FDX (large), TWTR (large), AMZN (small), GOOGL (small), European Banks, VIAC (large), GE, XLE.
Short SPY (small), NFLX (small), F (small).

* In 2019 equities rose far faster and interest rates fell sharper than the consensus expected
* 2020 could be a year of out-of-the-VIX thinking and mean reversion in valuations/stock prices as profits, politics, geopolitical events and other uncertainties weigh on global markets
* The S&P Index peaks in the month of January - at far lower levels than consensus (sell side) year-end consensus price targets
* The year's high in the S&P Index is made in the first month of the year (at under 3350), the 2020 low in the S&P Index is 2550 and the close is about 2700.
* The S&P Index declines by -17% in 2020
* Interest rates rise in 2020
* U.S. energy stocks climb by +20% this year
* European bank stocks are a high note - advancing by +30% to +40%



Like Diogenes with his lantern, I am, again in 2020, a cynic looking for truth (and an honest investor) - as I engage in my annual assault on the consensus and "Group Stink."

More than any year in the last decade, the contour of the U.S. stock market will likely be importantly influenced and shaped by politics and profits in 2020. Surprises in the political arena and in corporate profitability are my first two and most important deviations from the consensus.

2020 could be the year of mean reversion - a year of the vanishing Fed (and global central banker) put and a surprising turn in central bank policy (by the ECB), weakening global economic growth and less than expected corporate profits (again), political upsets (again), rising geopolitical risks (and global conflicts), a general recognition of the risks associated with untamed deficits and large debt loads and general market instability.

Remember, my Surprise List is not a set of forecasts. Rather, the List represents events that the consensus views as having a low probability of happening (20% or less) but, in my judgment, have a better than 50% chance of occurrence. In betting parlance this is called an "overlay."
__________

Surprise #15 A Credit-Related Event Causes a Market Liquidity Crunch as Covenant-Lite, Leveraged Loans, BBB-rated Downgrades All Pose a Potential Threat to Both the Debt and Equity Markets

Credit conditions tighten with more differentiation between CCC and BBB corporate and consumer credit. More companies fall out of CCC and out of BBB into high yield.

Surprise #14 Market Structure Haunts Our Markets Throughout the Year

The dominance of ETFs and quant strategies (e.g. risk parity) shows its ugly side.

The 2019 movie is in reverse this year - the ETFs and quant products and strategies that delivered a recipe for the relentless advance last year are reversed and, with so many looking to exit, liquidity evaporates. ETF prices, in particular, exhibit greater volatility than the underlying constituent holdings. The dominance of passive strategies is threatened and active strategies begin to garner inflows after a lengthy period of losing market share. Over one quarter of the listed ETFs are delisted.

A "Flash Crash" takes the S&P Index down by over -5% in one day. Volatility rockets to over 35 and stays elevated for most of the year.

Surprise #13 FANG(A) Gets Redubbed FAMG(A) With Microsoft Replacing Netflix

The competition from other streaming services causes Netflix (NFLX) to lose millions of domestic subscribers. The whole pricing power story unravels and market loses faith in the cash burning narrative. Netflix's shares trade down to $200/share.

Surprise #12A Large Sell-Side Brokerage Firm Abandons its Research Department Owing to Unbundling of Services and the General Lack of Profitability Associated With Their Efforts

Surprise #11 A Well Known Trader\Investor Who Frequently Appears on Bloomberg, Fox Business and CNBC is Indicted By the SEC For Failure to Disclose His Transactions and Investment Positions In a Proper and Timely Manner

The SEC discloses that many others have failed to fully disclose positions and their trading. The SEC releases a broad edict to all financial media outlets, websites, etc. to adopt new transparency and reporting requirements similar to what is currently required by sell-side brokerage firm's research departments.  
__________

Long GLD (small), FDX (large), TWTR (large), AMZN (small), GOOGL (small), European Banks, VIAC (large), GE, XLE.
Short SPY (small), NFLX (small), F (small).

* How did I do last year?



White House Politics:
(When asked what he wanted to give thanks for during a press gaggle Thanksgiving Thursday, Trump responded), "for having a great family and for having made a tremendous difference in this country. I've made a tremendous difference in the country. This country is so much stronger now than it was when I took office that you wouldn't believe it... And I mean, you see, but so much stronger people can't even believe it. When I see foreign leaders they say we cannot believe the difference in strength between the United States now and the United States two years ago."

- President Trump (Comments on Thanksgiving)

Policy:
"You only think I guessed wrong! ... You fool! You fell victim to one of the classic blunders - the most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: Never go in against a Sicilian when death is on the line!"

- Vizzini,The Princess Bride

The Economy:
"The missing step in the standard Keynesian theory (is) the explicit consideration of capitalist finance within a cyclical and speculative context... finance sets the pace for the economy. As recovery approaches full employment... soothsayers will proclaim that the business cycle has been banished (and) debts can be taken on. But in truth neither the boom nor the debt deflation... and certainly not a recovery can go on forever. Each state nurtures forces that lead to its own destruction."

- Hyman Minsky

The Markets:
"Every new beginning comes from some other beginning's end."

-Seneca the Elder

So, I said we'd be grading the surprises for 2019 that I unveiled a year ago.

Turns out I had a near average year relative to my historic percentages - with 46% of my Surprises were correct. (My worst hit rate was in 2013 when only 20% of my Surprises occurred. My best was over 60% in 2018).

As we entered 2019, most strategists expressed a constructive economic view of a self-sustaining domestic recovery, held to an upbeat corporate profits picture (abetted by the corporate tax rate reduction), there was a unanimous view that interest rates would climb and generally shared the view that the S&P 500 would rise in the range of 8% to 10%. (The S&P Index rose by nearly +30% and interest rates fell hard as the 10 year note yield spend most of the year under 2%).

Many readers of this annual column assume that my Surprise List will have a bearish bent (and to be sure, that was the case in the last few years and back in 2007-08). But I have not always expressed a negative outlook in my Surprise List and I often have positive (and out of consensus) things to say about individual companies and sectors.

In terms of success rates, the last few years were in the vicinity of 40%.

Below is a report card (46% correct) of my 15 Surprises for 2019:

Surprise #1 A U.S. recession in 2019 (followed by stagflation) VeryWrong
Surprise #2 Treasury yields decline Very Right
Surprise #3 S&P earnings decline and S&P makes a 2200 low in the first half of the year (the low was very close to that figure) and rallies later in the year as the Fed cuts interest rates and essentially started another QE program. On the year the S&P drops by -10% (remember my Surprise List was delivered a full month before year end after which the stock market collapsed into Christmas) Right and Wrong
Surprise #4 Despite the appearance of the Bear, FANG stocks surprisingly prosper (both absolutely and relatively) as investors seek growth (at any cost) in a slowing economy - Facebook's shares rebound dramatically Very Right
Surprise #5 "Peak Trump" - the President bows out in his pursuit of a second term Very Wrong
Surprise #6 2019 is the year of women in politics (though for a while this was correct it proved) Wrong
Surprise #7 Bitcoin remains weak and marijuana stocks soar (they did briefly in the beginning of the year but then got schmeissed over the balance of 2019) Right and Wrong
Surprise #8 Private equity, high yield debt and leveraged loan problems emerge Very Wrong
Surprise #9 The China/U.S trade rift continues throughout the year Very Right
Surprise #10 Bank stocks are surprising winners in 2019 Very Right
Surprise #11 Tesla's problems shift from production to demand to financial Very Wrong
Surprise #12 Berkshire Hathaway announces the largest takeover in its history Very Wrong
surprise #13 Google goes on a buying spree Very Wrong
Surprise #14 Goldman Sachs trades up to $239/share (after the company attempts to go private) Right (but for the wrong reason)
Surprise #15 Brexit happens Very Right

Without further fuss, my next posts will outline my 15 Surprises for 2020.

* This is my 18th year of compiling my Surprise List!

"In this age of infinite distraction. when the entitled elect themselves, the party accelerates and the brutal hangover is inevitable."

-- Dr. Michael Burry (he profited from "The Big Short"), 2012 UCLA Commencement Speech

"Never make predictions, especially about the future."

-- Casey Stengel (also short in stature)

"Those who are easily shocked should be shocked more often."

-- Mae West (she liked only two types of men -- long and short)

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

-- Legendary value investor Ben Graham (who in the short term recognized the market was a voting machine, not a weighing machine)

"Timid men prefer the calm of despotism to the tempestuous sea of liberty." [Think: Central-bank intervention!]

-- Thomas Jefferson (Founding father and long of stature)

It's that time of the year again! Time here on Monday morning for my 15 Surprises for 2020, which I'll unveil in a bit.

I've never walked the same path in my investment career that others have found comfortable and I'm not going to start now. You see, I find beauty in a variant view. It's satisfying intellectually, analytically and financially (at least when you're correct). There's something special about adopting a non-consensus view and watching it become reality despite protests from many corners. This notion forms the basis for my annual "15 Surprises' list.

The purpose of my annual list is to get readers to think more deeply about a variety of issues. As you read the installments to follow, it will become clear that my surprises this year are substantially out of consensus -- more so than in any year I can remember. As The Dude says in The Big Lebowski: "Yeah, well, you know, that's just, like, my opinion, man."

By means of background and for those new to Real Money Pro, 18 years ago I set out and prepared a list of possible surprises for the coming year, taking a page out of the estimable Byron Wien's playbook. Byron is a longtime friend of mine (and I am having dinner with him and Anita later this month). Byron originally delivered his list while chief investment strategist at Morgan Stanley, then Pequot Capital Management and now at Blackstone. (Wien's latest list just came out last week and it's always fun to compare our surprises. Click here to read his "Surprises" list for 2020).

It takes me about four weeks of thinking and writing to compile and construct my annual list. I typically start with about 40 surprises, which are accumulated during the months leading up to my annual column on the subject. I cull the list to come up with my final 15 surprises. (Sometime I include also-ran surprises, as I did last year and as I have done this year). The preparation of my list, as it was this year, often is not completed until the early hours before publication.

I often speak to and get input from some of the wise men and women that I know in the investment and media businesses (you can probably guess some of their names -- two close ones and very smart buddies are with me in the list's preparation in recent years. We call each other "the three stooges.") My other go-to sources are two brilliant hedge hogger acquaintances from New York City and South Florida. I always have associated the moment of writing the final draft (in the weekend before publication) of my annual list with a moment of lift, of joy and hopefully with the thought of unexpected investment rewards in the new year. This year is no different. I think this year's list is pretty intriguing and many of the surprises have a good chance of occurring!

I set out as a primary objective for my list to deliver a critical and variant view relative to consensus that can provide alpha or excess returns. The publication of my annual list is in recognition that economic and stock market histories have proven that more often than generally thought, consensus expectations of critical economic and market variables may be off-base.

History demonstrates that inflection points are relatively rare and that the crowds often outsmart the remnants. In recognition, investors, strategists, economists and money managers tend to operate and think in crowds. They are far more comfortable being a part of the herd rather than expressing -- in their views and portfolio structure -- a variant or extreme vision.

It is important to emphasize that these are not forecasts. Rather, they are events with a greater than a 50% chance of occurring that are deemed deeper outlier events (with a probability of 20% or less) relative to consensus expectations. In other words, my Surprises are anti "Group Stink."

Confidence is the most abundant quality on Wall Street as, over time, stocks climb higher. Good markets mean happy investors and even happier investment professionals.

The factors stated above help explain the crowded and benign consensus that every year seems to begin with, whether measured by economic, market or interest rate forecasts. But an outlier's studied view can be profitable and add alpha.

Consider the course of interest rates and commodities in 2014, which differed dramatically from the consensus expectations. And consider my outlier view in late 2014 that the drop in oil prices would fail to help the economy and that OPEC would come close to dissolution and oil prices would plummet. An investor could have done quite well by following that message of avoiding energy stocks over the last few years. Or consider the value of my surprise that in 2019 the Federal Reserve would reverse its stance and cut rates, leading to a 2.25% yield on the 10-year U.S .note; that surprise was in marked contrast to the almost universal view that the Fed would tighten and interest rates would rise.

To a large degree, the business media perpetuate group-think and coddle investors, often into a false sense of security. Consider the preponderance of bullish talk in the financial press. All too often, the opinions of guests who failed to see the crippling 2007-2009 drama are forgotten and some of the same (and previously wrong-footed) talking heads are paraded as seers in the media after continued market gains in recent years. Memories are short, especially of a media kind. Nevertheless, if a criterion for appearances was accuracy, there would have been few available guests in 2009-2010 qualified to appear on CNBC, Bloomberg and Fox Business Network.

In 2020, after more than 10 years of market and economic prosperity, the few secular investment bears remaining are often ridiculed openly by the business media in their limited appearances, reminding me of Mickey Mantle's quote: "You don't know how easy this game is until you enter the broadcasting booth."

Abba Eban, the Israeli foreign minister in the late 1960s and early 1970s, once said that the consensus is what many people say in chorus but do not believe as individuals. GMO's James Montier, in an excellent essay published several years ago, made note of the consistent weakness embodied in consensus forecasts:

"Economists can't forecast for toffee ... They have missed every recession in the last four decades. And it isn't just growth that economists can't forecast; it's also inflation, bond yields, unemployment, stock market price targets and pretty much everything else ... If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!"

Lessons Learned Over the Years

"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown."

-- Woody Allen

"Let's face it: Bottom-up consensus earnings forecasts have a miserable track record. The traditional bias is well-known. And even when analysts, as a group, rein in their enthusiasm, they are typically the last ones to anticipate swings in margins."

-- UBS (Top 10 Surprises for 2012)

There are five core lessons I have learned over the course of my investing career that form the foundation of my annual surprise lists:

1. How wrong conventional wisdom can consistently be.
2. That uncertainty will persist.
3. To expect the unexpected.
4. That the occurrences of Black Swan events are growing in frequency.
5. With rapidly changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns. 

Again, it's important to note that my surprises are not intended to be predictions, but rather events that have a reasonable chance of occurring despite being at odds with the consensus. I call these "possible-improbable events." In sports, betting my surprises would be called an "overlay," a term commonly used when the odds on a proposition are in favor of the bettor rather than the house.

The real purpose of this endeavor is a practical one -- that is, to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs on small wagers/investments.

Since the mid-1990s, Wall Street research has deteriorated in quantity and quality due to competition for human capital at hedge funds, brokerage industry consolidation and reforms initiated by former New York Attorney General Eliot Spitzer. It remains, more than ever, maintenance-oriented, conventional and group-think -- or group-stink, as I prefer to call it. Mainstream and consensus expectations are just that and, in most cases, they are deeply embedded into today's stock prices.

It has been said that if life were predictable, it would cease to be life, so if I succeed in making you think (and possibly position) for outlier events, then my endeavor has been worthwhile.

Nothing is more obstinate than a fashionable consensus, and my annual exercise recognizes that, over the course of time, conventional wisdom is often wrong. As a society and as investors, we are consistently bamboozled by appearance and consensus.

Too often, we are played as suckers, as we just accept the trend, momentum and/or the superficial-as-certain truth without a shred of criticism. Just look at those who bought into:

• The success of Enron;
• The existence of Saddam Hussein's nonexistent weapons of mass destruction;
• The heroic home-run production of allegedly steroid-laced Major League Baseball players Barry Bonds and Mark McGwire;
• The "financial-supermarket" concept at Citicorp, which was once the largest money-center bank;
• The uninterrupted profit growth at Fannie Mae and Freddie Mac;
• Housing's "new paradigm" in the mid-2000s of non-cyclical growth and ever-rising home prices;
• The uncompromising principles of former New York Governor Eliot Spitzer;
• The morality of other politicians (John Edwards, John Ensign, Larry Craig, etc.);
• The consistency of Bernie Madoff's investment returns (and those of other hucksters);
• The clean-cut image of Tiger Woods.

But enough of that rant.

In the second movement of the Prelude to My 15 Surprises for 2020, we'll issue a report card on my 2019 surprises. Check back soon!

From Danielle DiMartino Booth:

• The worker/manager pay divide has narrowed; peak worker wage growth was revised down to 3.6% in October and fell to 3.0% in December while manager wages rebounded to 2.0% from November's revised 1.7% pace, previously reported as 0.5%, a five-year low
• Worker Hours in the U.S.'s six most cyclical sectors turned positive in December for the first time in three quarters, which should bode well for 2020's first quarter; Markit's global sector PMIs New Orders-to-Inventories suggests tentative upward momentum in global cyclicals
• While the global yield curve has stopped flattening indicating a potential reprieve in global growth slowdown concerns, the tentative steepening could reflect the one global sector that has yet to signal a turnaround -- global autos, which remains weak in Germany and the U.S.

Are your heuristics in good working order? In the early 20th century, the Austro-Hungarian-born psychologist Max Wertheimer identified laws by which humans group objects into patterns. From the Greek word meaning "to discover," heuristics fall into three categories. The representativeness heuristic dictates people judge the likelihood that one subject belongs in a certain class based on its similarity to other members of this class - stereotyping. The anchoring and adjustment heuristic affords one the ability to estimate the end value by starting at an "anchor," initial value and adjusting it up or down - starting points matter. The availability heuristic allows people to weigh the frequency with which an event occurs based on how easily that event comes to mind.

Take average hourly earnings stepping back from November's 3.1% growth rate over the prior year to 2.9% in December, the first dip below the 3%-line since July 2018, characterized as "lackluster," "still subdued," and "incredibly disappointing." These reflexive reactions are where heuristics might not be optimal given the availability of superficial data and what it represents on the surface.

Never you mind, the U.S. yield curve "bull-flattened" in response to the headline data. The gap between short and long rates narrowed with the latter falling more than the former, indicating heightened rate cut expectations tied to a slowing economy. And, of course, the Fed lowering interest rates is both bullish for the economy and in turn, the stock market.

What did the market miss, because it wasn't explicitly spelled out? As presaged in Friday's Feather, the unusual divide between robust worker and weak manager wage inflation was poised to narrow. Sure enough, the revisions and freshly reported data did just that. The peak in worker wage growth was revised down to 3.6% from October's 3.8% rate and fell further to 3.0% in December. Conversely, manager wage growth was revised up to 1.7% in November from what had been a five-year low of 0.5%, and rose further in December to 2.1%, an eight-month high. Those who typically command higher wages, who've been thwarted of late, regained some wage pricing power.

The bigger picture, if you're in the business of forecasting, is it's a fool's errand to use wage inflation, the most lagged of economic data which trails the second-most of lagging indicators, the unemployment rate.

To project, follow hours worked. As we've counseled in the past, hours lead bodies both up and down in economic cycles. In addition, QI's Cyclical Six -- construction, manufacturing, mining, retail, transportation and wholesale -- lead the economy. We had been concerned that after a strong showing of rising hours worked in 10 of the 11 quarters through 2019's first quarter, the Cyclical Six saw three straight quarters in the red. But momentum turned positive in December, setting up a rebound in this year's first three months.

To backstop the domestic signal, we looked outwards to the epicenter cyclical slowing in the global economy. To illustrate, we called on J.B. Drax Honoré's Mark Gomez to make back-to-back Feather appearances through the global yield curve that carries his name (see graph source for details of make-up). As you can see, global growth communicated through the prism of this yield curve has tentatively stopped flattening.

This hesitancy is exactly what we're seeing play out on the global cyclical stage. We compared demand in the form of New Orders to supply using Inventories in Markit's global sector PMIs. What we found: Information Technology Equipment is well off its lows but recently losing momentum, while Industrial Goods and Chemicals have both recovered but also sport asterisks given the timidity of their upward momentum.

That brings us to what remains the sore spot -- the global auto sector. While the demand-supply imbalance, as defined above, has turned positive, New Orders remain in contraction. Broadening out to the eurozone as a whole, there's no tangible evidence of auto orders expanding at an appreciable pace, nor of supplies being rightsized to match demand.

As for hopes that the U.S. auto sector will prove the savior, Manheim's latest data suggest the opposite. While fleet sales rose by 2.9% in 2019, this primary driver of sales in recent years fell 0.7% year-on-year in December. Meanwhile, retail car sales to end consumers were a disaster, falling at an annualized 7.1% pace in December and 2.3% for the full year marking a fourth straight year of declines.

Talk about two different tales. Either the market's heuristics tricked traders -- the re-acceleration in cyclical-sector hours worked should have triggered an anchoring up of expected economic activity. The yield curve should have "bear-steepened," wherein long rates rise faster than short rates. Or... traders saw through the short-term message in the data and opted to anchor down their growth expectations until clearer signs of a sustained recovery, both globally and domestically, manifest.