10 Predictions for 2008
Insight NewsletterIssue #23
For 2008 we are bearish on stocks and bonds. We think housing and credit issues, combined with slowing global growth, higher inflation, and rising unemployment will make for a very tough year on investors. Our response to this will be contrarian protection of our client’s assets. We are selectively picking plain vanilla stocks that pay solid growing dividends. Barnes Capital continues to build portfolios to match market returns with less risk using a variety of standard and alternative assets.
In 2007 we achieved double the return of the S&P 500 for every one of our clients. Favor shone upon our client’s portfolios as our investments played out over the year. Our 2007 predictions were on target (see recap at bottom of article in the postscript). Let’s see what 2008 may have in store for us all . . .
Predictions for 2008
Likely to Occur
Prediction 1:
Gold will keep rising, breaking $1000 in the first half of the year, and $1100/oz. by year-end. Gold is real money. The world is gradually rediscovering this now. There is little reason to think their enlightenment will suddenly abate.
Prediction 2:
Slowing global growth and consumer prudence and frugality, particularly in driving patterns will moderate Crude oil’s hyperbolic ascent. Crude will be range bound in the $80-$110 area, but Energy stocks will continue to outperform the market.
Prediction 3:
The Democratic nomination. Once again, political pundits will lament the days of brokered conventions as Clinton will win enough of the delegates on Super Super Tuesday (February 5th) and coast to the Democratic presidential nomination. The market won’t react well to a surging Clinton candidacy. But it will also not be reacting well to other events such as the housing fall-out and the bear market.
Prediction 4:
The Republican nomination will remain wide open through the spring, sparking questions of the party’s absence of leadership and direction. Democrats will seem unbeatable for most of the winter and spring.
Prediction 5:
Bush’s Presidency will accomplish little in its final year, which is in keeping with most final presidential years. The market will have little reason to wax optimistically as the uncertainty of politics and future policy gives portfolio and corporate managers much to worry about.
Unlikely to Occur – but it wouldn’t surprise us if . . .
Prediction 6:
Housing prices collapse in the summer in California and Florida, driving worries of a full blown recession. Finger pointing will abound and the stock market will quiver with violent swings through the political conventions. Home sales prices will fall an additional 10-15% in the spring and summer in the overbuilt areas of Florida and California while Countrywide, Washington Mutual and at least one more major bank seeks governmental help to remain solvent. This will mark one of the first bottoms in the year’s short and vicious bear market. Housing prices will stop falling nationwide in spring 2009 but will continue down in Florida and parts of California in the most overbuilt areas like Miami, Modesto, Sacramento and Las Vegas.
Prediction 7:
The acceptance of Global Warming will continue to grow, while Ethanol politics (taking the pledge) will be publicly blamed for driving up the cost of agricultural food stuffs across the nation and the world by the end of the year. The last effort of the Bush presidency will be to back renewable energy legislation. Alas, this attempt will die a pitiful death in the fall sessions of Congress.
Prediction 8:
The Bond Market will hit new highs and then fall off the cliff in the summer. Following a six week decline in the Dow from 12,000 to 10,000 in the spring, the Dow will dip below 10,000 intraday. Meanwhile the 10-year note will touch 3.25% in the same week and then the wheels will fall off the Fixed-Income apple cart.
Following a year of “flight to safety” in the longer dated bonds, foreigners will look at the stalled supertanker economy, the surging Democratic Party, and higher inflation numbers and suspend their purchases of U.S. Long-Term Government Bonds. Long-term government bond yields will rise from 3.25% to over 5% by October. Inflation reports of 5% inflation will serve to confirm the drop in bonds and the media will discuss the similarities to the 1970s.
Prediction 9:
With significant losses in equities, bonds and real estate, a bear market selling climax will occur in the late summer, but due to higher volatility, headlining bad news, and inflation, few will identify the July low’s and the August retest and the November collapse, to be triple bottom of the 2008 bear market. That will change after the Dow rallies 3000 points in early December and January ‘09 following the confirmation of President Bloomberg.
Prediction 10:
The Presidential Election: With the Grand Old Party in disarray and patrician John McCain trying to build the base for a national campaign, Mayor Mike Bloomberg enters the Presidential Election as a Republican Candidate. Bloomberg looks presidential, is a billionaire, and has an impeccable record. Despite his lack of organization in more than 20 states, Bloomberg gains enough delegates to go to the Republican Convention. With the delegates being split between McCain, Romney, Bloomberg and Huckabee, Bloomberg emerges as the strongest candidate to defeat Senator Clinton. In a historic showdown of a political outsider versus the most established former 1st Lady, the Election shapes up as a titanic duel of two New Yorkers, a Jew versus a Woman. The fall campaign is fascinating and the election night is a nail biter, but in keeping with tradition, the Senator loses. Bloomberg emerges on top, carrying 300 electoral votes and 48% of the popular vote. Once again, in the key battleground states of Florida and Ohio (which Bloomberg wins), there are complaints of voting irregularities voiced by the Democrats. With the urging of her husband, Clinton refuses to concede the election and the country is once again thrown into Constitutional turmoil at a time when the economy is weak. The markets collapse for the last 3 weeks of November while this goes on, then rally spectacularly in December following confirmation of the election results selecting a Republican president.
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In Conclusion
We think we have our work cut out for us this year. It’s likely to be a very tough year on client portfolios and their managers. We continue to manage our clients’ money in the less growth sensitive areas and we are taking advantage of the once-in-a-lifetime opportunity in precious metals, while using solid citizen dividend paying blue chip companies as our core equity holdings.
As always, we appreciate any referrals by our network of colleagues, friends, and clients. Our approach is to protect and grow our client’s wealth with less portfolio risk than standard stocks and bonds. We are still accepting clients with portfolios under $250,000.
Have a terrific New Year.
Blessings,
Daniel A. Barnes, CFA
Barnes Capital
Lafayette, California January 9, 2008
About Barnes Capital
Barnes Capital builds and protects wealth for individuals, families and business owners.
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PS: For those of you who would like to review our 2007 predictions and the 2007 Year in Review, keep reading . . .
2007 Review:
We turned more bullish in Issue #11 (January 23, 2007). But even our new bullishness couldn’t keep pace with a market that ignored all bad news. It was as though God himself choose to levitate concerns away. It didn’t even seem to matter that California and Florida and many other areas were choking on an oversupply of homes, and the housing crash was beginning in earnest. It’s funny, even though the stock market is the best forecaster around, Mr. Market doesn’t always wake up on schedule. The inflow of global profits, savings and recycled petrodollars trumped all of our in-house domestic economy concerns until the credit markets began to seize in late July.
The market wobbled through the remainder of the year falling about 6% from its July high’s. For the year, the S&P 500 gained about 4% and added another 2% in dividends. The Dow faired better with a total return of 7% plus 2.2% in dividends. The Dow’s overall strength reflected the strong exports that the weak dollar has brought about as American companies like Coca Cola, Caterpillar and Proctor and Gamble flourished in the weak dollar environment. So how did those 2007 Barnes Capital predictions work out? (See them in Issue #10)
Let’s take a look:
Prediction 1:
We predicted that ETF’s would flourish and multiply. This they indeed have done, growing from a few hundred to more than 600. This was a lay-up prediction, we’ll raise the bar this year.
Score 1/1
Prediction 2:
We said that news of Chinese and Indian growth would send commodity prices reeling more than during the year, but that later restatements would show that double digit Asian growth isn’t ready to abate just yet… The commodity prices were slammed at least 3 times in the year, but overall were up substantially, as oil rose 60%, gold more than 30%, and Agricultural prices more than 20%. The whole Asian subcontinent seems likely to experience rising living standards. This in turn supports commodity prices by increasing demand in metals, foods and industrial materials. We believe that betting against commodities continues to be akin to betting against Asian growth.
Score 2/2
Prediction 3:
We said that the U.S. Economy would slip into a mild recession in summer ’07. Well the housing crunch and credit crunch certainly took an axe to growth around mid-summer, but we underestimated the resilient strength of other parts of the economy, particularly, the strong ties that accelerating global growth has to maintaining the U.S. economy. In this global world, it’s hard to fall off the cliff, if your partners are all doing well. While we got the timing on the big picture slowing right our thoughts that the Federal Reserve would see the coming storm, and act in time, were way off. Bernanke is playing Dr. Dad, and he seems to be repealing, for the time being, the law of Keynesian Economics.
Score it a miss, 2 for 3
Prediction 4:
We said that Crude Oil would tread water between $53 and $70, but Energy stocks would post 10-20% gains. We kind of nailed this. While we underestimated the strength of demand to drive oil prices over the $70 mark and (finishing at $99), we correctly estimated the strength and value in oil stocks. These posted solid gains, as steadily moving higher all year to post 20%-30% gains for the year.
Score 3 out of 4
Prediction 5:
We said that volatility will return to the markets and investors will again need to get used to 1%-2% daily price swings. Outcome: This happened. Until summer, volatility was very low, but beginning in late July, the market reacted violently with more than 1% price moves several dozen times.
Score 4 out of 5
We titled our predictions in two categories, “likely to occur” and “unlikely to occur”.
The next five we admitted were unlikely to occur. Let’s see if any of them happened.
Prediction 6:
We said that Hillary will decide not to run. We were WRONG.
Score 4 out of 6
Prediction 7:
We said Gold will tread water for the first six months, and then break $800-$1000 in the 2nd half. We were RIGHT. Gold flitted between 600 and 700 in the first half before moving to $840 by year end (and finally breaking its all-time high on January 2nd of ’08). In retrospect, we don’t know why we put this in the “unlikely to occur” category, as we were confident that this would happen, and we positioned client accounts accordingly. I suppose it was the loneliness of contrary thinking that had us hedging our prediction with the “unlikely” sticker.
Score 5 out of 7
Prediction 8:
We said that the Presidential Candidates will delay entry to conserve cash, and wait to see what Clinton, Obama and McCain will do. But we also predicted those governors would enter the race and upset their apple carts. Outcome: We got this partly right. Huckabee certainly has upset the Republican apple cart, but Bloomberg doesn’t seem to be running, and he wasn’t delaying announcing due to money issues. It’s an exciting event as today the Iowa caucus kicks off.
Score 5.5 out of 8
Prediction 9:
We weighed in on Consumer Technology, saying that Consumers would not use PC Televisions, that Skype would fail, and that hosted software will accelerate and some cool new things will gain traction. We scored here. PC Televisions clearly haven’t taken off, Skype is a bust, and some other cool things are happening. Going forward however, we will refrain from tech/consumer predictions. It’s not our forte’.
Score 6.5 out of 9
Prediction 10:
We said that King Google will stumble a bit, but not enough for Yahoo’s sake. Well let’s see, Google’s stock rose 50%, while Yahoo lost nearly 7%. Guess we got this half right, as Yahoo indeed became increasingly marginalized. However, we missed the 100% gain Apple Computer and Google didn’t exactly stumble, so it’s hard to take much credit.
Score 7 out of 10
2007 will be tough to top
~db
About Barnes Capital
Barnes Capital builds and protects wealth for individuals, families and business owners.