Sunday, December 30, 2007

2007 Recap/Look Ahead

2007 was a year of incredible volatility in the markets, and presented an environment where probably only the most experienced investors had highly profitable years. Combining the volatile swings in the market with the high level of panic in the media, it was a tough year to hold onto your core investments as an individual. The major indices will finish higher for the year, with financial stocks obviously being the biggest lag. The international growth story continued as the world's financial market is becoming more diverse, complex, and fluid. Lots of international investment poured into US equities, particularly in struggling banks and brokerages. In past decades, most would throw up a protectionist wall, but things have changed. Thanks to vast resources, countries now are producing the wealth to compete on a global scale economically. The rise of China as a world power continued, but we're also seeing great things out of countries like India and Brazil. I don't see any reason why this can't continue.

2008 will be similar year for stocks. The stumbling of the US economy has been highly documented, and in my opinion, somewhat overblown. Employment has been solid, as well as productivity. Our corporations are gaining new business because of these aforementioned growing economies. Interest rates are very cheap, which will continue to help balance sheets and corporate expansion. The housing market has been very difficult, but like any market, a correction was due. Banks took on a lot of risk because of their confidence in the financial markets. Some of this proved to be foolish, but people will always be looking for an edge. When markets fall, everyone is affected. Some banks have remained better capitalized than others, so there may be some consolidation in the industry if further turmoil arises. There is no great way to measure the value of CDO's and mortgage backed securities. Most analysts have assumed the worst, and that they are all worthless investments. There are some great values to be had in 2008 in financial companies.

Whether our policies on energy are right or not, they will continue under this regime. They are committed to subsidizing ethanol, and the boom in agricultural-related products will continue. This has caused undue inflation in my mind, but we'll see where it goes. Alternative energies are what the rest of the world is going to, and that is also where I want to be invested. Wind power, biofuels, and solar power will all be profitable. Elsewhere in energy, oil will still be profitable. I'd lean away from big oil as they may come under excess scrutiny and taxes if the US sees a major shift in next fall's elections. But oil services and offshore drillers will be immensely profitable.

Technology will continue to do well, but only in pockets. Companies that continue to innovate will always do well, in good markets or bad.

I will go into more detail about individual picks and their story, but here is the "first draft" of picks for 2008:

Noble Drilling Corp. (NE)
Manitowoc Corp. (MTW)
Potash Corp. (POT)
Credit Suisse (CS)
Morgan Stanley (MS)
Schlumberger (SLB)
Global Water ETF (CGW)
Agribusiness ETF (MOO)
Alternative Energy ETF (GEX)
SAP Software (SAP)
Cisco Systems (CSCO)
Apple (AAPL)
News Corp. (NWS/A)

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