(01/06/11) Ten Sure-Fire Predictions for 2011

It's the time of year to make resolutions we won't keep and predictions that probably won't come true. But there's always hope, isn't there?

My predictions about the market last year were pretty much on the money, although I was too sanguine about the economy.

I think some of that optimism will be vindicated this year. So, here goes …

The economic recovery will pick up steam

The US economy will finally shake off many of the remaining shackles of the financial crisis. Consumer spending rose 5.5% during the holiday season, manufacturing indices are growing strongly, and even business lending is picking up.

The consumer will be a surprising source of strength, as we saw firsthand during a Christmas week trip to Orlando, Fla. Flights were full, hotels were sold out, theme parks were packed, and malls were overflowing with traffic and shoppers. And here in the Big Apple, Broadway shows just logged their best holiday season ever, and New York City tourism set a new record in 2010.

Job growth also will finally pick up as smaller companies join some big multinationals in adding workers stateside. The jobs will be mostly higher-skilled ones, and they won't cut into the long-term unemployed in industries like construction, but total unemployment should drop below 9% by year end.

Far from recovering, housing prices will hit bottom

More than a million properties may be repossessed by lenders this year, according to RealtyTrac. Meanwhile, the Obama administration's housing-modification program will die a quiet death after failing to aid many of its intended beneficiaries. That should help housing prices hit bottom, falling perhaps another 10% on average from where they are now.

But we won't see a real recovery in home prices until the second half of the decade. No-hope markets like Phoenix and Las Vegas will see their 2006 highs again when the Nasdaq Composite index re-takes 5,000. Good luck.

The bull market in stocks will continue—mostly

Since last year's fourth quarter, we've been in the very best three quarters of the four-year presidential cycle. Since 1900, stocks averaged 12.6% gains in the third year of a presidential term, and since World War II they've achieved 21.3% gains during the third year of a first-term Democratic incumbent. Confidence is growing amid signs retail investors are nibbling at US stocks again.

The Standard & Poor's 500 recently broke through long-time resistance levels and could have some more upside. But it already has rallied nearly 25% from its July 2nd low, and sentiment indicators are looking frothy. I'm also worried by the consensus view of Wall Street strategists that stocks will rise nearly 10% this year. When are they ever right?

The biggest crisis yet looms for the Eurozone

And it's most likely going to hit in Spain. The European Union 's nearly $600-billion emergency funding facility could probably cover bailouts of Greece, Ireland, and Portugal, but not Spain, Europe's fourth-largest economy. Racked by 20% official unemployment, a housing bust even worse than ours, and savings banks (the cajas) teetering on the brink, Spain could face a full-fledged crisis in 2011. Moody's warned last month that Spain's public and private sector needed to refinance almost $400 billion in debt this year.

A crisis this big would likely drive US stocks down by at least the 16% they fell from April through July 2010, and they might even suffer the 20% decline that traditionally signifies bear markets. Ultimately I think Germany would swallow hard and dig deep in its pockets to prevent the collapse of the euro—and China could even throw in some yuan for good measure—but it would certainly be a bumpy ride.

Inflation will rear its head again

Inflation will become a real force in the global economy. It's happening already, with copper prices setting records and cotton changing hands at levels not seen since Reconstruction. Crude oil recently traded north of $90 a barrel, within shouting distance of the century mark.

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Emerging markets are feeling the pain now—India and especially China, where soaring commodity prices and big wage increases bear an eerie resemblance to the classic US inflation of the 1970s. Depressed housing prices and still-weak labor markets should stave off high inflation in the US, but prices will start to edge up here, too, much to Federal Reserve Chairman Ben Bernanke's relief.

2011 will be the biggest year for Internet IPOs since the dot.com boom

Red-hot Internet coupon provider Groupon may be ready to take off with the biggest initial public offering since Google (Nasdaq: GOOG) raised $1.2 billion in 2004.
Also on the tarmac: online game provider Zynga; business networking company LinkedIn; Groupon competitor LivingSocial, and maybe even social-messaging host Twitter. All of this could produce the biggest year in Internet IPOs since 1998-1999, when theglobe.com's offering launched the final, blowout phase of the Internet boom.

Facebook's recent investment by Goldman Sachs Group (NYSE: GS) and Russia's Digital Sky Technologies is also laying the groundwork for a high-profile IPO by that social-networking giant.

Private-equity firms will piggyback on the IPO boomlet to cash out of some of their best—and worst—investments of the previous decade.

And speaking of exit strategies

The US government will unload almost all its shares in the basket cases of the financial crisis. The government will sell the rest of its General Motors (NYSE: GM) stock—probably at a small loss—and will push IPOs of AIG and Chrysler before the end of the year. By the time President Obama's 2012 re-election campaign revs up, US taxpayers may not own any more shares of those troubled companies. What a coincidence!

But Fannie Mae and Freddie Mac will remain thorns in the side of both the administration and Congress. The administration may push a surprisingly thorough revamping of the mortgage giants, whose rescues have cost taxpayers $150 billion to date, but even a newly energized Republican majority in the House of Representatives won't be so quick to pull the plug on companies that are providing the lion's share of housing finance in this country. Look for a phase-out of the government's role over several years, a privatization that harkens back to the Reagan Administration.

Congress will make some headway on reining in spending

Newly elected Tea Party Republicans in the House and Senate will push hard to cut domestic spending, and they may find a somewhat willing partner at the other end of Pennsylvania Avenue. President Obama's approval rating has risen since the recent lame-duck session of Congress, and voters repeatedly say they want cooperation and compromise. The president may go along with at least modest budget cuts, and I wouldn't be surprised to see him propose bigger, bolder ideas in his State of the Union message. That would be very good for markets worldwide.

Tablet computing will really take off

If 2010 was the year of the smart phone, this year will be the year of the tablet device. Apple (Nasdaq: AAPL) will no doubt make some big improvements in its hot iPad, and other tablet suppliers like Amazon (Nasdaq: AMZN) and Barnes & Noble (NYSE: BKS) will step up the pace.

But I expect the big push to come from Samsung and other producers using Google's Android operating system, who could duplicate the success they've had in smart phones. And don't count out Research in Motion (Nasdaq: RIMM)—it's got enormous loyalty among corporate users and rapid-thumbed moms, and its new BlackBerry PlayBook has gotten good buzz.

Likely also-rans: the old Wintel alliance. Stick a fork in the netbook; it's done, and Steve Jobs' decision not to chase that market will look more and more prescient.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch.