25 Possible Market Surprises for 2007

by: Barry Ritholtz

Doug Kass puts together a terrific list each year. They are thought-provoking, and truth be told, kinda fun. These are just the headlines; the full details are here.

These are not intended to be predictions, but rather "events that have a reasonable chance of occurring, despite the general perception that the odds are very long."

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events - with large payoffs. After all, Wall Street research is still very much convention and groupthink, despite the reforms over the past several years.

25 Possible Surprises in 2007

1. Private equity deals begin the year in a spectacular fashion with two separate $50 billion dollar acquisitions announced in January.

2. Robert E. Rubin returns to his brokerage roots and becomes the CEO and Chairman of Salomon Brothers/Smith Barney after Citigroup (NYSE:C) decides to break up into three separate companies: a domestic money center bank (Citibank), investment banking/retail brokerage (Salomon Brothers/Smith Barney) and international consumer finance (Citiglobal).

3. Based on misleading government statistics, the housing market appears to stabilize in the first quarter of 2007.

4. However, continued heavy cancellations of home contracts (which are included in the government releases on homes sold and lead to an erroneous inventory of unsold units for sale) lead to (1) a dumping of homes on the market in the spring, (2) to a quantum increase in the months of unsold housing inventory and (3) to a dramatic drop in the average home selling price.

5. Foreclosures steadily rise over the course of the year to nearly 3 million homes in 2007 (vs. about 1.2 million in 2006).

6. The magnitude of the credit problems in mortgages takes its toll on the hedge fund industry, which is much more exposed to real estate than is generally recognized.

7. In a panic, Congress announces a series of hearings on the derivative industry and the Federal Reserve reduces the fed funds rate by 50 basis points in each of three consecutive meetings.

8. Commodity prices begin to collapse even before the mortgage market fiasco, but the onset of the decline is initially ignored by stock market investors.

9. Corporate profits for 2007 end up being virtually flat (year-over-year), but the pattern is very inconsistent.

10. Equity market volatility, like credit spreads, rise exponentially.

11. Stocks begin 2007 in the way they ended 2006 - very strong - and the S&P 500 Index temporarily breaches the 1450 level in February.

12. Fidelity Management announces the introduction of its first dedicated short equity product.

13. With confidence in the markets and economies ebbing, merger-and-acquisition activity slows to a crawl by May.

14. A well known corporate raider finds himself with a concentrated portfolio of illiquid investments and suffers large losses.

15. America's growing dependency on convergence and connectivity (computers control power delivery, communications, aviation and financial services) becomes a battleground and launching pad for a series of cyberterrorism acts by a terrorist group in early 2007.

16. There are several political surprises in 2007. Most significant is that New York Senator Hilary Clinton, citing personal issues, announces that she will not run for the Democratic Presidential nomination in 2008 and that she will throw her support to former Vice President Al Gore's candidacy.

17. After New York Yankee baseball team owner George Steinbrenner falls seriously ill, SAC Capital Partners' legendary Steve Cohen acquires majority control of the New York Yankees and, at year-end, retires from active management at his hedge fund.

18. Wal-Mart (NYSE:WMT) fails to come out of its funk and reports five consecutive months of negative same-store sales.

19. Google (NASDAQ:GOOG) marches on, proving its skeptics wrong, and dramatically exceeds sales, profit and cash flow expectations.

20. Saddam Hussein is assassinated in jail even before his appeal is concluded. Osama Bin Laden is found dead, and initial reports indicate that he has been dead for over 12 months.

21. A series of corruption scandals in Russia hits the emerging markets in 2007, which further exacerbates the impact of the uneven worldwide economic conditions and difficulties in the mortgage markets.

22. A large hedge fund lowers its investment management fees (to 0.5%) and incentive fees (to 10%).

23. With the hedge fund ranks diminished, commodities dropping in value and the appeal for alternative investments (private equity, real estate, etc.) moderating, the bullish chorus for a global liquidity case for equities becomes a faint whisper.

24. Maria Bartiromo leaves CNBC to join Joy Behar, Rosie O'Donnell, and Barbara Walters on ABC's ""The View."."

25. Amidst the early 2007 stock market euphoria, Jim "El Capitan" Cramer's "Mad Money" show goes primetime on CBS. But it is canceled during the midyear market meltdown and returns to CNBC by the Fall. CNBC extends the show to two hours by year's end after Cramer, The Movie, reaps $38 million in its first weekend.


25 Possible Surprises in Store for 2007
Doug Kass
Street Insight, 12/11/2006 10:10 AM EST