In Search of the Perfect Investment

Bryon Wien is Blackstone’s vice chairman. He’s been making predictions at the beginning of each year for 30 years. Sometimes he’s right.

A reader asked what I thought about Wien’s 2016 predictions — given that his last year’s predictions were wrong. I replied:

His wrong predictions for 2015 are irrelevant today.

The question for all of us is : Do we see sense in his 2016 predictions?

I do. I believe his 2016 predictions are relevant to what you and I are doing as regards investing our money and our family’s money.

The overall conclusion of his predictions produces the narrowing of investment opportunities. Narrowing is what you and I are dealing with today. I wish it were easier. Once I earned a nice income from muni bonds.

I’m being very, very, very cautious. And if that means, a heavy chunk of cash (waiting for the next decent investment opportunity to pounce), so be it.

Blood is still flowing in them streets.

Blackstone Vice Chairman’s 10 Surprises For 2016

1. Hillary Wins, Democrats Take the Senate

“Riding on the coattails of Hillary Clinton, the winner of the presidential race against Ted Cruz, the Democrats gain control of the Senate in November. The extreme positions of the Republican presidential candidate on key issues are cited as factors contributing to this outcome. Turnout is below expectations for both political parties.”

2. US Stocks Have A Down Year

“The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price-earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance.”

3. Only One Fed Rate Hike

“After the December rate increase, the Federal Reserve raises short-term interest rates by 25 basis points only once during 2016 in spite of having indicated on Dec. 16 that they would do more. A weak economy, poor corporate performance and struggling emerging markets are behind the cautious policy. Reversing course and actually reducing rates is actively considered later in the year. Real gross domestic product in the US is below 2% for 2016.”

4. Foreign Cash Heads Back Home

“The weak American economy and the soft equity market cause overseas investors to reduce their holdings of American stocks. An uncertain policy agenda as a result of a heated presidential campaign further confuses the outlook. The dollar declines to 1.20 against the euro.”

5. Great Fall of China

“China barely avoids a hard landing and its soft economy fails to produce enough new jobs to satisfy its young people. Chinese banks get in trouble because of nonperforming loans. Debt to GDP is now 250%. Growth drops below 5% even though retail and auto sales are good and industrial production is up. The yuan is adjusted to seven against the dollar to stimulate exports.”

6. Refugee Crisis Almost Means EU Breakup

“The refugee crisis proves divisive for the European Union and breaking it up is again on the table. The political shift toward the nationalist policies of the extreme right is behind the change in mood. No decision is made, but the long-term outlook for the euro and its supporters darkens.”

7. Oil Hovers Around $30/Barrel

“Oil languishes in the $30s. Slow growth around the world is the major factor, but additional production from Iran and the unwillingness of Saudi Arabia to limit shipments also play a role. Diminished exploration and development may result in higher prices at some point, but supply/demand strains do not appear in 2016.”

8. NYC and London High-End Real Estate Tanks

“High-end residential real estate in New York and London has a sharp downturn. Russian and Chinese buyers disappear from the market in both places. Low oil prices cause caution among Middle East buyers. Many expensive condominiums remain unsold, putting developers under financial stress.”

9. US Treasury Yield Stays Below 2.5%

“The soft US economy and the weakness in the equity market keep the yield on the 10-year US Treasury below 2.5%. Investors continue to show a preference for bonds as a safe haven.”

10. Global GDP Growth Falls To 2%

“Burdened by heavy debt and weak demand, global growth falls to 2%. Softer GNP in the United States as well as China and other emerging markets is behind the weaker than expected performance.”

To add weight to the gloom and doom, The Wall Street Journal explained on Monday:

As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research. Survival, for some, would be possible if oil rebounded to at least $50, according to analysts…

More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn.

 U.S. oil companies borrowed nearly $200 billion between 2010 and 2014.

Industry debt levels jumped by 55% during the “boom times” when oil was over $100/barrel. With oil at $30 today, many companies can’t pay their debts. According to The Wall Street Journal, North American oil and gas producers are losing $2 billion each week due to low energy prices.

Like most commodities, oil is cyclical. It goes through big booms and busts. Right now, the industry is going through its worst downturn in decades.

Eventually, oil will bottom out. We’ll get an amazing opportunity to buy the best oil stocks at bargain prices.

But for now, oil is still in a sharp downtrend. The world simply has too much oil.

We recommend avoiding oil stocks for now.

Byron’s Ten Predictions (he calls them “Surprises” for 2015. Most were wrong.

1. The Federal Reserve finally raises short-term interest rates, well before the middle of the year, encouraged by the improving employment data and strong Gross Domestic Product growth.  The timing proves faulty, however, as the momentum of the economy has begun to flag and a short-term slowdown has started.  The end of monetary accommodation and rising rates precipitate a correction in equities.  Long-term Treasury rates stay where they started and the yield curve flattens.

2. Our luck runs out on cyber terrorism.  Hackers invade the personal and corporate accounts of a major money center bank and the Federal Reserve orders the institution to suspend transactions for five business days while the accuracy of its balances is verified.  Various government departments and agencies are mobilized to deal with the problem caused by the hackers having proved to be more skillful than our corporate cyber security efforts.

3. The year-end 2014 rally in United States equities continues as the market rises for a strong performance in 2015.  A growing economy, fueled by housing and capital spending and favorable earnings, enables the Standard & Poor’s 500 to increase 15% during the year, outperforming equities in most major industrialized countries throughout the world.

4. Mario Draghi finally begins to expand the balance sheet of the European Central Bank aggressively by buying sovereign debt, mortgages and corporate bonds.  In spite of this expansion, Europe falls back into a serious recession.  Germany is particularly weak as reduced demand from various trading partners has a major impact on its exports.  The European policy makers fail to embrace the one option, fiscal spending, that could turn the economy around, and European stocks decline.  Politically, Europe moves dangerously toward the right.

5. Shock and awe no longer works in Japan.  The recession which began in the third quarter of 2014 continues throughout 2015 in spite of further fiscal and monetary stimulus and the suspension of the second planned sales tax increase.   The Nikkei 225 is flat for the year in yen and down in dollars.

6. China reports that it is no longer growing at 7% and that more fiscal and monetary stimulus is needed to grow at even 5% and to prevent a hard landing.  It also acknowledges that it must rebalance the economy toward the consumer and away from credit-based investing in state-owned enterprises and infrastructure.  What money is spent on infrastructure is focused on air, water and ground pollution, not roads and housing.  A lower rate of job creation leads to protests but they are contained without excessive violence.

7. The drop in the price of oil finally has an impact on Iran.  The country was dependent on its sale of crude to offset the impact of sanctions.  The economic weakness resulting from the unexpected decline in oil finally forces a conciliatory attitude on the part of its nuclear negotiators.  Pressure to cease nuclear weapons development comes from the Iranian people as well, as they seek more economic opportunity.  An agreement to roll back its weapons program is greeted positively throughout the region and world equity markets rally briefly on the news.

8. Brent slips into the $40s.  The low price of crude oil, which continues throughout the first part of the year, has a major impact on Russia.  A peace settlement with Ukraine is signed, giving Eastern Ukraine substantial autonomy but guaranteeing the sovereignty of the rest of the country.  President Putin seems to be trying to win back the respect of the international community as the country reels from its economic problems, but the Russian citizenry finally turns on him. His approval rating plummets and he resigns by year-end.  During the second half of the year, West Texas Intermediate and Brent crude are both above $70, as emerging market demand continues to increase.

9. The year-end 2014 meltdown in the high yield market, as a result of the collapse in the price of oil, creates a huge buying opportunity.  The spread between high yield and Treasurys is cut in half, and high yield becomes the best performer of the various asset classes as the U.S. economy continues to grow with no recession in sight.

10. The Republicans decide to position the party as the one that can get something done in Washington.  They argue that President Obama was ineffective in his first six years, but when they got control of both the Senate and the House, legislation was passed.  The Keystone pipeline finally is approved, as well as minor tax code revisions and even some changes in immigration policy.  The Republicans are determined to strengthen their position with Hispanics in 2016.  They want desperately to hold the nation’s highest office and they see Jeb Bush as a winner for them.

Clone. Backup. Clone. Backup.

Before I left for Australia, I cloned the hard drive in my working Lenovo ThinkPad X230 laptop — the one I use to write this column, send emails and sell stocks, etc. This morning it was acting up. It wouldn’t talk to my three external monitors.

I copied all my working files over to the cloned disk, popped it into my laptop, rebooted and I’m up and running again. I’m a cracked record on the importance of backing up and cloning.

Most importantly, keep hitting the “Save” button every few minutes. No reason to lose that precious Excel spreadsheet you’ve been working on for the last hour.

Harry Newton who wants to come back as the Newton family dog, Rosie. This is Rosie at 8:30 AM this morning, snug in the pillows on our bed:

I don’t have any jokes this morning. No humor when faced with a potential huge decline. The futures look awful. Thank God for my inviolate Stop Loss Rule. I’m out of most stocks, especially ones with huge gains and huge P/Es.