Oh, what a year it will be, even compared with all the turbulences of 2007!

Before going into the forecast let me wish you from all my heart to be surrounded by love and friendship that will help you to go through the tough times, good luck to avoid what is not under your control and the brain to change what you can! If those wishes materialize – believe me – you will be fine :-)

Recession

I do not make any recession call for 2008, because we are already in the recession since December of 2007. But my forecast is that the recession won’t be over this year

Credit crunch

The important feature of credit crunch is that it happens fast. Remember, the over-hyped Blackstone (the flagship crazy loaner) IPO was a huge success at June 21st and the full-scale credit crunch happened at August 10.

In 2007 the credit crunch was all about subprime mortgages, while in fact it was just the first wheel that came off. We will have some more major credit problems to develop in 2008:

  • Mortgages in general, including prime loans. Option ARMs – mortgages made for people who didn’t plan to pay from the day one
  • Commercial real estate
  • Credit cards
  • Auto loans
  • Municipal bonds

Each of those problems will come out of blue sky and cause major losses and panic across the board

Real estate

Whatever metric you chose there is no bottom in 2008 and it’s too early to say when that will bottom. For the details go to Calculated Risk, he’s the RE boss :-)

Major bankruptcies

It takes time for a company to bankrupt and even then most corporations finally do survive and re-emerge back from the bankruptcy, like Delta Airlines did. I have a list of companies that will bankrupt by 2010, but some of them (2 or 3) will seek the chapter 11 protection as soon as in 2008:

  • Countrywide
  • Washington Mutual – when this happens, it will be blood on the streets
  • Bkuna
  • Downey Financial
  • Chrysler (restructuring through bk, nothing special)
  • Standard Pacific
  • Beazer Homes
  • Hovnanian
  • Major problems (but no bankruptcy) for Fannie and Freddie

Stock market

The only thing I can say for sure is that we will be in the bear market for the whole year, with the first leg down in February. I have no idea how far down it will go – 5%? 30%? Who knows…

There are couple of sectors that will bottom and start drifting up already this year. That will be:

  • Utilities
  • Consumer staples
  • Financials. Yes, I’m not kidding. It will be a horrible year for financials but that will be a bottom, at some point. Two more panics like we had in August and I’m buying the big-cap banks and broker dealers, but not the small regional banks, those will not recover for years. I think the best day to go long will be a day when Washington Mutual goes bankrupt
  • Maybe Transports, hard to say

There are some sectors that will enter (or stay in) a violent bear market and have no recovery in 2008:

  • Cyclicals, Industrials
  • Consumer discretionary
  • Materials
  • Commercial real estate, REITs
  • Mortgage lenders, homebuilders

I have no doubt that the market in general will not bottom this year, but I will have many long positions going into year end, as I have many longs right now

Emerging markets

I think the first cracks in the Chinese economy will happen as soon as this year. They have three related major problems, each of nightmarish scale:

  • Almost all of the Chinese economy is very cyclical, they have very little counter-cyclical exposure. It’s similar to the industrialization in US back in 1920s. Moreover, the majority of industrial production is operating at the tiny margin, even no, when there is a boom, many businesses are operating at loss and receive government help. In comparison, US economy in 1920s had much better profit margins
  • Hundreds of millions of peasants left the countryside to work in cities for $1-$3 per day. They have no savings, no property. When the factory they work on finally bankrupt they will run out of food within days. There is no proper infrastructure to feed them, the only solution to the problem they will have is to take some weapons and kill for food, and there will be many millions of people like that. There will be blood on the streets
  • The Chinese middle class is fully invested at margin into grossly overvalued stock market. When market will start tanking for real it will have no bids, the 80% decline top to bottom is pretty much my target. This again reminds US in 1920s.

China is heavily dependent on the exports into Western world, and when the downturn happens we will have the upper hand. We can live with less imported junk, they can’t scale back. When we sneeze they’ll get sick, when we get sick, they will be in coma

Energy

I think oil will stay in the trading range until Chinese Olympics, probably making a last run to $100. After that the downturn will be so obvious that we’ll see $85 this year and $60-$70 in 2009. At some point oil will kiss $50, but it will be years from now, unless some kind of war happens