30 Dec 07, Predictions 2008: S&P Falls 25%, Chinesse Mkt Falls 40%,Oil $175 etc...
Reviewing my 2008 Predictions, following Saxo Bank:
Predictions 2008: S&P Falls 25%, Chinesse Mkt Falls 40%, Ron Paul Wins Presidency, Oil $175 etc... December 30, 2007 –
Most of it looks to be on track except: #1 Ron Paul elected President of the United States
Here are the interesting ones:
2) S&P500 falls 25% from its 2007 high to 1182
Why 1182? That would be an exact 25% drop from the 1576 high the S&P500 index reached in mid-October of this year. History shows that a stock market drops 15-30% when housing markets fail. “Easy Al Greenspan” and “the slice and dice any manner of junk and pass on the risk to your clients” investment banking paradigm triggered the biggest housing bubble in US history. The unwind from the height has already been severe – by some measures the most severe since the Great Depression – but it has further to go. So we are daring to forecast that the fall in the major US index would lie at the extreme end of the scale before we see the light at the end of the tunnel.
6) At least three of the largest 10 US homebuilders will go bankrupt
As 2007 draws to a close, many of the stocks for the largest home construction outfits in the US are rallying after Bush rolled out his desperate attempt to stem the subprime tidal wave by fiddling with rate reset mechanisms and implementing other measures that all seem like pumping medicine into a dead horse.These measures are too little and too late, as the last phases of the US housing boom were one of the worst examples of overextension by any industry ever – driven by excess liquidity (see S&P500 prediction above).Why is it that we think we need to abolish the economic cycle? The unwind of this bubble will continueand we think at least three of the largest US homebuilders could go bankrupt in 2008. If you are reluctant to go short stocks on this story, find companies that specialise in legal services. Why? This situation has the potential for endless lawsuits as this legal precedent-setting legislative proposal is guaranteed to produce a feeding frenzy for lawyers if no one else… To save you a bit of time, the tickers for the largest ten US home builders, as of this writing, are DHI, TOL, CTX, PHM, NVR, LEN, KBH, RYL, BHS, and MTH.
7) Chinese stock market falls 40% by late summer
The Chinese stock market bubble in 2007 saw one of the most remarkable accumulations of paper wealth in financial market history. The rise in Chinese equities is certainly due in part to solid fundamental underpinnings, including a liberalisation of markets and remarkable economic growth. But there are a number of factors that we believe may have resulted in an unhealthy overextension in equity prices that could mean an ugly correction in 2008 – possibly around the psychologically important 2008 Summer Olympics in Beijing. So what will provide the trigger for a sell-off? First, Chinese officialdom is showing an increasing willingness to clamp down on excessive growth with liquidity tightening. Second, some of the “fundamentals” in earnings are really a pyramiding of stock market gains as companies have booked profits stemming from stock market gains! Also, much of the bubble has been caused by capital controls that have kept too much liquidity bottled up in the domestic market. Signs are that those controls may be eased significantly to allow domestic capital to flow abroad and ease this pressure. So the Shanghai composite could fall as much as 40% or more in 2008. Look to buy any excessive fallout, however!
8) Grain Prices to double – again!
2007 saw the most spectacular gains in the grains complex in recent memory as wheat prices doubledand soybean prices rose to levels not seen since the wild grain markets of the 1970s. The story of grains is a simple one of supply and demand. Human population growth has slowed on a percentage basis, but per capita consumption of grain is accelerating as emerging markets switch to higher protein diets, which have a multiplier effect on the grain market. Every kilogram of beef requires 7 kilos of feed, for example. Chinese meat consumption has doubled per capita since 1990 and milk consumption has tripled since 2000. Most of the world that can be put to the till has been – this means that only pricing can stem demand in this most inelastic of all markets. Add to this the ethanol phenomenon, which many view as stealing food from people and putting into petrol tanks (watch for a growing ethics crisis in 2008 as the “starving stomachs vs. SUVs” debate grabs headlines). In short, the average price for the grains complex (Corn, Wheat and Soybeans) could double after having already doubled in the last 15 months. For those who would rather not trade grain futures, have a look at the ETF called the PowerShares DB Agriculture Fund.— 4 —
9) World oil prices accelerate to $175
Much of the conventional wisdom on oil has been proven wrong over the past few years, as previouslyunimaginable new highs in the price of oil have only been a reflection of the strength of global growth,rather than an obstruction in its path. And with the weak USD and shrinking profit margins for refiners,the end consumer in many places throughout the world hasn’t noticed a difference between oil pricesat 99 dollars compared to oil prices at 75 dollars. Even if global growth slows in 2008, it will continue tomove ahead in the emerging markets of the world where marginal energy demand is growing the most.As “peak oil” becomes a widely accepted principle and supply and demand do a nervous dance, the price risk in energy remains firmly to the upside.
10) UK growth turns negative
The UK economy may go into a nosedive in 2008, weighed down by some of the same factors that havetoppled the US. The UK housing bubble is possibly worse than the US bubble and has only begun tounwind. The Bank of England (BOE) has dragged its feet as the credit crisis has unfolded, which couldworsen the situation compared with the Fed, where “Helicopter Ben” has replaced “Easy Al”. The UKconsumer is even more overextended in terms of all forms of debt than his US counterpart. Need we saymore? Okay, we will: the UK terms of trade are awful and getting worse and its most important industry – financial services – is likely to see its worst recession since the internet/telco blowup of 2000-1. By Q3,UK GDP growth may flop into the negative column.