Friday, January 1, 2016

Scoring the Credit Bubble Stocks 2015 Reader Predictions

Just about a year ago we held the Credit Bubble Stocks 2015 Reader Prediction Contest. The results are in! The contestants fall into three categories: Hall of Shame (less than 3/5), Middling Middle (3-4/5), and Winner's Circle.

Hall of Shame
Remember reader "Texas" who does not think in terms of bullet point lists?:

I have a prediction that most readers of will find outrageous.

I believe that over the next 5 to 10 years the small cap Russian stocks will be one of the best growth assets on the planet (barring nuclear war breaking out). The ETF is the RSXJ.

First the fundamentals. Russia has very low welfare costs, and a very low tax rates on individuals and corporations. Russia has the lowest sovereign debt to GDP ratio (13.41% for 2013) of any of the BRICS. Thus, the economy has vastly much more room to grow than the economy of the U.S. or the EU.

Perhaps more important, the current economic sanctions are teaching the Russian political power structure some very valuable and obvious lessons for the future. Lesson number one is that an economy built upon the wealth and loyalty of a couple hundred oligarchs is a very fragile and vulnerable economy. Oligarchs loot a society and move the money out of the country. They do not reinvest their profits in the economy of Russia as would thousands and thousands of small business owners and successful entrepreneurs.

Finally, we hear much about the corruption and cronyism of the oligarch based economy, all of which is true for the time being. But the truth is that legal systems of England and Europe were equally based on personal status and power relationships up until about 300 years ago when a rising middle class began to force reform and force a uniform system of law to apply to all. Corruption will disappear as soon as the population of small business owners and new entrepreneurs grows to the point where dealing with strangers demands uniform and enforceable rules of contract and business conduct.

In my view the RSX is largely an energy play, and is indistinguishable from U.S. and Canadian plays except for specific Ruble currency volatility. I prefer the Canadian tar sands plays because of their long life reserves and their sensitivity to crude prices which produce bargain opportunities when crude prices plunge.

I view an investment in RSXJ as a bet on the fat right tail of the IQ distribution of the Russian population – a right tail that is very successful in the nationalized Russian arms industry largely because lean budgets force scientists to strive for major innovative breakthroughs as opposed to the very expensive bureaucratic incrementalism pursued in the leviathans of the U.S. defense industry. Through social contacts and family relations, this culture of innovation is certain to spread into the private sector of the Russian economy.

As for timing, the bottom for Russian stocks might be a year off. Watch for climactic volume on a sell off accompanied by a higher low in the MACD before taking the plunge.
What do you do with the guy who sends an essay instead of five predictions? We're going to say that since RSXJ is down for the year this is a 0/5.

The late entry:
  • German people will force Merkel from office in 2015.
  • Germany will leave NATO in 2015.
  • China will sell the bulk of its U.S. treasuries in 2015.
  • Turkey will leave NATO in 2015.
  • National Front Party in France will become part of a ruling government coalition in 2015
0/5. I will say that these predictions look less "crazy" than they did a year ago, e.g. the National Front won a plurality in elections. They were never 80% chances but maybe they went from 2.5% to 5% annual chances or something like that.

Reader "bjdubbs", with six predictions for some reason:
  • Brent tops $85.
  • Russia is strongest performing market.
  • Dollar closes at least 5c below 2014 close.
  • BBRY trades over $20.
  • Gold closes more than $100 above 2014 close.
  • XPO trades at least 40% below 2014 close.
All oil bullish predictions are scored wrong. Russia is down slightly; I'm showing Venezuela as best performing. (Did he mean real terms, lol?) Blackberry spent less than half the year above $10. Gold down for the year. XPO did trade more than 40% down, although it's back above that level now. Dollar is up for the year. Verdict: 1/6.

From reader "Admiral":
  • Between 8 and 16 publicly traded commodities companies will go through reorganization in 2015.
  • It will be the hottest (climate) year on record for continental US.
  • The National Bank of Greece preferred either starts paying or gets tender offer.
  • Sadly, Hugh Hefner's time in corporeal form will expire; and between 3 and 17 blonde ex-lovers will appear as part of probate proceedings.
  • On 12/31/15 the BBB corporate yield will be 6.5%.
Only one right - by our count, 11 public commodity companies filed for bankruptcy. 1/5.

From reader Gotham:
  • Elizabeth Warren challenges Hillary Clinton for the Democratic nomination
  • Venezuela defaults on its debt
  • IBM trades through $120 in the wake of a restatement of earnings due to fraudulent accounting, joining USAir and Salomon Brothers on the list of Buffett’s most grievous unforced errors.
  • The Canadian dollar trades below $.72 during the year
  • At least half of the following names will go bankrupt or experience highly dilutive debt restructurings: $REN, $MPO, $WRES, $NKA, $NES, $GDP
No Liz Warren, no VZ default (yet). IBM has been a great short - should've made it a $140 barrier which would've been a nice 15% decline. Just made it on the CAD during the last week of the year. Not enough of those six companies went bankrupt. Verdict: 1/5.

Reader "jHurt"
  • Oil goes below $50
  • Government Motors hits $50
  • Sears hits $50 (adjusted for any REIT spinoff)
  • Yen trades to 140 (at 120 today)
  • Euro trades down to $1.15 ($1.24 today)
Oil trade worked, GM didn't. I think the SHLD REIT right was worth about $5, so adding that back to SHLD price it's still way below $50. Yen did not hit 140. Euro well below $1.15. 2/5.

From reader "Rothko":
  • Oil goes below 60 and stays there (cartel kaput).
  • No increase in short term interest rates.
  • Goldbugs continue crying - gold goes below 1000
  • Early issues in EMs, but the Venezuela collapse didn't trigger anything as it was expected. But prepare for 2016.
  • Strength in financials and momo stocks propels the S&P to 2400.
Right on oil. Wrong on short term interest rates (front end is decidedly higher than a year ago). Wrong on gold (although so close). Right I guess on the vague EM prediction. Wrong on S&P. Verdict: 2/5.

From reader "Boston":
  • Gold breaks $1000 downside
  • Rates go lower
  • SHLD liquidates
  • Down year for S&P and HF's somehow underperform regardless
  • Bye $WLT
Gold wrong, SHLD wrong. S&P vs HFs right, WLT right. And rates are actually higher than a year ago - the whole curve is higher. 2/5.

From reader "Blue Devil":
  • Spot oil trades above $90 by middle of next year. (OPEC shows willingness to cut capacity and does so by the middle of next year; as soon as enough major long-term projects are cancelled. Shale was never the target and this was never meant to be a long-term campaign. The back half of the year. Once the damage is done, OPEC has no reason to try to keep the price down. You can't hurt shale. You need to get big long-term projects cancelled and raise everyone's costs of capital, but after that, if you can cut 10% of production to get a 30% price rise, you do it.)
  • Housing starts are higher than in 2014 as [INSERT STUPID NAME FOR OUR GENERATION] get into their 30s, find career stability after the great recession, get married, have kids, etc.
  • Obama becomes the lamest of "lame duck" presidents, who the Democrats only trot out (frequently) to veto things. A record will be set for international travel by a sitting president as he moves to solidify his legacy as statesman of the world.  
  • There is a lot of consolidation in the mining space, which will start to look like the banking space (a few huge players with massive funding advantages and everyone else).
  • There will be a lot of pressure to export crude oil from the US, repeal the Jones Act, and permit a lot of LNG export facilities (all of which will cause huge problems down the road if they are passed by the republican house and senate).
Verdict: Spot oil hilariously wrong. Housing starts and Obama good. I'm saying mining consolidation is wrong; should've been mining bankruptcies. The fifth prediction was pretty useless but we're going to give it a half point since the crude oil export ban was lifted. By the way, odd to predict crude oil recovery to $90 and pressure to export crude. 2.5/5.

Middling Middle

From reader "Zoolander":
  • China GDP growth rates each quarter will be lower than in 2014
  • Australia will have a recession
  • Natural gas storage levels below 5 year average by end of this winter
  • Uranium price rises
  • Oil prices do not increase
Oil prices, check. As far as I know, uranium prices fell slightly. Natural gas storage actually was below the five year average this spring (the end of "this" winter). No Australia recession. Looks like Chinese GDP did fall year over year. Verdict: 3/5.

Reader Stagflationary Mark predicts:
  • The Fed Funds rate will not increase in 2015.
  • The 30-year treasury will remain below 3%.
  • Full year exports of goods to China will not increase from 2014 to 2015.
  • Full year department store sales will fall from 2014 to 2015.
  • Although continuing to claim that hyperinflation is imminent, ShadowStats will remain unwilling to raise its annual subscription price of $175. ;)
Oops, the Fed Funds rate finally increased! The 30y did get above 3%. Looks like US exports to China did not increase, and department store sales fell. Shadow Stats is still $175! So that's 3/5.

Reader "whydibuy",
  • The S&P will be up 10%+
  • Bank stocks will continue to be solid with good dividends
  • Hussman underperforms ( 100% confidence on this one )
  • Housing continues to do well
  • Earnings of S&P companies increase 10%
S&P is down for the year. We'll give the bank stocks, Hussman, and housing ones. 3/5.

From reader "Allegheny":
  • Interest rates won't increase as much as predicted.
  • Europe will continue trudge along.
  • Japan won't blow up
  • But Kyle Bass will find a way to make another extreme prediction that gets him airtime on TV.
  • High ROE stocks will still be en-vogue regardless of purchase price.
This is a tough one - did high ROE stocks remain en-vogue? I say no thanks to VRX. The interest rate one is tough since there was finally the FF increase but the longer end did not selloff the way people have consistently predicted. Verdict: 3/5.

From reader "Memphis":
  • Iron ore prices will fall in 2015.
  • Chinese growth will undershoot consensus estimates.
  • Canadian housing prices show signs of peaking: lower transaction volumes, if not lower prices.
  • There will be increasing recognition that many foreign countries have housing mega-bubbles 
  • Interest rates won't rise significantly in the US.
I call that 4/5 - everything but the Canadian housing prices.

UPDATE: Reader "Hollywood" predicts:
  • Multifamily housing completions set a 25 year high.
  • The SAAR for US light vehicle purchases averages above 17.5MM units, and exits the year above 18.0MM units.
  • The United States runs a balanced budget in at least one month of 2015.
  • Elon Musk completes a controlled vertical landing of a Falcon rocket on land.
  • Hussman underperforms.
Looks like multifamily completions happened. The Falcon happened just before the end of the year. Hussman underperformed. I guess the balanced budget occurred (I shouldn't have allowed that prediction since the government uses bogus accounting). However, I think the US light vehicle SAAR averaged just a touch under 17.5MM. This looks like a 4/5 that just missed being 5/5.

  • There will be at least one mega CPG deal by 3G/Buffett similar to HNZ. [Note: I'd like to modify my first prediction from CPG to "consumer". Could be YUM.]
  • There will be at least one Big Oil mega-merger 
  • The IBB index loses over 30% for the year 
  • Fast casual chain LOCO trades down to $12 (from $24 now)
  • Personal products company NUS "comes clean" about what went on in China
  • The activist hedge fund index underperforms the SPY
Verdict: 5/6 - the IBB is up 10% for the year. Sadly, you have to have 100% to make it into Winners' Circle. Nobody made Panda write six predictions.

Winners' Circle
Your host's answers:
  • Quicksilver Resources, RadioShack, Walter Energy, and Molycorp will all restructure (dilutive out of court exchanges count).
  • U.S. ten year note yield will not exceed three percent.
  • Silver goes below $15/oz.
  • Spot WTI does not exceed $90/bbl
  • U.S. thirty year yield hits 2.5%.
That's 5/5.

From reader Louisiana:
  • We will see increasing predictions of AI and robotics revolutions (Google queries for both terms will rise YOY). Long term prediction: AI will never happen, only more sophisticated simulations of intelligence. The Singularity is the Scientology of Silicon Valley. What is it with California and cults?
  • Gasoline and oil prices will be lower, on average, than 2014, by at least 15%. The marginal demand for large vehicles will be much diminished by less confident Millenials, who will opt for minivans and station wagons instead of SUV's. They can't get a promotion because Baby Boomers can't afford to retire. The question for oil demand is whether demand from the growing Third World can overcome slacking demand from higher fuel efficiency, smaller vehicles, mandatory federal MPG increases and, at some point, economic availability of plug-in hybrids, which for the average debt-addled consumer needs to be about a 20%+ gross ROI to make sense. Forget about all-electrics - toys for environmental cultists to compete for social status.
  • A breakout populist candidate will emerge in the Republican primary. To quantify: not currently polling above 5%, for whom immigration and jobs will be a centerpiece issue.
  • Long term bond rates, nor inflation, will not exceed 2014 average levels.
  • The major stock indices will be negative for the year.
This predicted Trump! I'm calling it 5/5.

I did say that I would give a bottle of scotch to the winner. Since I'm sharing the winner's circle, I will give a prize to the co-winner.

If anyone feels that his score was too low, appeals are open for the next few days.

Stay tuned for the 2016 prediction contest. I have a much better idea for the structure of that one.


James said...

Euro trades down to $1.15 ($1.24 today)

Euro well below $1.15. 2/5.

I think he meant it would trade at or below 1.15, which was a pretty good prediction.

This is a tough one - did high ROE stocks remain en-vogue? I say no thanks to VRX.

I think compounders/quality businesses/outsider CEOs have been popular for so long that they won't go out of favor until there are more blowups. Ocwen and Valeant have inspired some cognitive dissonance among value investors, but right now these guys have too much invested--financially, emotionally, and reputationally--to abandon the "quality business" narrative.

CP said...

Yeah, so he got the oil one and the Euro one right.

The high ROE prediction was pretty vague. If the prediction had been, "a significant weakness in the high ROE investing model is exposed" that would've been A+. Since the prediction was basically the opposite of that, I think it's wrong.

James said...

Yeah, so he got the oil one and the Euro one right.

My bad, for some reason I thought GM was over 50 and you were counting that but not the euro.

CP said...

Hope you'll participate for 2016. I have a much more interesting idea for this contest.

James said...

Sure, I'm looking forward to it.

Stagflationary Mark said...

In my opinion, the winner should have gotten 4 out of 5 right. That was my goal but perhaps I misunderstood the contest.

The predictions were supposed to be made with 80% confidence. If you make a million predictions with 80% confidence and get every single one of them right, then people will start to assume that you are making predictions with 100% confidence.

That said, I am impressed with the winners. These were not "the sky will remain blue on sunny clear days" predictions intended to guarantee victory. Nicely done! :)

innerscorecard said...

Thanks for putting this together. These are fascinating to read, and I think a collection of them will be even more educational still.

Josh H said...

Thank you for analyzing and posting the results. One of the thoughts I had was how did someone get to an 80% confidence level? I did not participate but most of my ideas were focused on 100% confidence and I wasn't sure how to be only 80% confident.

Stagflationary Mark said...

Josh H,

For what it is worth, I tried to make each prediction with a 20% chance that I would be wrong.

For example, if a number was chosen at random from 1 to 5, then I could make a prediction with 80% confidence that it would not be the number 2. There would be 4 chances out of 5 that it would be a 1, 3, 4, or a 5 instead. If asked to make a prediction with 100% confidence, then I could have predicted that it would not be the number 6, since 6 would have been impossible.

If I had known the goal was to get 5 out of 5 predictions correct, then I would have made predictions I was much more confident about.

For example, I could have predicted that the Fed would not raise interest rates to 300% in 2015. While still possible of course, I was at least 99.999% confident that they wouldn't.

Stagflationary Mark said...

As a side note and as a Seahawks fan, I would not have predicted with 80% confidence that we'd be winning by 24 points over Arizona with 2 minutes left to play in the first half right now.

I'd definitely be willing to make a wager at even odds that we'll win this game right now, but I am not 100% confident. I could be at least 80% confident though.

Go figure. :)

Anonymous said...

Mark, if each prediction has an 80% chance of being correct, then the odds of getting 4 out of 5 right are about 41%...assuming each prediction is independent of the others.

Stagflationary Mark said...


Yes, I actually created a chart back when I originally made the predictions. It shows the 41% chance. Note that 4 out of 5 is the most likely outcome though, and therefore the optimal result one would expect if one is truly making 80% confidence predictions on 5 independent things.

CP said...

Phase One of new contest!

Josh H said...

Thanks Stag Mark for replying back. I hadn't seen the new contest rules when I posted and this contest looks much more interesting to me.

Just like your interest rate prediction example, I thought in those same terms but in relation to S&P500. There was no benefit to say 80% confidence S&P would be above 1500 vs choosing a lower number like 1000.

CP said...