Nathan Kowalski

Review of 12 surprises for 2019

  • Brexit decision: the election of the Conservatives with a large majority in December ended doubts that Brexit would happen (Photograph by Matt Dunham/AP)
  • Bouncing back: shares of cable companies like Comcast did indeed rebound (Photograph by Jeff Fusco/AP)
  • Retail struggles: local demand slid even as GDP rose in 2019 (File photograph by Akil Simmons)
  • On the slide: Netflix shares plunged after US subscriber numbers dropped for the first time in 2019 (Photograph by Gabby Jones/Bloomberg)

“Believing in predictions allows people to overlook their own ignorance, discount the role of randomness and generally overestimate their own skills. If you think you (or someone you pay) can divine the future, you create the illusion of control and stability, where often there is none. Order is created out of chaos; it is a comforting illusion.”

— Barry Ritholtz, The Philosophical Failings of Forecasting

In January of last year, I laid out 12 unexpected events or surprise situations that were, at the time, outside of the general consensus opinion that I felt had a reasonable chance of occurring. Remember that I believe forecasting is absolute rubbish. Anyone that ardently and inflexibly uses any form of prediction for investment decisions needs to reconsider their investment process. Let’s go back and look at how these surprises panned out:

1, Market dithers: I suggested the market would meander but likely never reach the 2900 initial analyst target price for 2019. It took only four months to get there and six months or so of consolidation, and then the trade deal news and Fed cuts help propel the markets higher.

Score: 0/12

2, Federal Reserve blinks: I suggested the Fed would not raise as much as anticipated in 2019 but never foresaw cuts. The yield curve, however, did steepen. After inverting in August, it rapidly steepened into the end of the year.

Score: 0.5/12

3, Agricultural crisis lifts some commodities: nope. Agricultural commodities were not solid performers in the year. Although there were many catastrophic weather events, they did not disrupt agricultural production. The swine crisis in China did little to lift hog prices in the US

Score: 0.5/12

4, Cable makes a comeback: the bounce did materialise. Charter Communications jumped over 68 per cent, and Comcast rose more than 30 per cent. Despite further cable subscription cancellations, broadband usage remained strong.

Score: 1.5/12

5, Australia rolls into recession: although Australian home prices fell in the first and second quarters of 2019, they bounced back a bit in the third quarter. The economy did slow but never dipped into negative territory. The string of recession-free years now looks like it will be 28 years!

Score: 1.5/12

6, A split in infrastructure: I suggested utilities would underperform, and Master Limited Partnerships would bounce with energy prices. Utilities did underperform slightly but MLPs underperformed despite an over 20 per cent rise in crude.

Score: 2.0/12

7, The spotlight reveals: I said: “Major IPOs for unicorns such as Lyft, Uber or Slack fail to impress. In fact, one or more is likely cancelled.” With Slack, Uber and Lyft sliding and We Work cancelling its IPO, I have to say this was spot-on.

Score: 3.0/12

8, UK exits but gains: I suggested: “Despite initial failures to secure a Brexit vote and little confidence that a deal can be made in time, the UK eventually does agree on an exit.” It does appear, after the election, that we are on our way to a Brexit. The pound and the UK stock market did bounce.

Score: 4.0/12

9, Netflix stumbles: I said: “With limited visibility on any path to near term positive free cashflow, multiple new streaming competitors, and rapidly escalating leverage, Netflix’s viability is questioned in 2019. The stock takes a dive and acquirers begin circling the company like sharks.” This became evident after the second-quarter release when subscriber growth slowed and the company’s stock price ultimately slid over 30 per cent. Competition is indeed heating up.

Score: 5.0/12

10, Bermuda staggers slightly again but ….: I suggested the economy in 2019 would stumble, but preliminary figures suggest it will be up if you consider GDP figures. Domestic consumption, however, looks weak and is trending negatively. I also thought we would finally begin codifying immigration reform and dealing with the “real issues” of healthcare. Neither happened. In my opinion, the critical issues of healthcare are the general demographic composition and lifestyle of residents and the number of units and cost per unit of healthcare services. Financing reform will not directly deal with the real issues.

Score: 5.0/12

11, Populism wins and losses: I suggested the “Euro-sceptics and populists stage a major surge in the European Parliament elections — gaining a majority as a group”. I also thought Brazil would surprise with a “series of pro-business and right-wing policy measures”. Nationalist opponents in Europe did have a solid showing but never gained a majority. Brazil did outperform the emerging markets index. A half-point here for being somewhat correct.

Score: 5.5/12

12, Dollar drops: this happened after the drop of the dollar in December — the Bloomberg Dollar Spot Index ended the year down about 1 per cent.

Score: 6.5/12

I missed several big financial surprises for the year, such as the cooling of the trade war, Trump’s impeachment saga, and a ripping year-end rally. The hit rate of 55 per cent is slightly up from 50 per cent last year — pretty much a coin-flip. This is a good thing and it would be even better had the score been weaker — forecasting doesn’t pay. Especially static forecasting where you cannot update your outlook with relevant information.

In investing, predictions are not important — principles and processes are. These surprises are just food for thought — ruminations to consider, ponder and ultimately forget as new information becomes available.

Sources

The Philosophical Failings of Forecasting, Barry Ritholtz

https://www.bloomberg.com/opinion/articles/2017-01-05/the-philosophical-failings-of-forecasting

Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the Chief Financial Officer of Anchor Investment Management Ltd. and can be contacted at nkowalski@anchor.bm

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