Thursday, August 16, 2007

Predictions for the Crisis

In the spirit of Byron Wien, I give you my humble predictions for the current financial crisis:

1) One or more major publicly held homebuilders will go into Chapter 11 bankruptcy, despite all we heard about how they were better prepared for a downturn this cycle.

2) The Fed will make at least one inter meeting emergency rate cut of 25 basis points, more to restore investor confidence than in any hope of having the practical effect of jump starting the credit markets. The stock market will surge, and have one of the biggest percentage gains in history, as short sellers scramble to cover.

3) Berkshire Hathaway and Warren Buffett will finally use that powder he has been saving all these years and step in and make an investment in a major brokerage firm or bank and prevent it from following Drexel Burnham and the Bank of New England into oblivion.

4) Domestic GDP growth will slow down to recession or near recession levels for at least a quarter. Due to the lag effect of financial data being reported, this will not be revealed until after the crisis ends.

5) A major marquee hedge fund will experience a "run" by investors and do an emergency halt to all redemptions, invoking an obscure clause buried deep in the offering memorandum. Investors will rant and rave but the agreement is ironclad and proves why the best lawyers in the world are worth a $1000 an hour.

6) The wheels will fall off the Chinese stock market and the miracle of Chinese "growth" will grind to a halt when U.S consumer demand limps along without the tailwind of cash out home refinancing and the psychology of stock market wealth effects.

7) A shocking drop in either new home sales or housing starts triggers a new sell off in the S & P Homebuilders (XHB) SPDR just when everyone thought that the industry had bottomed.

8) The National Association of Homebuilders, the mouthpiece for the industry, finally admits that - yes - it is possible for home prices to decline on a national basis.

9) Commercial Real Estate will begin its own down cycle, as lenders get stingier, and everyone finally realizes that overly optimistic estimates of NOI growth are no substitute for common sense.

10) Oil and other commodities will gap down in price as demand falls off sharply, and the recent classic book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," will start showing up in the bargain bin section of the book store right next to:

"The Great Reckoning: Protecting Yourself in the Coming Depression" (1992),

"Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market" (1999)

"Deflation: Strategies for Building Wealth in the Coming Wave of Deflation" (1999)

and my last prediction -

10) The investment staff of the Retirement Systems of Alabama finally convinces their boss to sell 55 Water Street (this one is an inside joke, so sorry if you don't get it.)

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