The key to 2007 lies in a Far East vault

We begin tonight with a look at what possibly will be the main event for 2007. The value of the Japanese Yen has fallen rapidly in recent weeks and rests tonight at 121.5 to the dollar and 156.9 to the Euro which is a decrease of approximately 5% in the last 6 weeks. Before I lose all of my readers please understand that the Japanese currency market is the driving force behind almost every major world market because of what is called “the carry trade.” Hedge funds are the biggest player in asset markets and their willingness to leverage gives them the ability to both start a new price trend or allow one to continue further than fundamentals might suggest. The overnight interest rate in Japan is 0.25% while the six-month rate is slightly higher at 0.50%. With the Japanese economy struggling to rebound from a severe bout of deflation the Bank of Japan has been very hesitant to follow the US Federal Reserve and raise short-term interest rates. Higher interest rates in an economy begging for a little inflation is a recipe for more deflation so this policy looks to continue for at least the remainder of this year. BUT it does allow hedge funds to borrow yen at a very low rate of interest (under 1%) and then invest this money in almost any worldwide market and earn a much higher rate of return. Whether a US Treasury bill at 5% or the stock market (recently at new highs), the ability to borrow in Japan has become the “drug” of choice for many of the top hedge funds. The two risks to this strategy are the price of the purchased asset and the value of the yen. Since the yen is borrowed the hedge funds clearly need a depreciating currency for profit and then of course a rising price from the purchased asset.

The Fed tightens, but does it really matter?

Fed chairman Ben Bernanke must be wondering what it will take to slow down the rapid price rise in many asset markets (stocks, corn, orange juice, gold, etc.) and normally the answer is a Fed that keeps short-term interest rates higher than long-term rates. The world has changed so much in the past 20 years that now a Japanese central bank’s loose money policy has major effects on US markets. I do NOT expect the Fed to change the Fed Funds rate at the meeting on Tuesday January 31st (announcement at 11:17am) but I am sure that the huge positions now “carried” by the these “hedgies” has the Fed more than a little concerned about the consequences of a Japanese lending structure that is sure to implode sooner than later. Fed policy has always been centered around US economic strength and inflation which are firmly under control as we begin 2007. But with long-term interest rates having risen 45 basis points in the last six weeks due to an increase in real rates, NOT inflationary expectations, it is clear that the interest rate markets are beginning to worry about storm clouds on the global horizon.

Worldwide central banks afraid of ?????

There is an old adage that states a market always worries about events that never occur but what occurs is never expected. Today central banks around the world continue to raise short-term interest rates because of a fear that inflation will rise to intolerable levels. Yesterday the head of the central bank of New Zealand announced that despite the fact that their economy was slowing and current inflation was low that the markets should expect an increase in overnight rates in the next few months. The Bank of England earlier this month raised its overnight rate by 25 basis points but only a week later the head of the bank clearly stated his expectation that UK inflation would fall later this year. Clearly every major central bank except Japan is trying hard to attract capital through the use of high “real” overnight interest rates. China is attracting capital for a very different reason….it does NOT allow its currency to float with the market and as a result the “Yuan” is at an artificially low rate thus attracting billions of dollars each month. Inflation is not a problem today and will not be a problem in 2007 or 2008 because rising asset prices due to hedge fund purchases do not create inflation. Long-term interest rates are rising due to the increasing uncertainty of central bank monetary policies.

What’s next

A chart of the Japanese Yen/US dollar resembles a rocket ship for the past five weeks and has created billions of dollars of profits for hedge funds. These funds are trend followers and are sure to increase their “yen carry” positions over the next few weeks/months in an attempt to pile on more profits. The problem is that they are playing fire with a big central bank that may not allow this to continue either through an increase in the overnight lending rate or currency controls?. Mania’s never end quietly (tech bubble, house price bubble) and this paved road to riches will end when one of the leveraged funds decides to exit a winning trade a little earlier than everyone else. The outcome will be ugly because the funds will have to liquidate the very positions that have made them so much $$$ (metals, commodities, stocks, etc.) and that could easily cause the economic accident of 2007. Timing is difficult as no one knows what will trigger the avalanche, but surely it is coming and the faster the yen depreciates the more likely we will see asset markets decline. This episode is much like a drug addict who continues to do what ever it takes to obtain his “fix” until the obvious and eventual outcome. Closely watch the price of the yen and it will tell you everything you need to know about the direction of stocks, interest rates and commodities throughout 2007.

Next week….busy, busy, busy

The US bond market found the path of least resistance to be down this past week as very little economic information was released by the government. Next week’s economic calendar is filled with nuggets that interest rate players will be chewing on for many weeks. Wednesday morning’s GDP and employment cost releases should show strong 4th quarter (2006) growth due to abnormally warm weather and consumer spending that drove the savings rate into record negative territory. Thursday brings the Fed’s favorite inflation indicator, the Personal consumption expenditures index that will show inflation remaining at the 2.3% level and finally Friday the number that no one trusts anymore (due to massive monthly revisions) – monthly jobs. The US bond market will react to these numbers which may be positive for rates as the focus will change from world uncertainty to domestic inflation (low) and monetary policy (on hold).

Summary

My forecast has not changed. I continue to expect much lower long-term rates later in 2007 and depending on how far the “yen carry” trade is stretched we may see a massive move into US treasuries by hedge funds as they finally flee the mother of all profitable trades.

January 21, 2005

It’s time again to circle the globe with a special emphasis on the US. Early this morning it was reported that UK retail sales FELL in December and represented the worst December since 1981. (ouch!) It will be difficult for the Bank of England to hold short term rates at these levels if we continue to see mortgage approvals continue to decline……

The Bank of Japan said today that it will NOT change its ZERO interest rate policy (short term T-bill rate is 0.01%) until the Japanese inflation rate goes UP to 1.0%. The rate has NOT been positive in many years as Japan continues to try and find a way out of DEFLATION……

Oil jumped $1.22 in late NY trading to close at $48.53. The important factor in the recent oil rise may be the January 30th Iraqi elections or…..????? does it really matter why??? the Fed is going to use a higher oil price to scream “inflation” and a lower price to say “more consumer purchasing power + inflation”, either way the Fed wants and is going to keep raising short term interest rates and you do remember the old saying…”never fight the fed”…there is another saying I am also quite fond of…”never marry your forecast, it might not love you back”….

The important question for all readers is “What does continued Fed tightening and higher short term interest rates mean for long term rates, real estate prices, the dollar, the US economy, etc. etc., etc.

Let’s start with a recap of current US interest rates and compare them to June 30, 2004 the day the Fed began its crusade.

June/2004             Today             Change

Fed Funds                          1.00                       2.25             + 1.25%

2 year Treasury                2.86                       3.14              + .28%

5 yr. Treasury                   4.10                       3.64              – .46%

10 yr. Treasury                 4.89                       4.14              – .75%

30 yr. Treasury                5.59                        4.64              – .95%

This is a very important grid to study and study and study because it shows that while the Fed has raised short term interest rates since June 30,2004 the longer term interest rates have NOT followed but instead have fallen and in the case of the 30 yr. Treasury (important for 30 yr. mortgages) they have dropped almost 1%…..

This has caught everyone (except my readers) by surprise because over the past 30 years whenever the Fed has tightened monetary policy long term rates have risen with the short term rates. This time it is very different and most importantly is NOT about to change……In fact this turn of events will be the prelude to a most spectacular DROP in long term rates when the Fed ends its current tightening policy….The BIG question is when will the Fed stop and maybe even reverse itself….The answer appears to be: Not anytime time soon….

Thursday St. Louis Fed President Poole said “inflation is well controlled” BUT he also said “if necessary the Fed will move aggressively to protect the relatively low rates of core inflation that now exist”. The problem is that the Fed is way ahead of everyone in their FEAR of future inflation. They are so far ahead that the long term interest rate markets (which are a function of inflationary expectations) are NOT controlled by the Fed…thus long rates are falling due to a LOWERING of future inflationary expectations….

The dollar has done the unexpected so far in 2005 and that is rise against the Euro even though we have a massive trade deficit. The dollar will continue to rise due to higher US short rates and the deficit will become a non-event just like it was in the mid 1980’s and 1990’s when the dollar rose in the face of high trade deficits.

So what about the inflation rate that is currently stuck at 2.2% and shows no sign of rising…..Are we going to have 1980’s style runaway inflation??? Not likely…..inflation is created by excess money supply growth and high velocity chasing goods and services that are in short supply. If one reviews this mornings newspapers they will notice some NON-inflationary items: 1) Ford reported that its financing unit made money last quarter but its car business was a loser. 2) 50% of GE’s profits now come from its financing unit. 3) Wachovia is laying off 4,000 workers and MBNA is letting 1,000 go due to a slowing of their loan business. Yes, the Fed reported a big jump in commercial and industrial loans today and the real estate/Heloc category continue to grow but I truly believe that the days of borrowing equity from your house to finance expenditures is just about over…will housing prices decline??….probably only at the high end but the bulk of the market will go sideways for a few years. Over long periods of time real estate values are directly correlated to personal income growth and income levels are NOT even growing at the rate of inflation (2.2%).

Bottom Line: Always watch the collective wisdom of the markets and NOT the consensus of economists and business writers. Long term interest rate markets are telling us LOUDLY that inflation is NOT around the corner and that means continued LOWER long term interest rates while short term interest rates (FED) continue to rise to levels that will soon exceed the long term rates. It’s called a negatively sloped yield curve and it’s coming soon to the US bond market.

The US bond market is slipping in the quick sand of uncertainty

The first three weeks of the new year have proven difficult for those that need long-term interest rates to move lower. As detailed last week, inflationary expectations are lower but because of higher real rates the nominal (4.78% – 10 year) have moved higher since the first day of this month. The US bond market is confused about future Fed policy, the course of inflation and the economy in 2007 and untrusting of the economic statistics released by the government. Uncertainty always results in lower market prices (higher rates) and until this ends it will be difficult for long rates to move lower. Normally a down move by oil (now $52) would lower inflationary expectations and rates, but again the bond market can’t decide whether low oil prices will increase consumer demand thus triggering potential inflation? or low oil prices will encourage consumers to save the extra $$ not spent at the pump. The result has created an environment of fear by bond holders and a move into cash (see higher dollar). This trend will not end until it becomes clear that inflation is NOT rising and that a strong economy does NOT always create rising inflation.

Inflation rate headed for 0.00%?

Thursday’s core CPI (retail inflation) numbers showed an annual rate of 2.4% and that is consistent with numbers throughout 2006. One of the major components of this release is “owner’s equivalent rent” which has shown a healthy increase over the past two years as builders have focused on houses and not apartment buildings. Adding to that is the fact that many who could not afford a house were forced to stay renters in a market where supply was NOT keeping up with demand. The result of course is higher rental rates and that is about to change in major way. The NY Times earlier this week had a front page article entitled “Buyers scarce, many condos are for rent.”, this is what I have been writing for over a year in the EWW. Investors who have purchased condos are now faced with a market lacking buyers and are being forced to rent at lower rates to try and recoup a part of their monthly mortgage payment. When supply exceeds demand prices fall and that is surely what we will see from rental rates in 2007. This will cause the CPI rate to fall quickly and when you add in recent declines in commodity prices (except corn and orange juice) you have the perfect recipe for an inflation rate of 0.00% or lower. This will be the “light going on” for bond buyers and drive long rates lower later this year. Remember that 75% of the time rates rise in the first half of each year so the first three weeks action comes as no surprise to EWW readers and is the reason the yellow flag flies in front of the green flag at the top of this letter.

Japan overnight rate remains at 0.25%

In a surprise to many experts (not to EWW readers), the Bank of Japan earlier this week decided not to raise the overnight lending rate by the expected 25 basis points. If you need to borrow, Japan has the lowest overnight rate in all of the world and many hedge funds continue to borrow in yen and invest in other areas of the globe. The yen continues to weaken (another profit for those borrowing yen) and the Japanese economy has not begun its long awaited exit from the deflation of the past 15 years. The good news for Japan is that bank lending has finally hit bottom and showed its first rise in the past 10 years. (Can you imagine the reaction if this occurred in the US for one year?) The average Japanese consumer is trying to help out with spending patterns similar to their US counterparts and by lowering their savings from 23.1% in 1975 to the current 3.1%. (The US savings rate is negative) but it could take another 2-3 years before actual inflation returns to positive readings. (In Japan everyone wants inflation to return).

Housing bottom is a mirage

The recent boost in housing permits and starts have given many a false hope that the worst is behind us in housing price decline. Unusually warm weather in December and faulty seasonal adjustments have created the illusion, but reality will soon take over when sellers soon reappear with prices that are more realistic and at much lower levels than previously seen in the fall of 2006. Amazingly the stocks of many home builders have risen recently despite the negative remarks coming from the CEO’s of many of these companies. The National Association of Realtors (NAR) will soon unveil a national advertising campaign telling us again that this is the best time ever to buy a home. My question is why now? And of course the answer is that because they need the business and this is what they do for a living. The market does not rise because people need it to rise, but of course that is something that we only learn by experience in life.

Bottom Line

Not much has changed in the last week and next week the news calendar is light. The next FOMC meeting is a two-day affair on January 29-30 with a Fed announcement at 11:17am on 1-30. The Fed is as confused as bond players but is happy that the 10-year interest rate is above the key 4.50% level so it doesn’t have to lower the fed funds rate due to a sharply inverted yield curve that create high recession probabilities. The Fed is very content to sit back and watch the bond market and then wait for the next big move down in long term rates (later this year) before it is forced to lower the funds rate to 5.00%

January 12, 2005

There is NOT a lot going on in interest rate land this week as the 10 yr. US treasury yield “hangs” around the 4.23% level. We may just sit between 4.00% and 4.50% all year UNTIL the Fed finishes its tightening mode….It appears that Mr. Greenspan does NOT want to leave the Fed in early 2006 the way he arrived in 1987 after Paul Volker. Mr. Greenspan immediately felt he had to raise short term rates to cool the overheated economy and save the dollar. Those actions helped to bring about the stock market crash in October 1987 and I’m sure are indelibly framed in his memory as something he does NOT want repeated when he is replaced by a new Fed Chairman.

Today’s Wall St. Journal had an article about the nation’s LEAST affordable housing markets and of the top 29 cities 20 are in California (the only surprise is that all 29 were NOT in Calif.) If you want to live in luxury for half the price try New York where 6 out of the top ten are listed. Interestingly New York residents have only 19% of its mortgages that are adjustable while California averages over 60%. Remember for Fed statistical purposes that an 5 yr. fixed rate goes in the adjustable category.

Last night China reported that its foreign currency reserves increased by $200 billion to a total of $609 billion mostly due to currency speculators and a widening trade surplus. It also appears that much of this hot money is finding its way into real estate. Remember China has a HUGE amount of supply that has NEVER come to the market and if prices begin to rise heavy supply will follow……Speculating on a rising Chinese Yuan is like being able to bet on a horse AFTER he has crossed the finish line in front of all the remaining horses. The risk of the yuan declining is either zero or near zero, it’s just a matter of time before the Chinese Central Bank gives in and allows a revaluation……

Back to real estate Marcus & Millichap reported that 4 of the five best markets in 2004 for apartment owners were in California. That’s not a surprise but those buying in 2005 at cap rates of 4 & 5 are going to have to wait a very long time to see ANY profit…..

The U.S. trade deficit widened in November to a record $60.3 billion as imports rose (US demand for foreign goods) and exports FELL (foreign demand for US goods). Would you rather have a trade surplus???? That would occur if the US was in a big recession and our trading partners were seeing big economic growth….

Retail sales are announced on Thursday at 5:30am and the bond market closes early at 11am on Friday and is closed on Monday.

10-year interest rates rise another 12 basis points

The yellow flag remains in front of the green flag again this week as 10-year interest rates rose another 12 basis points. At 4.77% the 10-year sits approximately 50% between its high on June 28, 2006 and the low on December 4, 2006. The big news continues to be “why rates are rising” and I am concerned that when the real reason hits the press the results won’t be lower rates. Last week I wrote about the two components of interest rates: the inflationary part and the real rate. To review, the past 5 weeks increase in long term rates (now 34 basis points) has occurred due to a dramatic increase in the real rate while the inflationary component has fallen. This past week the 12 basis point increase was composed of a 13 pt. increase in the real rate and a one bp DECREASE in inflationary expectations. To those in need of lower rates (borrowers) this surely is confusing as we are taught that when inflation decreases interest rates fall which is generally true except in rare instances like we are currently experiencing. The problem lies with the fact that the bond market is having a difficult time digesting the economic statistics released by the government agencies that compile these numbers. This morning’s retail sales report showed consumer demand for December higher than expected, but what drove rates higher was just as much the fact that November numbers were revised again (lower). I’m not sure what is going to change but if these revisions continue long term rates could go much higher despite a lowering of current and expected inflation. With recent oil and other commodity price declines it is obvious to everyone that retail prices will soon be falling but that doesn’t seem to offset the uncertainty over the credibility of government stats…….

Thursday’s unexpected 25 basis point increase by the Bank of England sent many bond bulls into hiding as the clear consensus was for no action. The fear of course is that the Bank of England was ahead of the Fed in policy decisions and they would lead the Fed into the next easing. But due to a much stronger housing market in England and much less leveraged borrowers the connection between the two countries separated by the pond is not as strong as it used to be.

The bond market is closed on Monday (1/15) so interest rates can not rise for at least three days. The most important date ahead is Wednesday January 31st as two important events collide. The first will be at 5:30am with the release of the 4th quarter GDP (Gross Domestic Product), a number that was once thought to be less than 2%.
The other occurs at 11:17am with the release of the statement from the FOMC (Fed) which might give an indication as to the direction of future monetary policy and this will come at the end of an unusual two-day meeting. The GDP number is important because it will show an increase in economic growth and a decrease in inflation.
But most importantly it will show a decrease in nominal GDP growth as the “real” GDP growth rate (nominal less inflation) is increasing, giving the appearance that the US economy is growing.

Bottom Line

The first half of each year almost always shows an increase in the demand for credit (loans) thus driving up long term interest rates. I don’t see the increased demand this year but the perception that the economy is growing and a complete lack of confidence in government statistics is driving long rates higher.
This could easily last another few weeks/months but the longer it lasts the harder the reality will hit when it becomes apparent that housing has not bottomed, inflation is declining and a negative yield curve decreases credit demand. The result will be much lower long term rates and a move to under 4% in the 10-year treasury later in 2007. A little pain now will be a distant memory for those with the patience to wait for the pot of gold that lower rates will bring to the few who know that to obtain the impossible you must be able to see the invisible.

2007……….my 3 BIG surprises for the year

A very happy and healthy new year to all of my readers, life is short, don’t forget to enjoy yourself and make a difference in this ever changing world in which we occupy temporary space.

What goes up must go down

We begin this year with a review of a very strong seasonal trend that enabled me to correctly predict that 2006 would see long-term interest rates rising in the first six months and then falling for the remaining six months. Last year the US 10-year Treasury note yield bottomed on January 18th at 4.34% and then rose for 161 days until June 28th at 5.24%. From the peak in late June rates fell for 159 days until December 4 at a level of 4.43%. Using data back to 1966 I have observed that long rates rise 75% (31/41) of the time in the first six months and fall in the second half of the year. It’s important to analyze each year separately to make sure you don’t get caught on the wrong side the 25% of the time when rates fall early in a year (2002, 2004, 2005). History does repeat itself but often not when you are expecting or needing that result for your own finances.

To understand where we are headed we must view recent interest rate movements and discover the why before we can project the when and how of the next major move. The best starting point is the recent bottom on December 4 with the 10-year at a low of 4.43%. With near certainty that the Fed would ease in early 2007 and an inverted yield curve (short-term rates far above long-term rates) the market was convinced that long-term rates were on their way to 4.00% or less. Instead of a continued decline, rates began a march back above the key 4.50% level and today closed at 4.65% (10 yr. t-note).

Normally when long-term interest rates rise we assume it is because of an increase in future inflationary expectations. In the last month the 10-year has risen 22 basis points (4.43% to 4.65%) but this rise is NOT because of inflation worries. If we compare the 10-year Treasury TIP (treasury inflation protected) bond we see that it has risen 27 basis points since December 4. (I know this is somewhat complicated but this puzzle will soon come together). By subtracting the rise of 27 bp from the 22 bp rise in the actual 10-year note we find that inflationary expectations have actually FALLEN 5 basis points. Interest rates have two components: a real rate of return (confidence in the lenders ability to repay the debt and make interest payments) and a future inflation rate. In analyzing the market action of the past four weeks we find that investors are NOT concerned about the Fed’s ability to fight inflation but they are concerned about the reliability of the economic information being released by the US government. I wrote about this over the past couple of months (see archive) and said that the huge revisions in the monthly data would cause confusion among investors and raise rates as they demanded a premium for the uncertainty and that is exactly what has occurred. I would be very concerned about the direction of long rates in 2007 if inflation expectations were rising but that is not the case and still expect long rates to be much lower later this year.

Today’s jobs report

At 5am this morning Southern California winds were howling and gave an indication that something strange would occur when the jobs number was released just 30 minutes later. An increase of 167,000 was not expected and the market had set-up for an actual decline based on a Wednesday prediction by ADP (-40,000), a relative newcomer to the forecasting arena. Long rates rose within minutes but the realization that the government has recently made major revisions to these numbers gave market players reason to end the selling and a bad day for rates was converted to something more manageable. Diving into the details of the report I found that everything is not so rosy in job land. Residential construction jobs fell by 16,200 and have lost a total of 133,600 since February 2006. Most importantly December was a very warm month with an average temperature not seen since 1957 and 4.5 degrees warmer than 2005. Even though 167M jobs were created, full-time employment actually FELL by 96,000 after a 77,000 decline in November. It appears that employers are hiring more part-time workers and laying off full-time workers concerned that the economy and consumer spending may begin to slow in the spring. Job growth is seen by the Fed (Bernanke) as a coincident indicator and NOT one that leads the economy.

The Fed and Mr. Bernake

The next FOMC meeting will take place on Tuesday (1/30) and Wednesday (1/31) with an announcement at 11:15am on the 31st that the Fed remains concerned about future inflation and leaving the Fed Funds rate at 5.25%. The minutes of the December 12th meeting showed the Fed clearly on hold with “most participants expecting core inflation to moderate slowly over time, but stressing that the risks to the inflation outlook remain to the upside.” It was interesting to note that one member actually spoke about a possible easing of the Funds rate with this quote: ” One member did not favor language that referenced only the possibility of additional policy firming and believed that, although the risks to inflation remained the predominant concern, the statement should emphasize that policy could be adjusted in either direction depending on the evolution of the outlook for inflation and economic growth.” This is important because it shows for the first time since the beginning of the Bernanke era that the Fed has begun to consider the lowering of short term rates. In my opinion those that believe the Fed’s next move is a hike in the Funds rate are totally missing the fact that the housing market is NOT at a bottom but merely a ledge that is about to break as we tumble down to the next level of lower prices in this slow, painful bear market.

Housing

This morning the nation’s second largest home lender, Freddie Mac announced a $550 million loss for the third quarter due to a $1.5 billion (yes billion) loss on derivatives and credit guarantee assets and obligations. Interest rates declined almost the entire third quarter so they obviously made huge bets that long term rates would rise and couldn’t have been more wrong. These are supposed to be the best and brightest minds in the mortgage business and they completely missed the big move down in rates…amazing!!

Fannie Mae, announced that it will now require lenders to underwrite loans for borrowers who choose interest only loans to be qualified at a fully indexed rate that assumes a fully amortizing repayment schedule. Unless you are in the mortgage business this may not mean very much but I assure you this will have MAJOR repercussions to many borrowers who are hanging on to their homes by a thread because of flat home values and negative amortization loans. This will be a major story in 2007 and we will revisit it many times in the next few months.

Rental rates will soon be declining in many major US cities. A Washington Post article this morning points out that many condos which were purchased as investments are now being rented in an effort to create income for monthly mortgage payments.

In Naples, Florida there is a 16-month supply of homes and 17-month supply of condos on the market. This supply will shrink as the owners realize they must find a tenant at declining rental rates or face foreclosure on their purchases.

For many homeowners mortgage payments aren’t the only problem as Massachusetts will soon send property tax bills that average 5.3% more than 2006 to homeowners that are desperately seeking buyers.

Normally when prices begin to decline supply decreases so that prices can stabilize at the new lower levels. In Long Beach the inventory of condos continues to increase as builders still believe that if they build, buyers will arrive. This is another reason that I believe we are at the beginning of this most unique bear market in real estate history that no one has ever witnessed so they can’t expect what they have never seen.

2007 surprises

I have three major predictions for 2007 and all are not expected by the majority of analysts/economists.

1) The price of sugar will rise dramatically as a substitute for corn in the growing ethanol market. Sugar closed today at 11 cents per pound and I am looking for a 40% move to above 15 cents in the next 6 months. Please note this is NOT an investment newsletter and this is only suitable for the high risk investor.

2) The stock market will have a major decline in the first half of this year. The consensus opinion is up, up, and away for stocks in 2007 and I believe any surprises will be on the downside, especially in the Nasdaq. The market has not had a 2% correction in 176 days and that has only occurred 7 times in the last 76 years. Hedge funds are long and financed by a cheap yen and when, not if, the yen strengthens these funds will be liquidating any and all assets quickly.

3) The housing market will not bottom in 2007 but long-term interest rates will decline to new lows (below the 2006 low of 4.34%) as market participants realize that the energizer bunny US consumer has finally run out of steam. The Fed will begin easing when it sees credit demand weaken and the inflation rate begin to decline (very soon).

For those willing to go against the experts (Freddie Mac) and see that the future does repeat itself but ever so slowly, 2007 will be a very, very good year.