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December 29, 2007

My Ten Predictions for 2008
by Thomas Tan

At the beginning of every year, Byron Wien, a former long time Chief Strategist for Morgan Stanley and now for Pequot, a hedge fund, makes his 10 predictions for that year. His records have been up and down, probably around 5-6 correct picks for good years and only 1-2 for bad years. It seems initially that he doesn't set a very high bar for us to beat since most of them are wrong anyway, but it actually indicates how difficult it is to make correct predictions. 2007 is probably not one of Byron's best. The only one he nailed right on is gold over $800 and the uptrend for some other commodities including oil.

I don't want to be influenced by him and his thinking, as we should be hearing from him shortly after the New Year. Also not to compare myself to him, but just for the fun of doing it, I also decided to make my own 10 predictions for 2008. I will only stick to the financial markets, will not delve into other areas, such as election, foreign relations, or politicians, like Byron. I may or may not trade these trends and any of my opinions is subject to change over time. Here they are:

1. The price of gold will touch 4 digit in USD ($1000) for the 1st time in human history. Gold has entered the 2nd phase of its uptrend, will have more explosive up movement 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.

2. With gold rising, silver and mining stocks represented by HUI will eventually catch up. I expect to see 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.

3. After a temporary rebound, USD will continue its downtrend again, as an inverse mirror image of gold. USD will lose another 10% of its value and USD index will touch 70 sometime during 2008.

4. In 2007, we see the burst of mortgage bubble followed by the burst of real estate bubble. We will see the burst of credit card bubble in 2008 (another blow to the credit market), while some consumers have financed their credit card purchases to the hilt and many years into the future. The burst of this long time 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 jack the rates to as high as 36%, making subprime rate look paltry.

5. Citigroup will drop to teens (below $20). More bad news to come in the banking industry. Only less than half of the subprime write-downs have announced in 2007, with another half yet to come. OTC derivative market is full of land miners, like steroids in professional baseball, even we don't know the exact implication and situation of each player (bank), we know many of them having problems and will hear more explosive news in 2008. Banks will be stacked with lawsuits, from self-promoting fund returns with the whole purpose of collecting fees and bonuses, to unable to show ownership documents to foreclose homes and face countersuits from disgruntled homeowners. The current moving SIVs to balance sheet will further invite shareholder lawsuits, with the argument that SIV instruments should never have been off their balance sheets to begin with thus false and misleading shareholders, and now putting them back at par further destroying shareholder's equity. The fact that banks are busy bringing in sovereign funds tells us there are much 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 US is no different than previously holding all US treasuries in their funds, only this time they "diversify" into more risky US equities. Not only this is too early for bottom picking, likely to suffer 25% loss like their Blackstone investment, but also any future return (if any) will be more than offset by the further falling USD.

6. Inflation will grow high, and agriculture commodities of soybeans, corn and especially wheat continue to rise to new highs. Wheat is a commonly used ingredient for many daily products which actually provides a better gauge of food inflation than any other indicators. Public will start questioning government published CPI number when food, energy bills are growing intolerable high. There will be pressure for government going back to the pre-adjustment CPI methodology used in the 70s and 80s which is 3-4% higher than current published data, so that their TIPs investment could receive more equitable income. There will be talks and fear about real double digit inflation down the road.

7. Energy price will continue to rise. We should finally see oil at 3 digit ($100 and more) and a decent recovery of the natural gas market with inventory level declining. Against popular opinion, higher oil price would 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 environment challenges. Biofuel not only drives corn price to sky high, but also reinforces public perception that biofuel takes poor people's basic need for food (corn) away to pay for rich people's gas-guzzling SUVs.

8. S&P market will be at trading range and volatile. Both banking and retail sectors will continue to be under pressure, as discussed earlier. The $1,576 price S&P 500 reached in October 2007 is likely the highest for this ending bull market, we should see 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, a typical valuation trap at the start of a bear market.

9. 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.

10. National real estate market will decline faster in 2008 than 2007, recording double digit loss and we won't see the bottom at least until 2009.

Thomas Tan, CFA, MBA
www.investorwalk.com

Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

Copyright © 2006-2009 Thomas Z. Tan

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