SPY Advancing Without the Breadth

Closing Breadth

S&P 500 Sectors

Nasdaq 100 Heat Map

I am getting a lot of these Tesla TSLA offers in my email box:

Double the Credits Through New Year’s Eve

You have until midnight New Year’s Eve to earn up to double the amount of Tesla Credits.

Get $1,000 instead of $500 in Tesla Credits for each qualifying person you refer who takes delivery of a new Tesla by December 31, 2024.

The first 10 people who use your referral link will now get $1,000 off Model Y, $1,500 off Model 3 or $2,000 off Model S, Model X or Cybertruck.

All new orders that take delivery by December 31, 2024, can also enjoy 3 months of free Supercharging and Full Self-Driving (Supervised).*

Limited to 10 awards. Subject to change or end at any time. Residents in OH and VA qualify for the Buyer and Loyalty benefit only. Terms, conditions and exclusions apply.

*Customers who take delivery of a new vehicle between November 14, 2024 and December 31, 2024, are eligible for three months of free Full Self-Driving (Supervised) and Supercharging. Offer cannot be postponed to a later time, or transferred to any other account or vehicle, and subject to change at any time. An alternative option will not be made available to those who purchase Full Self-Driving (Supervised). Used vehicles and business orders are excluded from this promotion. 

douglas cassel

I certainly agree with Doug K on one thing. If AI does indeed turn out to be a bust, then the Mag 7 is insanely overvalued. I think stock prices are projecting multiple benefits from increased productivity related to Al. If this doesn't happen, slugflation may be the operative word, and markets will dump.

I remain more optimistic than Doug K, and think that once ridiculous expectations are rationalized, some real benefits will accrue, but that is mainly based upon my trust in the genius of others.

Met someone working on optical quantum computing, they were pretty sure it will be the next big thing. I will keep you apprised.

With S&P cash back to +34 handles I am re-shorting SPY and QQQ calls for February.

My cost basis for trades below (put on when S&P cash was +34 handles) — now up by less than +19 handles:

* SPY $593.98.

* QQQ $523.06.

Just What the Doctor Ordered

I am at the doctor's office but with S&P index +34 handles I have shorted very small (SPY) and (QQQ) .

Position: Short SPY (VS), QQQ (VS)

By Doug Kass Dec 23, 2024 2:40 PM EST

Things I Did Today

These Index trade (common) shorts, along with a short in NVDA at $138, and adds to longs in ELAN at $11.66 and JOE at $44.17, will suffice as my "Things I Did Today."

I am at the doctor's office but with S&P index +34 handles I have shorted very small SPY and QQQ. 

Breadth

Sectors

 % Movers

Nasdaq 100 Heat Map

* The markets are not broadening... in fact, it's the opposite trend!

On Friday I made the case that without a broadening out of the market, we are unlikely to see a new bull market leg (which underlies bullish, consensus strategists' forecasts). 

Despite the vigorous recovery in equities on Friday, the Russell's weekly drop (-4.5%) doubled the S&P's weekly loss of -2.2%:

From Friday:

By Doug Kass Dec 20, 2024 8:00 AM EST

Sorry Tom Lee, Mr. Market Is Not Broadening...The Opposite Is Occurring

* This is my 23rd year of Surprise Lists — so "let's give them something to talk about"

* My Surprise List goes from 10 Surprises in 2024 to 15 Surprises in 2025.... well, because its such a surprising year with a vast array of unexpected political, social, regulatory, economic and market surprises on tap!

* To begin with — and perhaps the biggest surprise — is that there is unexpected news for "Swifties"! (What is a Swiftie?) 

* Among the other big surprises in 2025 — a divorced Donald Trump grows more moderate/centrist in policy, the Democratic party moves further to the left, Elon Musk is dumped, private equity acquires some of our countries' leading private university football teams, interest rates rise rapidly, technology eviscerates cryptocurrency values and a natural disaster causes supply chain dislocations, a spike in inflation and a U.S. recession....

"Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time."

-- Byron Wien

The creator of the annual Surprise List, Byron Wien, remains in my thoughts after his passing a year ago.

One year ago, in preparation for the assembly of last year's Surprise List I paid homage to my dear pal Byron Wien. 

(Byron Wien, Wall Street Seer of the Unexpected, Dies at 90 - The New York Times)

Here was my tribute to Byron on TheStreet Pro. May his memory be a blessing.

Without further ado, here are my 15 surprises for 2025: 

People are talking, talkin' 'bout people

I hear them whisper you won't believe it

They think we're lovers kept under cover

I'll just ignore it, but they keep sayin' we

Laugh just a little too loud (a little too loud)

Stand just a little too close (too close)

We stare just a little too long

Maybe they're seeing something we don't darling

Let's give 'em something to talk about (something to talk about)

Let's give 'em something to talk about (something to talk about)

Let's give 'em something to talk about

-- Bonnie Raitt - Something To Talk About

Surprise #1: Another attempt on former President Trump's life occurs early in his term. 

Was it Iran? Was it the FBI? Was it the CIA, the NSA or just the deep state? No one finds out. The election is a big problem for many powerful vested interests and the swamp doesn't want to let itself get drained. Is the Secret Service even capable of protecting President Trump?

During the early Summer, Donald and Melania Trump announce their intention to divorce. It is revealed that a separation agreement was conceived several years ago.

By the end of 2025, it is revealed that President Trump has been having a relationship (with a Democrat!). He publicly declares his desire to get remarried but divorce settlement negotiations with Melania extend and delay the divorce... and his fourth marriage.

Surprise #2: The "other" romance, between Trump/Musk, doesn't make it past Spring, 2025. 

National protests and demonstrations emerge and demands from a wide array of members of both the Republican and Democratic parties (including conservatives and liberals) call for "ousting" Elon Musk, an unelected official, from playing such a dominant role in the U.S. government.

Bernie Sanders, taking the Senate's mantle of opposition to Musk, tweets about Elon Musk's and other billionaires' outsized role in the government:

"The precedent set in the last few months should upset every American who believes in our democratic form of government. In 2024, just 150 billionaire families spent almost $2 billion to purchase political candidates. Since the election in November, Elon Musk, Jeff Bezos and Mark Zuckerberg got $300 billion richer and are now worth $1 trillion combined. It appears that from now on no major legislation can be passed without the approval of Elon Musk, the wealthiest person in our country. That's not Democracy, it's Oligarchy. We must fight for an economy that works for all, not just the few. Elon Musk is an unelected official that is essentially acting a the President of the United States. We must pass legislation that changes this!"

Funded by George Soros, the law firm Boies, Schiller & Flexner launches a suit restricting the role of unelected officials without official positions in the Administration (like Elon Musk and Vivek Ramaswamy). The suit ends up going to the Supreme Court but is unresolved by year-end.

Reading the room (and increasingly uncomfortable with Musk's nororiety), President Trump begins to be openly critical of Musk and finally abandons him entirely.

Musk lashes out and retaliates by forming his own party and has a nervous breakdown.

Separately, Tesla makes little progress in "full self driving." The U.S. government takes away the $7,500 tax credit, competition from China intensifies, unit sales drop by double digits and Tesla's profits collapse. In addition, an "accounting issue" (related to warranties) is uncovered by a short-oriented research boutique. All these factors cause the shares of TSLA to drop to $100/share.

Elon Musk's non-Tesla investments suffer from reduced U.S. government support.

Musk grows ever more unhinged throughout 2025 - his mother attempts a family intervention.

Surprise #3: The Trump/Vance Administration is far more successful in carrying out its campaign promises than Trump I or really any recent President. 

Starting with immigration, the U.S. southern border is simply shutdown at the beginning of his term and at least 2.5 million undocumented people are deported. There is a high-profile crackdown on a few employers. Jobs for the undocumented become harder to secure. Further, the various federal support and benefit programs for the undocumented becomes unavailable. Fewer jobs and benefits and the constant risk of being deported cause an additional 1.5 million people to self-deport.

The economic implications are very inflationary for U.S. wages -- contributing to much higher inflation (see below). Certain industries like hotels and restaurants are particularly challenged to retain adequate labor. Low-end retail suffers, as the customers have fled the U.S. and low-end apartments develop vacancies.

President Trump takes back his "Drill, Baby, Drill" campaign promise. U.S. oil production continues to fall as shale basins top out and drillers focus on free cash flow. The price of oil rises to $85/barrel by mid-2025, aiding to inflationary pressures.

Surprise #4: Relating to tariffs, while there are continued threats of robust tariffs directed at specific trading partners - they mostly serve as negotiating positions and do not get implemented. 

However, an across-the-board 10% tariff is instituted - further contributing to additional inflationary pressure.

The bond vigilantes come out of hibernation and are ubiquitous next year.

Inflation reaccelerates and rises to above 4% by year-end 2025 (the yield on the 10 year Treasury note exceeds 5.5%) - the Administration considers price controls.

The Federal Reserve pauses in its rate cutting course and eventually reverses policy and tightens. President Trump attacks the Fed and seeks Jay Powell's resignation. Powell stands firm as Fed Chairman.The U.S. economy enters a recession in late 2025/early 2026 following a continued weakening of the economies of the European Union and China.

Surprise #5: Amid weakening domestic economic growth, planned austerity measures (and reduced fiscal spending/support), recommended by DOGE, are unsuccessful and abandoned.

Surprise #6: President Trump grows more moderate in tone and policy - and, surprisingly, moves away from his MAGA base. 

In contrast, the Democratic party grows more liberal (with California Governor Gavin Newsom temporarily taking up the party's de facto mantle of leadership). But, with Newsom moving further to the left (and going even softer on crime policies in his state), California's Governor falls in the polls by year-end and is no longer considered a party leader. The Democratic party appears rudderless, without any clear front runner.

This lays the groundwork for more Republican party political wins in 2026.

Former Vice President Kamala Harris leaves the political scene and accepts a professorship at Stanford University's Law School. Late in the year, Harris announces a plan to reenter politics but it is quickly rebuffed by the Democratic National Committee.

Surprise #7: AI related equities are adversely impacted by two factors - the inadequacy of supply of electricity and the absence of a killer app or related income stream:

* With AI data centers so power-intensive and the AI arms race continuing apace - our nation's supplies of electricity prove inadequate. Power outages become common place and consumers' utility bills soar. With the need for the construction of new natural gas-driven power stations natural gas prices double (contributing to further inflationary pressure). A pissed off public demands action. In order to subsidize lower prices for households, large taxes are placed on AI data centers.

* As the year progresses it becomes clear that there is no material killer app or related revenue stream that is derived from the use of Generative AI. Focus shifts from being directed to consumers to helping corporations cut costs. This transition benefits tech integrators and consultants to the detriment of hyperscalers - the later ultimately recognizes that there is not an adequate revenue stream and scale back their capital outlays and budgets.

Nvidia's NVDA "day in the sun" abruptly ends and the share price falls to between $50-$75 in a matter of days as it grows clear that double and tripling ordering buoyed the company's past reported top and bottom lines. The view that other manufacturers "over earned" produces a contagion and a setting in which large cap stocks like Microsoft and other hyperscalers' share suffer similarly.

Surprise #8: AI headlines are replaced with quantum computing headlines. 

Though it is many years away from commercial use, the hype/hope cycle takes on a different subject and character. One of the important impacts will be to eventually hack proof of work crypto currencies including bitcoin. In time and if hacked, bitcoin becomes nearly worthless - and bitcoin collapses in price to under $25,000 in the late Summer. Most other secondary and tertiary crypto currencies fall to zero.

The collapse in cryptocurrency prices causes fear of financial contagion - and equities fall by nearly -7% in one month.

Surprise #9: In 2025 the S&P Index falls by about 15%. The technology-laden Nasdaq drops by over 20%. 

But the equal-weighted S&P Index RSP only declines by 5%.

Under the weight of AI disappointment, higher interest rates, rising inflation and lower economic growth - financial and technology stocks are among the largest losers.

The Indexes close at their yearly low on the last day of 2025.

Surprise #10: There is peace throughout the world. The Ukraine war is settled and there is peace in Israel. Israel and Saudi Arabia announce a new (and friendly) accord.

Surprise #11: Climate change strikes the U.S. in a 500-year rain and flooding event.

Inflicting $250 billion -$500 billion in damages (roughly 10-times worse than Hurricane Katrina in 2005), the property and casualty industry is unprepared for such a catastrophic storm. With insufficient reserves and a move to forestall financial contagion, one of the top ten property and casualty companies is bailed out by the U.S. government.

The multi-year move to move away from globalization and towards reshoring in the U.S. backfires as another natural disaster (Covid being the first in early 2020) wrecks and disrupts supply chains in our country and causes another inflationary spike (already abetted by the wage inflation incurred from the deportation policy of the new Administration)).

A dramatic reset higher in natural disaster insurance pricing harms home prices across the country -- serving to contain the rise in commodities and finished goods inflation. But with consumers questioning the value of their largest asset (their homes) coupled with a mortgage rate over 8%, consumer confidence collapses.

Surprise #12 Private Equity first acquires college football franchises and then some investors plan to purchase entire private universities. 

College football team takeover activity is initiated by Mark Lasry's Avenue Capital Group, which acquires 51% of Notre Dame University's football team for $700 million.

Blackstone purchases a majority interest in the largest and most valuable public sector's football team, the Ohio State University (for $1.5 billion, an offer that the school's trustees deem too large to turn down!), Kohlberg Kravis purchases more than half of (public) University of Alabama's football team for almost $1 billion.

Then, in a shocking move, billionaire investor and Pittsburgh native, David Tepper, acquires all of Carnegie Mellon University for an undisclosed amount.

But Wharton alum and Apollo CEO Marc Rowan is rebuffed in his attempt to have Apollo buy The University of Pennsylvania. Apollo settles on the purchase of 51% of Penn's football team for $175 million.

Senator Elizabeth Warren exclaims, "Isn't it enough that our country's billionaires own professional football teams!"

Even President Trump is irate. Soon thereafter, Congressional legislation prohibiting the acquisition of any private University is proposed and introduced into law.

Surprise #13: The U.S. government intensifies its anti-trust cases against big tech and initiates legislation aimed to regulate the shadow banking and private equity industries.

The Google case is decided in late 2025 with significantly adverse effects on both Apple and Google—  the shares of both plummet.

The Trump Administration, appalled by the audacious acquisitions of some of the leading U.S. universities' football teams (and then by audacious attempts of private equity to acquire entire universities!) reacts by introducing regulatory and imposing strict capital actions against the private equity industry. Blackstone, Kohlberg Kravis and Apollo fall under the weight of these efforts.

Surprise #14: Warren Buffett's corporate curtain call is the acquisition of the Boeing Company in 2025 - the largest acquisition in Berkshire Hathaway's history.

Berkshire Hathaway eliminates its entire stake in Apple AAPL - selling all of its shares by mid-year.

Surprise #15: Surprises in the sports world abound in 2025:

* The LA Dodgers and New York Yankees meet again in the World Series. This time the Yankees sweep the Dodgers.

* Yankee Global Enterprises LLC (which is majority owned by the Steinbrenner family) sells a portion of the New York Yankees to Blackstone.

* Bill Belichick never coaches the University of North Carolina football team - as he is offered and accepts a NFL head coaching position.

* Deion Sanders leaves the University of Colorado and, he too, becomes an NFL head coach - replacing Mike McCarthy of the Dallas Cowboys.

* The heavily favored Super Bowl contender, the Kansas City Chiefs, get blown out in the first round of the NFL Playoffs. Shortly thereafter, similar to the famous 1973 wife swap It's 50th anniversary of Yankees' most insane swap ever of New York Yankees pitchers Fritz Peterson and Mike Kekich, Kansas City Chiefs' Patrick Mahomes and Travis Kelce switch partners ((Patrick Mahomes marries Taylor Swift and Travis Kelce marries Brittany Mahomes).

* How did I do last year?

* Very poorly!! Only about 30% of most important surprises were accurate - my worst showing 11 years.

"A second argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: 'Maintain buying reserves until current uncertainties are resolved,' etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."

-- Warren Buffet, Forbes (1979)

"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

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



-- Seneca the Elder 

I wrote in "Prelude First Movement" that I would be grading the surprises for 2024 that I unveiled a year ago. In 2024 less than one third of my Surprises proved prescient. In 2023 four of my first five most important surprises were accurate. (Nine out of my 15 Surprises were correct, a 60% success rate -- tying my best year ever.) As a means of reference, my worst hit rate was in 2013 when only 20% of my Surprises occurred. My best was over 60% in 2018.Below is a report card of my 10 Surprises for 2024:

1. Donald Trump is convicted of obstruction and conspiracy.

In an agreement between the former President and the current President, Biden pardons Trump in exchange for Trump agreeing to leave the 2024 Presidential race. Governor Ron DeSantis finishes third in both the Iowa and New Hampshire primaries and drops out of the race -- with Nikki Haley capturing many of his supporters - closing the gap with Trump. Chris Christie drops out soon thereafter while Vivek Ramaswamy hangs on to the bitter end. Nikki Haley becomes the Republican Presidential nominee.

In early September, shortly after Biden wins the nomination, the President suffers a health emergency and, like Trump, leaves the race. If Trump indeed has left the race, Governor Gavin Newsom is selected as the replacement nominee for Biden. If Trump is still in the race (and not convicted) and Biden does have a health emergency, the Democrats draft Governor Gretchen Whitmer after first trying to attract Michelle Obama into the fray (she demurs). Whether the contest is between Haley/Newsom or Trump/Whitmer, the winner will be the first woman President...either Nikki Haley or Gretchen Whitmer.

Former President Trump's obstruction case was terminated upon his election. President Biden did leave the race because of health reasons. HALF CORRECT!

2. In part due to fear that Democrats will continue to hold onto the Presidency, foreign powers step up military confrontations.

The West continues to lose patience with how the war is going with Ukraine as the U.S. backs off of its support. Negotiations on a territorial split begin and Ukraine is forced to give up the East of the country to Russia.

North Korea, with support from Russia, undertakes skirmishes in the Demilitarized Zone and makes threats to invade South Korea. Iran completes its nuclear buildup which provokes a direct attack from Israel. Though China doesn't invade Taiwan it continues with aggressive war game tactics in the South China Sea.

The global economy is more susceptible to supply shocks than is generally believed. With Russia and Saudi Arabia conspiring on production cuts, the price of oil exceeds $110/barrel and the price of a gallon of gasoline in the U.S. approaches $6. Shares of Exxon Mobil XOM , Occidental Petroleum OXY and Chevron CVX each rise by over one third next year.

The Democratic Party lost the Presidential election but foreign powers escalated militarily. Though oil did rise in price and energy stocks fared well in early 2024, energy prices and securities fell in the second half. HALF CORRECT!

3. There is neither a soft landing nor a hard landing -- just very sluggish real growth in the U.S. economy.

With no negative payroll prints, wages continue to grow at a three to four percent rate as unemployment stays below 4.50%. China's economy starts a surprising recovery causing commodity prices to begin to inflect higher and oil begins a slow but persistent recovery in price. Inflation fails to tick much lower, remaining well above the Fed's target. Nonetheless, with the polls tight and in an effort to influence the election, the Federal Reserve cuts rates twice before July.

These policy moves and conditions prompt a resurgence in headline inflation, and as discussed above, in a further spike in the price of oil in late summer -- complicating the Fed's desire to cut rates. Though domestic growth begins to trail off in the last six months of the year and unemployment moves higher, no further interest rate cuts occur over the balance of the year. It's slugflation (sluggish economic growth, sticky inflation), clear as day.

The yield on the 10-year Treasury, which today is at 3.91%, never declines below 3.75% and fluctuates between 3.75% and 4.75% most of the year. A developing US recession, late in the year, sends the budget deficit as a percentage of GDP to 10% or more -- overwhelming Treasury supply and sending the 10-year yield back above 5%.

The U.S. federal debt problem is no longer shrugged off by investors -- it looms larger in late 2024 and slowly becomes a serious systemic problem in the years ahead.

Creditors demand more to buy U.S. debt. After the 10-year Treasury yield touches 5.5%, the Fed ends QT and restarts, temporarily, QE - breaking its word of sticking to its inflation target.

CORRECT ON THE ECONOMY, INTEREST RATES (THE TEN YEAR YIELD WAS WITHIN THE RANGE). VERY RIGHT!

4. The S&P Index never exceeds 4900 and drops to under 4100 in the oil price scare.

Despite all the macroeconomic, geopolitical and political drama, the trading range for most of 2024 is the narrowest in years. The S&P Index ends the year with about a 5%-10% decline. Led by the drop in the shares of Apple AAPL , the Nasdaq ends the year with a decline of between 10% and 20%. The market doesn't broaden out further and the Russell Index also exhibits a loss for the year as many components of the Russell face financial (debt rollover) and operating headwinds.

VERY WRONG!

5. The biggest and most popular stock in the world, Apple, suffers a large percentage loss in 2024 as trade tensions with China escalate.

With China supporting Huawei, Apple loses substantial market share in that country and overall revenues decline again in 2024 (over 2023). Meanwhile, as a result of the Google Anti-Trust case, Google GOOGL stops paying Apple $18 billion in search fees. Apple's shares drop to below $130/share. Berkshire Hathaway BRK.B "doubles down" on its already large Apple stock holdings - raising its position to nearly two billion shares.

VERY WRONG!

6. Fears of credit problems are realized and the banking industry, among others, suffers large loan losses.

Commercial real estate fails to recover in price. A wave of commercial real estate busts create another regional banking crisis and forces the FDIC to negotiate several bank mergers. In 2024, bank stocks return to their 2023 lows.

VERY WRONG!

7. Wall Street's most vicious vultures -- private equity -- are about to get torn to shreds.

With still elevated interest rates, especially in the second half of the year, and a slowing global economy, loan rate resets contribute to a leader in private credit failing. Blackstone's BX shares drop by a third after BREIT (private real estate fund run by Blackstone) and BXMT come under new redemption pressures. Shares of other private equity stocks (Apollo (APO) and KKR plunge as the SEC opens an investigation into the failure of the private equity industry to realistically mark-to-market their portfolios in a timely manner.

VERY WRONG!

8. What would a surprise list be without mention of Elon Musk?

It is revealed that Elon Musk suffers from a serious addiction. Entering an extended stay in rehab, Musk is forced to temporarily relinquish operating control over his companies. Tesla's TSLA shares fall back to the lows of 2023.

VERY WRONG!

9. Warner Brothers Discovery (WBD) and Paramount Global (PARA) suffer operationally and financially ("profitless prosperity") Streaming fails to fulfill optimistic expectations -- the total addressable market is over estimated, content costs remain high and profits are nonexistent.

On the brink of a liquidity crisis, Shari Redstone sells Paramount (at a discounted price) to private equity. Disney's DIS shares trade in the $70s and corporate raider Nelson Peltz sells out for a large loss. Bill Ackman's Pershing Square hedge fund purchases Peltz's shares.

VERY RIGHT!

10. JPMorgan Chase's (JPM) Jamie Dimon departs the bank and joins either the Haley or Whitmer Administration as Secretary of Treasury.

Marianne Lake becomes CEO of JPMorgan.

VERY WRONG!

Next up, my 15 Surprises for 2025!

* This is my 23rd year of compiling my Surprise List (which jumps in number by five this year)!

* Nothing is more obstinate than a fashionable consensus.

* My Surprise List 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.

* 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

* In Prelude #1 I discuss the history of my Annual List, why I embark on this exercise and some of the lessons I have learned (hint: the importance of thinking creatively and independently)...

"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!

I will shortly be unveiling my 15 Surprises for 2025.

Abnormal Distribution of Outcomes Have Become More Normal

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 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 of 2022 were 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."

This year brings more out-of-consensus surprises.

Background

By means of background and for those new to TheStreet Pro (formerly Real Money Pro), 23 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 who we lost in late 2023. Byron originally delivered his list while chief investment strategist at Morgan Stanley, then Pequot Capital Management, and finally at Blackstone.

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 surprises that make it in print. The preparation of my list, as it was this year, often is not completed until the early hours before publication.

Getting Some Help From My Friends

I often speak to, and get input from, some of the wise men and women whom I know in the investment and media businesses (you can probably guess some of their names -- two of "the three stooges" (I am the third!) are among those that help most in the constructing of my list). My other go-to sources are three brilliant hedge-hogger pals who think out of the box and have successfully navigated many market and economic cycles.

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!

Think Independently: Don't Be a Lemming

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 25% 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 perpetuates group-think and coddles 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 or the market's schmeissing over the past year 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, it seems 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 or in 2022 qualified to appear on CNBC, Bloomberg and Fox Business Network.

***

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 important and 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 a rapid decline in institutional commission rates. 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.

Ayn Rand put it well:

"You can ignore reality, but you cannot ignore the consequences of ignoring reality."

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 seeming "success" of Enron, WorldCom, Qwest Communications and ZZZZ Best;
• 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 leading into the Great Financial Crisis;
• 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, Rod Blagojevich, Tom DeLay, etc.);
• The consistency of Bernie Madoff's investment returns (and those of other hucksters like Sam Israel (Bayou Funds);
• The meme stocks (Gamestop GME , AMC AMC, Robinhood HOOD et al);
• The adulation of FTX and Sam Bankman-Fried.

But enough of the rant.



In the second movement of the Prelude to My 15 Surprises for 2025, I will issue a report card on my top 2024 surprises.

Charts from 8:28 a.m. ET:

Chart from 8:47 a.m. ET:

Bonus — Here are some great links:

Stock and Crypto Market Analysis

The Market Stress Test

The Russell Index Is at the Crossroads

Preparing for 2025 

* Paradise Lost?

It was a volatile evening for stock futures.

After being flat, S&P futures rose as high as +32 handles (around midnight) and are now +9 handles.

I wish I had been awake to re-short the Indices but it way after my bedtime.

I usually wake up once or twice to look at my Bloomberg screen but I didn't last night.

Paradise lost?

* But a bit less so than Thursday night...

The S&P Short Range Oscillator stands at -7.31% vs. -8.55%.

I shorted more Apple AAPL at $256.16.