Monday, December 31, 2007

13 Outlier 2008 Predictions

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One of my favorite reads of each year is Doug Kass' Annual Predictions over on Realmoney.com. Now, unlike most prediction lists he posts things that are way outside the box, and amazingly a good proportion of these do happen (generally 1/3rd to 1/2). So instead of doing a non descript "Predictions for 2008" I thought I'd follow his script and make some predictions that are not part of the conventional thinking. I want to get this posted before he posts his list, so that I am not influenced by his comments... keep in mind, by nature of this list quite a few will not come to fruition due to the extreme difference versus conventional wisdom.... a few will be a bit tongue in cheek

#1 I have been stating since late in the summer I expected the Fed, in a desperate attempt to mimic Uncle Alan's intervention policies, to cut rates to 3.5% by the Spring despite lip service about inflation. By year end as the financial world contracts, and despite raging inflation in things that affect Americans, the Fed cuts rate to 2.75%. The central UK bank follows suit (as fellow 'financial innovators'), and arm twisting gets the Canada central bank to lower rates substantially as well. Only the stubborn European Central Bank holds out, wondering what the heck this world is going too. However, a housing implosion in Spain, causes the ECB to cut rates to some degree during the year, but nowhere near the level of the subprime nation aka USA.

#2 Now that 2007 bonuses are secure, financial CEO's start laying the axe down and over 100,000 financial jobs are lost in Q1 2008. Workers are outraged, but CEOs say "well that's how it works" - we get the reward from our dumb decisions, you get the pain. Social acrimony in this country only continues to increase. Another round of major layoffs hits in summer as the spring "housing boom" never materializes. CEO's mention they have to be mindful of 2008 bonuses, and cannot keep carrying "dead wood" such as ... workers. Despite hundreds of thousands of job losses throughout the country through 2008, the unemployment rate only bumps up to 5.2%. George Bush smile knowingly and can point to a "raging bull economy" and wonders what all the complaining is about... anyhow, it's someone else's problem soon enough.

#3 Food inflation ramps worldwide causing serious issues and front page news in countries across the world. The US central bank says, really who cares, after all its not part of core inflation. Somewhere a defeated Ron Paul exhales loudly and exclaims "If they only had listened to me." Inflation becomes an evil term, and part of the mainstream vocabulary again, even by non investing types.... aka "Milk for $6, what the hell, this is ridiculous inflation". Private equity firms and hedge funds start snapping up farmland in the greater Midwest, as this is the "next great investment front", driving up prices to record levels and sparking talk of a "farmland real estate bubble". Food banks report shortages and inability to feed the poor in the country, as people are finding it too expensive to hand out such an expensive commodity for free. They'd rather give peso donations... err, dollar donations, as its a much more worthless commodity than say, beans. Gold spikes to over $1000, and pawn shops become a huge business as people start selling jewelry to pay for gas and food.

#4 Political Scenario A: Not 1, but 2 independent candidates emerge to make an unprecedented 4 horse run to the White House. Ron Paul, after winning every online poll every devised, decides the public swell is too great and he must out of principle run after the Republican party refuses to acknowledge there is a person in their party with the name Ron Paul. Mike Bloomberg announces a candidacy in April 2008, and with the public's utter disgust with the 2 party's incompetence, wins the 4 party election with a 34% majority.

#5 Political Scenario B: In a stunning comeback, John McCain finishes a respectable 3rd in Iowa, and moves on to win New Hampshire. McCain, not Romney or Guliani, emerges as the anti-Huckabee candidate. A series of primary battles between "experience" and "religion conservatism" break out, with the experience of McCain winning over enough Republicans; especially after the machine that is the Clintons wins the Democrats despite a great run by Obama. After a spring and summer dominated by economic concerns on the political trail, a major terrorist attack in a Western country during the summer, sets in motion the groundwork for a McCain presidency. In a major icing of the cake, Mike Bloomberg is brought in as McCain's VP, setting up a dream ticket and trouncing the conventional wisdom that this election is the Democrats election to lose.

#6 A major hurricane hits the southern US, spiking crude oil prices to $125 and gas to near $4, in the middle of an economic slowdown. Natural gas prices temporarily spike, hurting profits for corporations for 1 quarter but quickly fall right back as a slowing US economy continues to put a cap on pricing. Coal continues its ascent as voracious appetites for energy across the world continue. The Fed ignores this and says, well it's not part of the core inflation rate so really if a tree falls in a forest and no one is there to hear it, did it really happen. Senior citizens on fixed income and only getting cost of living adjustments equal to government 'official' statistics begin to agitate.

#7 After over 2.5 years of not suffering a down 2% day dating through early 2007, volatility in the stock market takes over as the theme of the year, 2% daily increases and drops become a weekly occurrence. The market suffers its first 20% drop (from Oct 9, 2007 peak) in the first half of 2007 as consensus emerges that "a major slowdown" (which dared not be called a recession due to elections coming), is happening. The first half of 2008 is marked by major downward revisions in 08 estimates and a 'cheap market' doesn't look so cheap. The major terrorist attack in Western country (to try to influence US elections), along with record spike in oil prices due to hurricanes (along with a Google warning - see next post) mark a dramatic bottom in the markets through late summer/early fall. Markets make a dramatic rally off these lows as all the worlds banks coordinate to flood massive infusions into the system (all this money needs to go somewhere) - and in combination a massive wave of foreign investment hits US firms (non financial), driving up equities late in the year. Investors are giddy before realizing a 10% return in equities marked with 9% inflation really only means 1% return, but they clap like seals anyhow. Pundits will claim how resilient the economy is without realizing we are selling off large pieces of it... The market ends the year only down 2.78% as economic based bloggers throughout the world wonder what it takes to make the market ever go down?

#8 Google is finally hit by an earnings miss by Q3 2008. It won't be a major miss, but enough to rock psychology. Advertising slowdown, led by US recession... err not a recession but a "slowdown" (its a political year folks), finally hits Google, despite secular growth. Google will be seen as human and a company that is not immune to the business cycle, driving the stock down. Baidu.com will suffer a 40% loss as investors, not realizing Baidu is in China and Google is in the US, think US advertisers will cut their spending with Baidu.com as well. Or maybe it's just too expensive. In a sick twist of fate Yahoo emerges as the best performer in the space as News Corp comes in with a buyout as the stock trades listlessly again in 2008.

#9 Not 1, not 2, but 3 of the top 12 homebuilders file for bankruptcy after the spring and summer of 2008 see no serious rebound in the real estate market. Bankers, finally seeing the light, stop extending life support to these homebuilders who just continue to build homes no one needs, to create cash flow. This creates a major tradeable low in the homebuilders in the fourth quarter and massive rallies on order of 50% are seen in the remaining players. While the ultimate bottom is still a year away, a great trading opportunity is created. Meanwhile the National Association of Realtors throughout the year pushes out their date of "major rebound in all real estate markets" from January 1, 2008 to March 2008...then May, then July, then September, then November, and then January 1 2009 right at midnight.

#10 After writing off every kitchen sink in America, the 5 major investment banks, after a poor first half of 2008, stage a massive rally in fall 2008, proving once again the black box rules the world. Goldman Sachs attributes its weak first half of 2008 to "we were too busy in strategy sessions figuring out how many government posts should be filled with ex Goldman executives in the next administration, so our core business of milking the financial system for all it's worth and transferring wealth from middle class to upper class suffered. So while we didn't have our eye on the ball, in a way we were. I mean complete dominance of all parts of the world economy, both economic and political, is important no?" This disclosure will be found on page 143 footnote 17 in the 2008 10K. Goldman executives are named to 53 of the 54 top posts in the McCain/Bloomberg administration. The other goes to Bill Richardson so Republicans can be seen reaching across the aisle and win over the Hispanic vote in 1 fell swoop (Goldman of course advised on this move). Somewhere, Ron Paul screams. Money center banks suffer another year of disaster with no end in sight. Repeated dead cat bounces prevail but the increasing defaults in auto loans, consumer loans, and the "that's so 2007" mortgage loans continues to puncture them. The Federal Reserve takes unprecedented actions, buying bad loans and keeping them "until markets return to normal" instead of overnight or for 25 days, etc. Normal doesn't return for 2-3 years. Another 2-3 waves of foreign capital infusion from the Far East and Middle East is needed... but at that point these investors realize these banks really are toxic waste dumps. Citibank trades to $23. Even the best run like Wells Fargo cannot escape the coming defaults by the overextended US consumers. Credit cards become in 2008 what 'subprime mortgages' are in 2007. Defaults rage across the country, and politicians, clueless to what is happening in the real world, haul credit card executives back to Washington to make a circus about their tactics (yet again). After this show and dance to try to impress the peeved electorate they whisper post meeting "I'm not really mad at you, this is just for show - just keep doing what you are doing and please make sure you contribute at least $2300 to my campaign"

#11 Apple continues its run to become the largest market cap stock in the USA, tacking on another 50% to finish at $300 by end of 2008. Steve Jobs puts his pinkie to his lips and cackles like Dr. Evil as he quickly positions Apple to be THE consumer electronic convergence BRAND of our lifetime. Macs quickly approach 10% market share, and consumers in foreign countries flee to Apple as a consumer cult brand like a Nike or Adidas. iPod Touch is a surprise massive hit, and the revenue sharing agreement (on subscriptions) from the iPhones is finally realized as the Trojan horse brilliant idea it is. As worldwide laptop sales burst past desk tops, Apple unveils a new consumer convergence product, something bigger than an iPod but smaller than a laptop, but something so good, so sexy, so necessary, people will want to have it surgically attached to their arms. Apple investors will tell you "I told you so" and "please join the cult", and Apple naysayers will say "just wait until next quarter, it's overpriced I tell ya". Dell announces it is buying Apple brand computers for its corporate headquarters (ok just kidding on that last one)

#12 China has a raging success in its Olympics, although everyone notices no cars are allowed to drive during the 2 weeks (smog and all). Meanwhile the decoupling effect is proven to be yet another farce by CNBC pundits, and major foreign markets, following the lead of the US market fall in tandem. China Shanghai market drops 30%, and daytrading housewives countrywide panic. Taxi cab drivers go back to driving taxis instead of trading stocks. China's sovereign fund decides to simply keep buying Chinese stocks in a desperate attempt by the government to keep the prices high.

#13 Sports: The Indianapolis Colts travel to Boston for the AFC championship game, and in a stunning victory beat the Patriots 35-34 as .... oh nevermind, we can't get that crazy - I have to retain some credibility.

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