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Kass: Checking In With 2007's List of Surprises

Doug Kass

Next week I will issue my list of surprises for 2008 -- and I will also publish my own review of how well or poorly my surprises fared for this year.

But before I do, let's examine James Altucher's bold critique of my list from last year. I was really appreciative of his effort, and I hope that he does the same this year in response to next week's column.

Generally speaking, Altucher thought I went out on the limb in a number of my surprises. I did, I always do -- that is why they are called surprises!

Altucher was correct in suggesting that Goldman Sachs (GS Quote) did not go private -- there were extraneous credit issues that negated this one! -- and that Citigroup (C Quote) failed to split up.

He did, however, expect a continuation of large private equity deals and successes into 2007; I vehemently disagreed and wrote that "the fractured mortgage markets will lead to a standstill in deal making as the capital markets (and underwriting activity) will seize up!"

The above was my most important surprise, and maybe my most important contribution to RealMoney to date. "The great housing depression of 2007" and the anticipation of instability in the credit markets -- specifically for asset-backed securities -- were probably my best calls in years.

Altucher disagreed strenuously on both issues. He couldn't see how low interest rates and a continuing economic expansion could do anything but stabilize the housing market, and he felt that "enough hedge funds and banks are short the subprime tranche that a short squeeze would buffer any fall."

We now know that housing and subprime were the biggest news items in finance for 2007. The "doomsday scenario" in the derivatives market I envisioned came through despite Altucher's protestations against this surprise.

I even suggested that the derivatives problem would become so severe that:

1. Congress would hold a series of hearings on the derivative problem; and
2. The Fed would be forced to aggressively ease.

My prediction for 2007 that corporate profits would be flat (and inconsistent) were closer to being true than Altucher surmised.

I predicted that volatility would rise exponentially in 2007 and that stocks would routinely have 2% moves; Altucher remarked that volatility was at an all-time low and seemed likely, based on history, not to conform to my prediction.

Altucher (the eternal optimist) and I (the eternal pessimist) also clashed on our equity market price expectations. The spike in the S&P 500 price that Altucher forecast was never seen, nor was my expectation for a 10% decline -- though we were both correct in forecasting a strong start to the year. Nevertheless, as I suggested, a steep drop occurred owing to the "mortgage implosion."

I was 100% correct in the reason (a nascent credit crisis) and substance of a material slowdown in M&A activity. Altucher didn't see this development.

I thought a well-known corporate raider/hedge fund would suffer losses in the credit crisis of 2007. Altucher disagreed and was wrong as some notable blowups occurred and continue to take place.

There were no cyberterrorism attacks, as Altucher suggested.

I saw the general consumer slowdown affecting Wal-Mart (WMT Quote) and others; it did. Altucher saw a continued expansion in retail sales.

Finally, we agreed on Google's (GOOG Quote) continued success.