Also in the error column, large caps didn’t outperform small caps (#5). While performance was pretty close, small cap indices outperformed mid-cap indices and mid-cap indices outperformed large caps. Given risk premiums associated with size, this is actually what is supposed to happen; but I got it wrong.
The third prediction I was dead wrong about was Volcker (#12). I predicted the Volcker Rule would be watered down, and while the new Volcker rules have not been redrawn, given the London Whale, LIBOR, and Money Laundering scandals over the past few months, we can assume that when Volcker gets re-floated, it will be anything but more lenient.
Two of my predictions were half wrong: # 7, concerning capital-raising for SMEs; and #14, which predicted that Treasuries would be hot and interest rates would invert for FCM clients. While Congress did pass the JOBS Act in March 2012 and called for the ability to enable crowdsourcing for SME finance, wider spreads for small cap stocks, and a relaxation of certain Sarbanes-Oxley provisions for SME firms, few of these provisions have actually been passed by the SEC. In fact, it is likely that these provisions will be stalled until a new SEC chairperson is selected. Since many of these rules have been developed in the recent past, and under current SEC staff, much of this legislation may not go anywhere for a long time -- until a new leader is appointed who can push this legislation through the regulatory bureaucracy.
[Related: “Why DC Passed Crowdfunding; Why It Will Survive Anyway”]
In regard to prediction #14 -- while the treasury part of the prediction was right, the thoughts about interest rates on FCM accounts going negative have not come to fruition (at least not that I know of). That said, clearing rules for OTC derivatives have not gone into effect and the demand for US Treasuries only looks to be increasing.
I had the pleasure of talking recently with the head of investment bank funding for a global bank, who said that his Treasuries are already pledged before he walks in the door, and that he had no clue where the inventory for these bonds will come from once the rules for stricter capital controls and liquidity constraints collide with greater margin requirements. The cost of financing Treasuries will certainly go up, and it will be interesting to see if the cost of financing them becomes more than their yield, in which case it may just be cheaper to buy Treasuries rather than finance them if you are required to post Treasuries for collateral.
[Related: “Looming Bond Liquidity Crunch”]
On the positive side, I did get the election right, Europe has not gone over a cliff (at least not yet), volatility is down, HFT is off the front page of the Times and the Journal (at least in December), the SEC is more attuned to market structure issues, Dodd-Frank has been delayed, and the market is evolving as both ICE and the CME have launched swap futures, and the challenges with Basel III are becoming more apparent (especially as banks wrestle with the issue of Liquidity Coverage Ratios and pushing out their financing 30 days). In addition, firms are closing down proprietary trading businesses and banks are restructuring their businesses, increasingly relying more on technology and less on research, relationships and high-touch services. This has caused firms to embrace shared infrastructures – the cloud is all that technology folks are talking about these days -- and data (especially unstructured data) is top of mind.
As for latency, while HFT isn’t off the front page of the Times and the Journal – at least for the last week in December -- latency seems to be less of an issue. I believe this is because the competition for latency has been won and it has become too expensive to compete at the lowest levels of latency given the decline in trading volume and volatility. That said, latency is still important; however, more firms are moving away from a pure latency play toward leveraging greater levels of analytics and analysis on unstructured data.
So all in all, my performance wasn’t too bad. My rundown, at least the way I count it, was 15 right, 3 wrong, and 2 half right. Round that to16 right and 4 wrong – not too shabby. While I may not make it into the pantheon of prognostication, I won’t be drummed out of the business either.
Stay tuned: My 2013 predictions will be out in a few days. More fun to follow.