25 Takes on 2007 Surprises, Part 1

11. The arc of the markets. Kass believes the markets will begin 2007 very strong. I agree. But then he predicts that the S&P will end the year around 1250, dropping 11% in 2007.

Certainly a correction can happen. But the global economy right now is flourishing; interest rates are low, continuing to have their stimulus effect; and price-to-earnings ratios relative to interest rates are near all-time lows. Historically, the earnings yield of the S&P 500 (earnings over price; about 6% projected for 2007) has almost always been lower than the yields on T-bills. Now it's greater. The market is pretty much backing in almost permanent zero or less growth in the economy. I believe that when people realize this is not happening, the S&P 500 will spike incredibly in 2007.

In particular, Kass believes tech will fall by 20% in 2007. Didn't this already happen just a few years ago? Again, short-term corrections can happen. But Vista is going to light things on fire at some point in 2007.

12. Fidelity and Alliance announce dedicated short products. I'm sure this is top of mind for Kass because his product is a hedge fund-dedicated short product. But Doug, don't worry so much. Try to enjoy life a little!

13. M&A activity will begin to slow down. With private-equity firms flush with cash and S&P 500 companies sitting on $600 billion in cash, I just don't see this happening.

Editor's note: Check back for Part 2 of this column Monday.

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