As the New Year approaches the typical topic of discussion is to prognosticate, predict, and further espouse a view of what the future will bring. Our view is not a pretty view, well, certainly not in the short-term, but a view that becomes somewhat less gloomy as the year 2008 progresses.
In the first quarter of 2008, we will continue to feel the pangs of pain from the fall out of the sub-prime mess. This will cause banks and other lending bodies to, finally, become conservative on their lending practices. Then, as a first quarter gift, we will begin to see some of the lending excesses, in the form of “Exotic Mortgages,” begin to fail. While this event will likely only be felt in the wealthy sectors of the economy, it will nonetheless, curtail spending and further pressure home prices. The FOMC will continue to lower rates, but this will not help loosen the new tight lending practices, just learned. Many lenders have been stung by the mortgage-bee and, will be less likely to lend that aggressively again. This will slow down the consumer spending habits. A further effect of lowering interest rates, is to encourage inflation, which is already percolating at a boil. The US Dollar index will feel this pressure, and may take another leg, to the downside, destabilizing further, its reserve status. Commodities will continue to rally, gold will rally and crude oil will surpass the $100.00 mark, pushing beyond the century mark before retreating. The Chinese will enjoy the Olympic boom after which, its aggressive growth will moderate. We look to Japan, Korea, India, Turkey and Russia for growth in the year ahead. We would be long resources and short consumer extravagances. This gloomy forecast will last for, at the very least, the first quarter, and possibly the second quarter, but will lead to a rally for the summer and into the election season. Thus, the year will close just marginally above where it opened 2008 with an election campaign flooding hopes for fairy dust to get us out of our messes. The result will be to throw the bums out and “tax the rich.” We do not agree with this, however; that will be the mantra. We are capitalists at heart, and do not believe in punishing those who have been successful.
The bottom line is: where do you put money to work. Obviously, with interest rates very low, another home for free cash is needed. We encourage you to look into preferred issues of stable companies for an increase in cash flow. Further, convertible preferred and convertible bonds on good stocks are a good source of cash-flow, with an equity kicker. Also, remember that there is cap on the taxes you pay on dividends, well, so far there is…. that cap is at 15%. Dividends have the preference, not bond coupons, which are taxed as ordinary income. Naturally, this investment strategy is good for a declining interest rate environment and needs to be adjusted when that strategy changes. We continue to like gold, but will avoid industrial metals. We like commodities because even in a recession, “Man has to eat and heat.”
Monday: the last day of the year 2007 and the last day to take losses for the tax year, November existing home sales, and November semiconductor book-to-bill is released.
Tuesday: HAPPY NEW YEAR!
Wednesday: December ISM is released at 10:00, November construction spending is released at 10:00 and the minutes of the last FOMC meeting are released at 2:00.
Thursday: Challenger, Gray & Christmas issue December’s job-cuts and November factory orders are released at 10:00.
Friday: December’s nonfarm payroll and unemployment rate are released at 8:30 and Fed Vice Chairman Kohn speaks.
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282