Tuesday, September 26, 2006

Fearless predictions

My fearless predictions about the housing markets and other things.

Soft to bumpy landing for housing market

  1. Mild national housing recession with regional hard landings in overbuilt areas.
  2. Reserve army of unsold housing depresses housing prices for longer than generally expected.
  3. Waves of opportunistic refinancing as people switch out of ARMs and lock in fixed rates.
  4. Widening of spreads between credit and non-credit ARM portfolios.

Macro US

  1. Growth slows to below long term trend with some self-fulfilling slowdown as a result of lost consumer/business confidence.
  2. Higher oil prices seep into core inflation moderated by less economic activity reducing total demand for oil.
  3. Core inflation will stay above Fed's 2.0% target, but rates will not be raised more than once if at all.
  4. Fed holds rates steady till early-mid 2007

Investment strategy

  1. Increase in required equity risk premium holds down US stock prices.
  2. Greater investor interest in safer investments: (SDY)/(SPY) continue to diverge.
  3. Investor boredom with natural resources/commodities may create buying opportunities (IGE)(XME).
  4. Continued divergence between equity and bond markets over economic outlook.
  5. Continued underpricing of inflation in treasury bond market suggests TIPS are undervalued relative to normal bonds.
  6. Yield curve inversion continues until there is a "relaxation of tension" among market participants. Fixed income strategy should be focused on short end and especially liquid end of yield curve.
  7. Risk for BRIC countries is underpriced because the export-fueled growth means that the fate of these economies is very linked to consumer countries. (EEB)(VWO)


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