21 Surprises in 2010
BlindReason submits: Hard to beat 2008 and 2009 in terms of the potential for interesting surprises, but would a little bit of relative boredom be such a bad thing at this point? Here is the list for 2010:
- AT&T (T) gets revenge in 2010, aka "The Empire Strikes Back". It achieves an 18-24 month lead in speed / capacity and devices in 2010. LTE emerges as the dominant standard however Clearwire (CLWR) and others use financing opportunities to keep Wimax as a viable alternative. Verizon (VZ) rolls out 4G LTE but experiences unexpected difficulties. AT&T holds back on 4G but pushes its 3G network forward with software and TRX upgrades that dramatically improve its network especially compared to Verizon. It achieves a 24 month speed / capacity lead over Verizon. Just for the record, one of my first posts ever was a post likening AT&T to the former Soviet Union and I was one of the first to call their network horrible years ago. However, they will have the tech gods on their side in 2010 because of software upgrade path issues that work in their favor and problems rolling out LTE by Verizon.
- Health Care Continues to be Broken despite passage of the Health Care Bill in February. Already signs that Medicare costs continue out of control start to show by the September. President Obama gives a speech "We are not done". If Democrats retain at least 50 seats in the Senate (I believe they will), they will pass a new reform bill with budget reconciliation that imposes much steeper cuts in total national health care spending, most likely after the election in November. This sends shock waves throughout the industry as many doctors and nurses are no longer needed for unnecessary procedures.
- Apple (AAPL) releases an iPhone version at least 90 days earlier than its usual summer release date due to competitive fears (March / April or earlier). Tablet product releases as well as some innovation in its laptop line makes it another great year for Apple but challenges from Google (GOOG) emerge. The iPhone comes to more carriers but Verizon isn't the first carrier to get it. The price for the tablet is closer to $900 (around $599 after carrier subsidy).
- Oil drops to $35 at one point during the year putting huge pressure on Venezuela, Iran and Russia--countries that all go broke below $70 over a sustained period. Gold increases in value even while the dollar increases breaking a previous inverse correlation (as per an earlier piece on Blindreason.org). Government programs in China keep factory demand for commodities humming but explosive growth that mimics the period in 2005-2007 does not materialize. i.e. they rise but not quite so dramatically. Oil trades in the most volatile range with a high toward $100.
- There are attacks on Iran but not what people expect. There is no air strike against Iran as the US hopes for home grown revolution as a solution to the crisis. As long as internal dissent continues, no overt military strikes take place. However covert sabotage in terms of imported materials, computer systems and infrastructure continues to disrupt the Revolutionary Guards efforts to produce a nuclear weapon. The Supreme Leader in Iran is forced out of office and the country. The Revolutionary Guard tries to paint this as a fresh start while trying to stay in power and retain control of key Iranian industries. Protests continue despite this. The nuclear standoff continues with a few "negotiation breakthroughs" promised but never acted upon. Iran takes every opportunity to grab the brink of conflict without going over the precipice in order to keep oil prices high. This includes provocations in the Gulf and on the Iraqi gulf. Eventually the regime in Iran falls, but it holds on to power longer than people thought due to support from large blocks inside Iran.
- The seeds of a new political party in America emerge during the November elections. With the advent of the internet and social media, a third political party will start to form as several representatives become unhappy with extremist views in both parties. Third parties have typically failed to gain traction due to difficulties matching field organizations, however the internet makes this possible. This change is for the better and outstanding candidates from both parties join in the hopes that the internet revolution can make a third party viable in the United States. More parties are seen as making it more difficult for big business and unions to buy influence.
- Obama's popularity rebounds from lows as the economy gets a moderate rebound in Q1. Prime housing continues a nice rebound despite an uptick in mortgage rates. High end housing faces pressure. The Democrats lose 24 seats in the House but not the complete drubbing forecast in current polls. Early waves of populism against the excesses of the rich, are outweighed by small government low tax populist movements reminiscent of the 80s. The two populist waves cancel each other out.
- Interest Rates. Consensus for the US interest rates are for a spike next year. The Fed gets in backward. Instead of pressuring Congress to pull in huge deficit spending, the Fed curtails monetary policy by mid year (the exact opposite should be happening). However, concerns about sovereign defaults elsewhere ameliorate interest rate rises in the US at least somewhat. We get an increase, but it's not cataclysmic. Consensus forecasts for a upside in the first 6 months followed by a huge shake out in equities does not occur. The big "shake out" in excessive debt levels in the United States does not occur-this year.
- The FCC continues pressure on the large wireless carriers. Pushes for new spectrum and new wireless broadband entrants continue. While regulatory pressure continues, the FCC decides to auction off large bulks of spectrum to non incumbents. When unleashed, this spectrum will increase competition and innovation in mobile / fixed broadband data and video. Wimax survives and thrives as an alternative to LTE in the United States despite massive debt concerns at Clearwire. One of our predictions some time last year was for the FCC to launch an investigation, at this point this is how it will probably resolve. I love the current FCC commissioner, by the way. The guy seems to be making good judgment calls across the board.
- Natural gas takes on increasing momentum as an alternative to foreign oil to power US cars--the primary source of demand for oil. Bills move forward in Congress that move the US trucking fleet to natural gas.
- One or both CEOs of Twitter Leave. Social networking continues a trend reversing some of the anti social effects of the Internet. The internet made it so you'd never have to leave your house, mobile networking makes you connect with people around you where ever you are. Not all goes well in Social Networking as there is some kind of disaster at Twitter in 2010. Either one or both of the founders leaves the company (for performance reasons), or it becomes clear that their efforts in building a revenue model fall short. Any exit here falls short of earlier expectations for a billion dollar valuation. Momentum in location based gaming takes off with a brand new game launched that catches on across demographics (kids and their parents play together).
- Goldman Sachs (GS) and other banks stay public-- however their proprietary trading operations are "spun off" or otherwise separated from the bank holding companies. This is seen as a way to prevent taxpayer funding of what have become publicly backstopped hedge funds.
- Bonds over priced, equities under priced. There is too much of a preference for bonds over equities which is driving my expectation for equity returns upward. There is also an overwhelming consensus for a "split" year with upticks in the first half followed by a downturn in the 2nd half as interest rates spike. My surprise here is the S&P has a tremendous year hitting 1345 or approximately a 20% increase. The market has 10% correction at around 1225 on the S&P but rebounds by the end of the year. If you factor in inflation however, it's not that big a deal. Actual earnings and corporate balance sheets are not excessively debt laden. Most of the debt is on the US government balance sheet, Fannie / Freddie (asset backed) and the US consumer. This is a bet that the foreign consumer, while tamed, will take up at least some of the slack as US companies sell abroad. However, this is just postponing a day of reckoning as debt continues to rise. Tech continues with a banner year with Facebook going public as well as 1-2 other rising stars in social media. Microsoft (MSFT) peaks in Q3 of 2010 and begins a slow and steady secular decline. Bing does well, but Microsoft Office and OS continues to lose market leverage as alternatives proliferate. Browser share declines and mobile efforts don't quite match Android or Apple momentum in any meaningful way.
- A Year of Challenges for China. 2010 becomes the year where China is challenged by the US but more importantly, by everyone else too. China faces tremendous trade pressure from its neighbors in ASEAN. Its 40% subsidy to the dollar is viewed as "stealing jobs" from its Asian neighbors. A declining US current account deficit means less of its reserves go to buying US treasuries. The China bubble looks like a 2011 to 2013 crash. Note, China is still a great long term story as it emerges from 300 years of hibernation (in 1700 its technology was on par with Europe). However, in the short term it's got Dubai style over capacity. If it collapsed so soon in 2010 it would indeed be a surprise given it has trillions in reserves. I'd guess a Dubai style shock could occur around 2012 / 2013. Reserves will be depleted to keep their population employed but $2 trillion goes a long way. Continued internet pressures also with unrest in Tibet and in the vast Muslim regions in the west.
- Obama enacts a fiscal policy restraint program including salary cuts and hiring freezes in the Federal Government. This is viewed as a necessary austerity measure for entitlement reform. Health care reform is not done. Democrats consider using budget reconciliation in 2010 to enact reforms that more closely mimic a public plan appeasing those who felt too much compromise was made in 2009.
- There is a tentative middle east peace deal.
- The Comcast (CMCSA) / NBC deal starts to look like AOL / Time Warner (TWX) without all the big upside as old media continues a rapid decline. Pressure on broadcast networks declines further with the rise of new distribution and content creation. The younger generation in particular shuns the advertising model used by mainstream networks (we have to watch commercials?). Efforts by Rupert Murdoch to stem the tide of new low cost, original content fail. We see the first few upstarts in new media content creation gain real traction. New companies that provide large volumes of low cost, unique and valuable content take hold. The old question of what is more valuable-- content or distribution-- is settled. However, it's the brand new content creators that benefit the most.
- The "new" big battle in Congress next year is over immigration reform. Turns out to be even uglier than health care. Old battles over the deficit, government spending and entitlement reform (medicare, social security) reach a fever pitch, however.
- The Macro world has increased sovereign debt concerns for EU member countries and increasingly Japan. Demographic and financial problems in Japan, Russia, Venezuela and elsewhere increase. North Korea experiences some sort of change in government, but Chavez stays. No real reform in Russia and corruption and mongol style backwardness continues.
- Fannie and Freddie debt levels go to the front burner of worries as the Ponzi scheme of 2010 keeps pressure on the Fed from tightening too much. Despite real estate recovery, Fannie and Freddie Debt levels and the now de facto U.S. guarantee induce a 10% correction in the U.S. market. Concerns about this keep from raising rates as high as they ordinarily would. Rock and hard place -- meet Ben Bernanke.
- New Methods of Search Monetization. Current methods of compensation are reworked.
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