A list of grey swans (and a few black ones) for 2011

As the calendar year draws to a close it has become quite popular to make a series of predictions for the year ahead. Instead of making absolute predictions for events that may or may not occur during the next 12 months, I will lay out a series of events that could take place in 2011 which I believe the markets are not properly pricing. After reading various analysts’ and market participants’ predictions for 2011 it is clear that the vast majority are calling for another bullish year for equities. In fact, in the latest Barron’s several sell-side analysts called for S&P 500 2011 targets ranging from 1400-1450. There is obviously a great deal of ‘group think’ going on with regard to bullish optimism for equities in 2011. A savvy market participant should shun such group think and rather try to anticipate the unexpected (as per the Soros quote at the top of my website). Without further ado, here is my list of improbable underappreciated events that could occur in 2011 along with my estimate of the probability of each event occurring (each event should be thought of as independent of the others and these events are NOT part of some sort of macro-thesis for 2011):

  • Greece leaves the Eurozone as political pressure mounts and austerity strikes paralyze the country- Probability of occurring in 2011- 25%
  • The US Federal Reserve embarks on QE3 (another round of quantitative easing) despite political pressure not to- Probability of occurring in 2011- 40%
  • Gold reaches $2000/ounce and silver trades above $40/ounce as loose monetary policy in the EU and US causes market participants to flee to something that cannot be made out of thin air- Probability of occurring in 2011- 20%
  • The S&P 500 suffers a 15-20% correction from year-end 2010 levels- Probability of occurring in 2011- 30%
  • The US Treasury 10-year note yields over 4% as inflation picks up faster than expected in the 2nd half of 2011- Probability of occurring in 2011- 30%
  • Israel/US bomb Iranian nuclear infrastructure- Probability of occurring in 2011- 20%
  • The Eurozone moves towards adopting a ‘super-sovereign’ approach (central fiscal strategy) in an attempt to stave off a breakup of the Eurozone- Probability of occurring in 2011- 35%
  • A dissolution of the Eurozone in its current form as austerity protests and strikes create political chaos for EU leaders- Probability of occurring in 2011- 10%
  • Oil retests its 2008 highs as loose central bank monetary policy and a stronger than expected world economic recovery create strong demand for black gold- Probability of occurring in 2011- 15%
  • The SEC lands some big fish (Yes, I mean BIG FISH) in its insider trading investigation- Probability of occurring in 2011- 40%
  • The state of California will seek assistance from the federal government in dealing with their debt- Probability of occurring in 2011- 30%
  • The Federal Reserve raises rates in Q4 2011 due to a sharp unexpected rise in core CPI- Probability of occurring in 2011- 25%
  • The probability of the S&P 500 reaching the 1373 average target of Barron’s 10 strategists and investment managers – 15%

Finally, for the record my end of year 2011 target for the S&P 500 is 1200 (13.33 times my 2011 S&P earnings estimate of $90).

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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