2007, Part II

“Economics is not science, at least not in the sense that repeated experiments always produce the same results.”
– The Bank of International Settlements

Now I realize why July 4th is such a celebrated day in America. It’s the day when each financial analyst turns to the one to his side and says “Well, we did it the first half. Lets do it again”.

But what should we expect from the rest of the year? Todd Harrison from Minyanville gives his undertaking, here is a synopsis of what the future may hold.

Meanwhile, Tim Ianco from TheMessThatGreenspanMade has done a phenomenal job in predicting 2007. Here’s how he did so far and what we should expect for Part 2.

Currencies – “The Dollar will continue its decline and be positioned firmly in the mid seventies by the end of the year. The Euro will gain prestige as never before, old-Europe will look pretty smart, and Asian currencies will finally unhinge from the greenback a little more, but not too much.”

So far, so good. Although we may expect a near-term rally in the dollar made possible as a function of negative sentiment, a dollar is still a worthless IOU that seems to have more risk than reward.

Stocks – “Amid plunging home prices in the U.S., equity markets will continue higher… Where else are you going to put money? In the bank? There will be a couple of nasty sell-offs and short sellers will be confounded for yet another year.”

We saw the first such sell-off in February and we may see another heading into the second half. Large caps should outperform small and mid-caps, on a relative basis, and energy and metals will take the leadership baton from tech and financials.

The Precious Metals – “Gold will spike to around $800 an ounce and will finish the year in the high $700 range. Silver will almost hit $20 an ounce and finish the year close to $18. There will be at least two gut-wrenching corrections that will cause many new investors to make an early exit from this sector.”

We have yet to see…

Debt – With $2 trillion in adjustable rate mortgages reset in 2007, specter of higher global rates and a whole bunch of CDOs lined up to get marked-to-market the era of easy money seems to have begun its tightening. Once again, steer clear of the financials.

Hedge Funds – With Blackstone now public and many others in the IPO pipeline one must ask themself “Is this the last bastion of liquidity, one that could potentially spark a blow-off phase or echo-bubble, or is this a clarion call that those in the know are beginning to bottleneck at the last, remaining exit?”

Commodities – Merger & acquisition activity should pick-up in the hard-asset space as smaller niche players are absorbed in a global effort to scale.

Interest Rates “The Fed will leave short-term rates at 5.25 percent and long-term rates will hover around 4.5 to 4.7 percent. The Fed will talk tough on inflation when it’s appropriate and threaten to raise rates.”

Long-term rates just rose to 5.2 percent and now they look like they’re headed higher, at least for the time being (mostly due to credit spreads). This is the first clear miss in predictions. The lock between the housing woes and higher inflation risk seems tighter than ever.

Inflation – More people will realize that the government’s inflation numbers are bogus. They won’t be happy about it.”

This is happening very slowly, but it is happening.

Real Estate“We should see a 10 percent decline in the year-over-year national OFHEO resale price data – not refinancings, just resales. At some point in time, making sub-prime, option-ARM, interest only, 50-year loans no longer makes business sense.”

Notice the subprime mention. We seem to be on track. Todd says that persistent supply may be keeping prices afloat.

Energy “Oil will average $70 per barrel in 2006 and will finish the year at about $75, after spiking to $90 sometime during the spring or summer. Russia will become increasingly important in global energy production and they will become increasingly difficult to work with.”

This one was great Tim!

Volatility This year should see an up tick in overall market volatility.

The Economy –Growth will Slow, Consumption will Continue. Trillions of dollars of home equity that hasn’t been spent yet will be spent in 2007. Much of this will be in the form of reverse mortgages for senior citizens in order to make ends meet. Economic growth will continue to slow coming in just below 2 percent for the year with a recession starting in the fourth quarter.

The business of reverse mortgages for senior citizens is one of the hottest sectors in banking today. Recession is still in the cards.

As Brian Tracy says that the brain warrants positive impulses. So on the bright side, I think right now it pays to be bullish on bearishness.

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