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Everyone has an opinion. In recent days, many investment gurus were giving us their forecasts for the stock market in 2007. In reality, these forecasts are nothing more than a guess.
We have all heard the term "educated guess", but even one who is educated and guesses is no better than someone who is not educated and guesses. I say this because the world is in constant state of flux, and no one can predict what the stock market will do unless we live in a utopian society.
So, forget about all the predictions for the stock market since they are nothing more than a useless waste of news print.
What I do know about market predictions is that taking the contrarian side of consensus opinion is usually a good bet. An example of this is the "Dogs of the Dow" theory. You remember this don't you? It is a contrarian strategy based on selecting the ten most out of favor stocks, based on stock dividend yield, in the Dow Jones Industrial Average. You hold these high-yield Dow dogs for a year and then repeat the process the next year by selecting ten new dogs.
So, how well has this strategy worked? The long term track record of buying the "Dogs of the Dow" is impressive. But, as the investing masses began climbing aboard this "can't lose" strategy, almost on cue the performance began to suffer.
When I was a broker, I remember when many of my colleagues were jumping on the "Dogs" bandwagon. Almost on cue, the "Dogs" method began to falter;
DOGS OF THE DOW RESULTS
2005: Dogs: -8.9%, Dow 30: -1.1%
2004: Dogs: 0.5%, Dow: 30: 4.4%
2003: Dogs: 23.6%, Dow 30: 28.7%
2002: Dogs: -12.2%, Dow 30: -18.6%
2001: Dogs: -7.8%, Dow 30: -7.3%
2000: Dogs: 2.7%, Dow 30: -6.1%
Net: Dogs: -2.1, Dow 0
So much for consensus opinion.
Bloomberg's Chet Currier published an article this morning entitled "Bullish Mood for '07 Has Some People Feeling Bad: Chet Currier." Here are some quotes from the article;
"Money managers are bullish on stocks for 2007,'' says Russell Investment Group, which invests $180 billion, reporting on its latest quarterly poll. The survey found ``the highest percentage ever'' of managers who consider the market undervalued.
"Stock strategists raise alarms with unanimous call for a rally,'' said the headline on one recent Bloomberg story. ``Investor sentiment appears worrisomely bullish, suggesting a market correction may be needed,'' said the financial newsletter Dow Theory Forecasts.
You can read the entire article by clicking the link above, but my point is clear. When the majority gets on one side of an issue, it may be wise to position your chair on the opposite end of the ship.
The problem I have with mass consensus opinion is they tend to ignore the realities of bad decisions by our government and the people who control them. If we were able to get an honest stock market opinion from people in the know, I wouldn't mind going along. But, since we can't, I won't waste my time listening to majority opinion.
Doug Kass from Seabreeze Partners is a great independent thinker. Here are a few of the 25 Surprises for 2007 worth considering;
-Based on misleading government statistics, the housing market appears to stabilize in the first quarter of 2007. For a few months, those forecasting a bottom in residential real estate appear vindicated. Evidence of cracks in sub-prime credits are ignored, with housing-related equities soaring to new 52-week highs by March 1.
-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:
A dumping of homes on the market in the spring
A quantum increase in the months of unsold housing inventory
A dramatic drop in the average home selling price.
Sales of existing and new homes take another sharp leg lower as we enter what I've dubbed "The Great Housing Depression of 2007."
Importantly, the financial intermediaries that source mortgage financing/origination begin to feel the financial brunt of "The Great Mortgage Bubble of 2000-06" after years of creative but nonsensical, low or non-documented lending behavior.
-Foreclosures steadily rise over the course of the year to nearly 3 million homes in 2007 vs. about 1.2 million in 2006. Deep cracks in the sub-prime market spread to other credits in the asset-backed securities market as a lumpy and uneven period of domestic economic growth takes its toll. In a similarly abrupt and dramatic manner, credit spreads fly open and revert back to mean valuations, as previously nonchalant investors are awakened to the reality of credit risk.
-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 generally recognized. A handful of multibillion-dollar, derivative-playing hedge funds bite the dust in the aftermath of the housing debacle. Several California-based industrial banks fail (the West Coast is always at the leading edge of financial creativity and leverage!), and a large brokerage firm, heavily involved in fixed-income market-making and trading, faces material losses, and its debt ratings are downgraded. As the financial contagion spreads, rumors of a $10 billion-plus derivative loss at JPMorgan Chase (which ultimately prove to be false) spark the largest one-day percentage drop in its shares in the past 15 years.
-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. Those efforts are too late to affect the already weakening economy as the long tail of housing begins to affect not only consumer confidence and spending but also other peripheral areas of the economy.
-Commodity prices begin to collapse even before the mortgage market fiasco, but the onset of the decline is initially ignored by stock market investors. The CRB Index moves below 300. Notably, crude oil falls under $50 in a deflationary scare as interest rate cuts fail to revive the economy. The yield on the 10-year U.S. note falls to below 4% and stays there over the balance of the year.
-Corporate profits for 2007 end up virtually flat year over year, but the pattern is inconsistent. After rising 8% in first-quarter 2007, corporate profits are down 5% in second-quarter 2007, up by 2% in third-quarter 2007 and back down by 4% in fourth-quarter 2007.
-Equity-market volatility, like credit spreads, rises exponentially. The S&P 500 routinely has 2% daily moves, acting more like a commodity than a stock index. Mutual fund and hedge fund redemptions rise dramatically.
-Stocks begin 2007 the way they ended 2006 -- very strong -- and the S&P 500 temporarily breaches 1450 in February. But by the end of the second quarter, under the brunt of the mortgage implosion, stocks drop nearly 15% and remain relatively range-bound for the rest of the year. The S&P 500 ends the year at around 1250, dropping by about 11% in 2007.
Reflecting the deflationary threats, one of the best-performing groups of 2006, industrial materials, morphs into the worst-performing group in 2007. With credit spreads flying open, the junk-bond market records its worst performance in over two decades and substantially underperforms almost every asset class in 2007. Technology, pinched by an abrupt demand plunge in consumer electronics, a listless response to Microsoft's Vista and a drop in business spending, ends the year with a 20% decline in value.
-With confidence in the markets and economies ebbing, merger-and-acquisition activity slows to a crawl by May. Several leading universities and endowments, which previously underwrote large private equity commitments, announce that they are dramatically reducing their exposure to that asset class.
-Wal-Mart fails to come out of its funk and reports five consecutive months of negative same-store sales. Overall retail spending follows the housing decline and briefly falls to levels that haven't been seen since the last recession as consumer confidence drops to lows not seen in more than 15 years. Purchases of discretionary items such as motorcycles, high-end kitchen appliances and jewelry suffer.
-Amid the early 2007 stock market euphoria, Jim "El Capitan" Cramer's "Mad Money" show goes prime time 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-end after Cramer, The Movie reaps $38 million in its first weekend.
Like I said, everyone has an opinion.
Here's something that's been bothering me lately (my opinion);
How can our legal system send two of our U.S. Border Patrol officers to prison for shooting an illegal alien drug trafficker in the butt? This criminal was smuggling 80 pounds of marijuana and 20 pounds of cocaine across the border from Mexico.
President Bush was asked by Fifty-one members of Congress if he would commute the sentences of or pardon the two officers and press secretary Tony Snow has called the pardon issue “nonsensical.”
You can read the entire article here
Read this and you might figure out why Mr. Bush will not pardon these two officers- NAFTA Super Highway
With all due respect to those people making market predictions for 2007 & beyond, it’s possible to make predictions if you live in utopia. Unfortunately, we do not travel yellow brick roads, we do not have a wizard, and there are too many witches to contend with.
