At the beginning of every year, Byron Wien, a former long-time Chief Strategist for Morgan Stanley (NYSE:MS) who now works for Pequot, a hedge fund, makes his 10 predictions for that year. His record has been up and down, with approximately 5-6 correct picks in a good year, and only 1-2 during a bad year. Initially, it seems that he doesn't set a very high bar for us to beat since most of them are wrong anyway, but it actually indicates just how hard it is to make correct predictions.
2007 was probably not one of Byron's best. The only one he nailed right on was gold going over $800, and the uptrend for some other commodities including oil.
I don't want to be influenced by him or his thinking, as we should be hearing from him shortly after the New Year. I don't want to compare myself to him, but just for the fun of it, I also decided to make 10 of my own predictions for 2008. I will only stick to predictions in the financial markets, and will not delve into other areas, such as elections, foreign relations, or politicians, like Bryon. I may or may not trade these trends, and any of my opinions are subject to change over time.
The following are my 10 predictions for 2008:
The price of gold will reach quadruple-digits in U.S. dollars ($1000) for the 1st time in human history. Gold has entered the 2nd phase of its uptrend, and will have more explosive up movements, and become more volatile. We should see $50+/- intraday movement in 2008. But this gold bull market has a long way to go beyond 2008.
With gold rising, silver and mining stocks represented by the Amex Gold BUGS Index (HUI) will eventually catch up. I expect to see the HUI over $600, and sliver over $20 in 2008. Don't give up on them. A turnaround always happens at the time when everyone feels desperate, and gives up.
After a temporary rebound, the U.S.dollar will continue its downtrend, as an inverse mirror image of gold. The U.S. dollar will lose another 10% of its value, and the U.S. dollar index will hit 70 sometime during 2008.
In 2007, we saw the mortgage bubble burst, which was then followed by the bursting of real estate bubble. In 2008, the credit card bubble will burst (another blow to the credit market), as some consumers have financed their credit card purchases to the hilt. The effects of this will be felt for many years. The bursting of this long-standing consumer bubble will dampen any recovery hope of the retail sector and the economy. At the end of the day, the credit card industry is similar to subprime, with new cards of initial tease rate of 0% to people who should not even have a card, then jacking the rates to as high as 36%, making subprime rates look paltry.
Citigroup (NYSE:C) will drop into the teens (below $20), and there is more bad news to come in the banking industry. Less than half of the subprime write-downs were announced in 2007, with the other half still to come. The OTC derivative market is full of land miners, and like steroids in professional baseball, we still don't know all of the ramifications, or situation of each player (bank). We know many of them are having problems and will hear more explosive news in 2008.
Banks will be faced with scores of lawsuits, from self-promoting fund returns with the whole purpose of collecting fees and bonuses, to those unable to show ownership documents to foreclosed homes. Many of these institutions will face countersuits from disgruntled homeowners. Moving SIVs to balance sheets will invite more shareholder lawsuits, with the argument that SIV instruments should never have been off their balance sheets in the first place. As a result, shareholders were mislead, and the banks are now being forced to put back them back at par, further destroying shareholder's equity. The fact that banks are busy bringing in sovereign funds tells us that there are more skeletons in the closet.
If this now is the end, banks are able to absorb all the write-downs and would not have asked for sovereign fund injections. The mindset behind sovereign funds investing in U.S. is no different than previously holding all U.S. treasuries in their funds, only this time they "diversify" into more risky U.S. equities. Not only this is too early for bottom picking, likely to suffer 25% loss like their Blackstone (NYSE:BX) investment, but also any future return (if any) will be more than offset by the further falling U.S. dollar.
Inflation will grow high, and agricultural commodities such as soybean, corn and especially wheat will continue to hit new highs. Wheat is a commonly used ingredient for many daily products which actually provides a better gauge of food inflation than any other indicator. The public will start questioning government published CPI numbers when food, and energy bills become intolerably expensive. There will be pressure on the government to return to the pre-adjustment CPI methodology that was used in the 70s and 80s which is 3-4% higher than current published data. This way, their TIPs investment could receive a more equitable income. There will be talks and fears about real double-digit inflation down the road.
Energy prices will continue to rise. We should finally see oil hit triple-digits ($100 and more), and a decent recovery of the natural gas market with inventory level declining. Against popular opinion, higher oil prices will neither reduce global demand, nor increase global supply. Alternative energy is more a dream than reality. Oil from tar sands is not only costly, but also faces environmental challenges. Biofuel not only drives corn prices sky high, but also reinforces the public's perception that biofuel takes poor people's basic need for food (corn) away to pay for rich people's gas-guzzling SUVs.
The S&P will be at trading range and volatile. As I discussed earlier, both the banking and retail sectors will continue to be under pressure. The S&P 500 reached 1576 in October 2007 which is likely the highest level for this ending bull market, and we should see a more severe correction in 2008. Corporate earnings and profit margins will shrink along with stock prices to make P/E at about the same level as now, which is a typical valuation trap at the start of a bear market.
The Fed will try to rescue market from time to time after big crashes by further lowering fed fund rates, likely 3.5% by yearend. As inflation fear grows, long bonds will drop and yield will go higher. 30-year yield will be back above 5%, with short end (Fed rate) at 3.5%, yield curve will become much steeper than now.
The national real estate market will decline faster in 2008 than 2007, recording double-digit losses and we won't see the bottom until at least 2009.