January 2, 2007

A Review of 2006 Predictions

In what was the first of what will surely be an annual tradition, 364 days ago predictions were offered up at the blog. Appropriately titled, Predictions for 2006, it contained a host of prognostications for the year just ended.

Let's see if they were any good.

Ignore all the qualifiers in the original post about the casual nature with which the predictions were offered and that they aren't taken very seriously here.

The predictions turned out to be pretty good.

All that stuff about "just for fun" was just in case they turned out to be horrible - they weren't.

If you don't have some thoughts about what's going to happen in the year ahead, how can you possibly manage an investment portfolio, let alone know whether it's a good time to buy or sell real estate.

Oh yeah, according to David Lereah of the National Association of Realtors, now's a great time to buy or sell a house (or generate a commission, according to one inventive blogger from somewhere in the Northeast).

So, with that out of the way, let's see how the predictions fared, beginning with what will be sure to lead the list of predictions for 2007 - housing.

1. The Housing Bubble Will Not Pop

Despite everything that bubble blog readers, writers, and commenters may feel in their loins, there are just too many willing lenders and too many dumb buyers out there. While 2006 homebuyers may hear something about a "housing bubble", it won't register until 2007, at which time, it might register in a very big way.

Housing is still affordable with all the wacky loan products available today and guidance is no substitute for regulation - look for wackier loan products in 2006 as the biggest fools achieve the American dream of home ownership.

Sure, the speculators are going to squeal a little, and in some of the hottest areas, don't be surprised if by the end of 2006 you see year-over-year declines of maybe 10 percent or more, but nationally, prices should be about flat to up a little for the year.

Having observed the phenomenon that is the worldwide housing bubble for a few years now, it seems that the turning of the real estate market will be akin to turning an aircraft carrier - very slow, but near impossible to stop - a long, drawn out period of flat to gently falling nominal prices with falling real prices, after maybe a fairly large jolt to the price structure in 2007.

Grade: A

Hit the nail on the head about the willing lenders and dumb buyers. As for price declines - see Sacramento and Sarasota for double-digit declines while nationally, prices are about flat (though it depends on which measure you look at). The housing bubble certainly did not pop in 2006, however it is that you define the word "pop" (unless of course you live in Sacramento or Sarasota).

2. The Dollar Will Not Tank

The trade weighted U.S. dollar index (against the Euro, Yen, Pound, etc.) will resume its decline and be positioned firmly in the low eighties by the end of the year. Against commodity based currencies found in countries such as Canada, Australia, and New Zealand, the U.S. dollar will fare worse, but not by much.

After a lackluster 2005 for U.S. investors, foreign currencies and bonds should once again be a good place to park money in 2006.

After closing out some of his previous positions in 2005, when you hear that Warren Buffet has once again placed more bets against the U.S. dollar by buying foreign currencies with some of Berkshire's huge pile of cash, it will have been too late - most of the gains will already have been made.

Grade: A-

The U.S. Dollar index moved from close 90 at the beginning of 2006 to 83.6 on Friday - about a six percent decline. Against the currencies of Canada, Australia, and New Zealand the dollar fell 1 percent, 8 percent, and 2 percent, respectively, making foreign currencies a good place to park money. No word about Warren Buffet and his foreign currency holdings.

3. Stocks Will Not Tank

U.S. equity markets should be about flat for 2006, with growth limited mostly to energy and natural resource companies along with some big multi-nationals. Asian markets will fare better, particularly overseas natural resource companies supplying commodities and related services in support of Far Eastern growth. Google should hit $700.

There will be a couple of nasty sell-offs in U.S. equities and a couple of miraculous recoveries - short sellers will be confounded for yet another year as Plunge Protection Team conspiracy theories swirl once again.

These market gyrations will generate only a minor disturbance in the force that is the American investor continuing to dump retirement money into a stock market that they have been trained to believe will provide for them in their golden years.

Grade: B

Equity markets in the U.S. were up 10 to 15 percent - a good year all the way around despite Google being turned back at the $500 level. Growth in overseas markets was not limited to commodity related companies, however these companies did very well. And yes, it was a tough year for short sellers.

4. Interest Rates Will Rise Further Than Most People Think

Absent any big external events, the Fed will raise rates to 5.5 percent by late 2006 and stop there. Getting to 4.75 percent is a given, as incoming Fed chair Ben Bernanke must show his mettle, but rising commodity prices and reasonable growth will have even Mr. Bernanke erring on the side of fighting inflation.

Our Asian trading partners will keep long rates fixed at 4.5 percent, so toward the end of 2006, there should be almost 100 basis points difference between the 30-year note and the Fed funds rate.

The 2006 inverted yield curve will accurately predict the recession of 2007.

Grade: A-

This was a bold call at the beginning of the year - there were very few who thought that rates would rise past five percent and 5.5 turned out to be pretty close to the eventual pause level of 5.25 percent. Long rates rose with short term rates but then fell back to the 4.6 to 4.8 percent range for much of the second half of the year resulting in an average yield on the 10 year note of around 4.7 percent for the year. Inverted yield curves and recession? See tomorrow's post.

5. Energy Prices will Continue to Climb

Though oil will average almost $70 per barrel in 2006, gasoline prices will remain under $3 gallon. The entire world learned a valuable lesson about the American consumer and gasoline prices - nobody wants to repeat that bout of lost confidence in the Fall of 2005, and one way or another, gasoline prices in the U.S. will stay under $3.

Natural gas and heating oil will remain uncomfortably high, gently squeezing the thirty percent of the populace that do not own their own homes. Most of the population will be able to borrow against their homes, if necessary, in order to continue to heat them.

Grade: A+

Oil did average about $70 a barrel and with the exception of the first week in August, when the national average for regular unleaded gas rose to $3.004, retail gasoline prices were under $3. Hank Paulson and Goldman Sachs took care of the gasoline price after it breached the $3 mark, even though it was only by four-tenths of one cent.

6. Gold and Silver Will Soar

One of the best places to be invested in 2006 will be precious metals - gold and silver. Look for highs near $650 an ounce with a year-end price just below that figure for gold, while silver surpasses $11 an ounce.

Shares of mining companies in general, but junior exploration companies in particular, will see huge gains as the price of the underlying metal rises. Most U.S. investors will discover these smaller Canadian companies after they land at the AMEX or announce that they are now in the uranium business, so for maximum gains, be sure to get in before they make that move off of the pink sheets and before they make their uranium announcement.

There will be at least one gut-wrenching correction that will cause many new investors to make an early exit from this sector. But, when the gold dust settles on 2006, there will be a lot more precious metal investors and prices will be much higher.

Grade: A+

Bingo, bingo, bingo - modesty must be dispensed with given the results for this one. The highs were clearly off by a wide margin, but remember that gold had just breached $500 at this time last year and silver was still under $9. Things got a little crazy there in April - look for more craziness in 2007.

The Shares of Mining Companies category in the model portfolio here at the Iacono Research website ended the year up 47 percent and yes, the uranium miners had a good year - most of them have not yet moved to the AMEX and are still only available over-the-counter in the U.S.

Gut-wrenching corrections? Uh, two of 'em.

7. Economic Growth will Slow, Consumption will Continue

The still-undaunted overly indebted American consumer will continue to provide support for the American economy, however GDP growth will slow noticeably into the 2 percent range. Consumption will remain fairly strong, with an increasing portion financed by home equity withdrawal, which will be a big story of 2006.

As more and more seniors use reverse mortgages, more and more younger people will rely on home equity as a source of income. There are many trillions of dollars still available via home equity extraction, and if you think those Ditech.com commercials were annoying in 2005, you ain't seen nuthin' yet.

Advertisements for home equity withdrawal will be ubiquitous in 2006, as millions and millions of homeowners are forced to tap their housing wealth to make ends meet for a lifestyle that they can no longer afford.

Unfortunately, for many seniors, the lifestyle that they can no longer afford consists primarily of paying for prescription drugs and heating their home.

Grade: A+

Wow. This is starting to get a little scary.

8. Reported Inflation will Remain Contained

Reported inflation for 2006 will once again be benign. Three new measures of consumer prices will be developed and widely publicized in the new year - they will all measure inflation at around two percent.

Long-term inflation expectations will remain contained.

There will be a growing chorus within the mainstream financial media that question the continuing rate hikes by the Federal Reserve while reported inflation remains under control. A new commodity based inflation indicator will be developed, showing inflation near twenty percent, but most economists and the mainstream financial media will pay little attention.

Ben Bernanke will awkwardly refer to this commodity based inflation indicator during a Q&A session before a Congressional subcommittee, sparking a $25 rise in the price of gold the next day.

Grade: N/A

This one was mostly for fun. Anyone who believes anything the government says about inflation is a fool.

9. Job Growth Will Slow

As nationwide residential construction employment levels out and begins reversing, Gulf Coast re-construction employment will take up the slack. There will be a mass migration of sorts, from the Rust Belt to the Gulf Coast for those seeking steady employment and a better way of life.

More hurricanes will cause more destruction later in the year and more re-construction will be planned. This cycle will continue for many years, providing stable employment for hundreds of thousands of workers who otherwise would be unemployed.

Retail sales and food service jobs will continue to be available as homeowners continue to tap their home equity in support of the lifestyle to which they have become accustomed. Overall, employment will slow, but not by much.

Grade: B

Can't really tell if this one was in jest or not. The hurricane season prediction was wide of the mark and the mass migration to the Gulf Coast seems to have come from the south. Food service and retail jobs seem to have softened lately but this is largely due to there being no more teenagers willing to do this work - there are plenty of help wanted signs around, but when your parents have all that home equity, why work?

10. There will be Major Unrest Somewhere in the U.S.

Somewhere within the continental U.S. there will be major unrest - likely in either the Gulf Coast or the Rust Belt. It will look a little like recent events in France or Australia, except that, with ready access to handguns, people will be shooting at each other.

In part, the unrest will be spurred by a growing realization by many people that their experience in the world is not matching what the government is telling them it is.

As the gap between rich and poor widens, and as the middle class and senior citizens are squeezed, more people will question the oft-repeated proclamations that our economy is strong and that inflation is not a problem.

More people will attend church and more people will buy handguns.

Grade: C

Detroit lost the World Series which was the fall-back position for the unrest prediction. Oh well. There was certainly unrest during the November election, but it was manifested by votes rather than gunshots.

Overall, this was a pretty good set of predictions for the ones that matter to someone who also runs an investment website. Be sure to check in tomorrow for thoughts on 2007.