20 Surprises for 2008?
Doug Kass of thestreet.com has put together his annual “might happen” list for 2008. He was “right” about 1/2 of his “predictions” last year, including the mortgage meltdown and the credit crunch. It may behoove you to heed some of these cautionary possibilities.
Here are the lowlights (there’s not much good news here):
1. The Housing Depression of 2007 morphs into the Retail Spending Depression of 2008. Stubbornly high inflation coupled with a deceleration in the rate of job growth, which turns into job losses by midyear, and an absence of innovation (a creativity void in consumer electronic products and apparel), leads to an unprecedented and abrupt drop in personal consumption expenditures.
5. The Federal Reserve embarks upon a series of moves to ease monetary policy in 2008. Nearly every meeting is accompanied by a 25-basis-point decrease in the federal funds rate even despite continued inflationary pressures.
Nevertheless the economy fails to revive as the Fed pushes on a string.
9. The administration’s proposal to revive the housing market falls on its face (as the housing bust accelerates), and President Bush enlists a well-placed Democrat and former cabinet member to become the U.S. housing czar, who has the primary charge to propose and administer a massive Marshall Plan for housing.
14. Reversing its recent strength, the U.S. dollar’s value falls by over 10% in 2008 (and gold rises to over $1,000 an ounce). Despite the weak domestic economy, foreign reserve diversification efforts and the demand for higher interest rates cause the yield on the 10-year U.S. note to move higher throughout the year.
15. The price of crude oil, insensitive to a weakening world economy, eclipses $135 per barrel after an “exogenous” event of terrorism, supply disruptions or political upheaval. The $100 level becomes the new $70! Surprisingly, energy stocks react in a muted fashion to the rip in price as, by midyear, the Democratic Party’s populist view of a windfall tax on energy companies gains increased acceptance.
18. There are several major Enron-like accounting scandals in 2008, causing investor confidence to plummet. These will come in some large financial and industrial (rollup) companies in Europe and the U.S.
Some good news:
7. The Chinese juggernaut continues apace and, despite continued protestations of a market bubble, the Chinese market doubles again in 2008.
8. The Japanese market puts on a surprising resurgence as the world’s investors respond to compressed valuations (vis-à-vis peer regions), reasonable multiples (absolutely and against Japanese bond yields), accelerated M&A activity, share buybacks and relative strong corporate profit growth.
11. With the economy weakening and corporate profits tumbling, investors pay up — real up — for growth. The three horsemen — Research In Motion (RIMM) , Apple Computer (AAPL) and Google (GOOG) — move into bubble status, and short interest triples as the naysayers increase their bets. Their shares double in 2008 even as most equities decline.
Citigroup (C) halves its dividend, and the shares briefly trade in the mid-$20s. Asset sales and writedowns leave the bank crippled, and in late 2008 (after another capital infusion by Abu Dhabi), Citi is merged with Bank of America (BAC) . Its new name is its old name: CitiBank!
Now, will all (or any) of these things happen? Some will, some won’t, some will be the opposite of what the author says might happen. It’s always a good idea, however, to take the good and bad together, be prepared for both (and even the middling), and diversify your holdings and always look for ways to minimize your risk while maximizing your returns. That’s the hallmark of investing and should be followed at all times.
Remember, investing is a marathon, not a sprint. Sprints are for speculators.
So, what am I going to do? I will move my current 50% allocation in foreign stocks to more like 75% foreign, with a heavier weight in China and Japan. The strong economies will make it through this mess, the developing countries will falter, in my opinion. I’m not sure where the US will come out on all of this, or when. I think we’ll make it through, but I fear that the economy (and its markets: housing, stocks, bonds) will undergo a long (5 years or more) malaise that we haven’t seen in a long, long time.