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I have to say again that Doug Kass is bold for putting out his 25 Surprises for 2007,

parts 1

and 2. All I can do is comment on them rather than go out on a limb like he did. I do think his stab at attaining "prophet" status is both thought-provoking and a little "did he really say that?" but his ideas are great jumping-off points worth following up on.

Here are my thoughts on his 25 -- and I look forward to any

email

or Columnist Conversation responses they provoke.

1. Private equity deals

. Kass gets into specifics about the private-equity transactions he believes will happen in the beginning of the year, including ones with

Kohlberg Kravis Roberts

,

Goldman Sachs

(GS) - Get Report

and

Berkshire Hathaway

(BRK.A) - Get Report

.

I agree with his general sentiment, that 2007 is going to be

the

year of private equity. There is so much cash out there, it's ridiculous, and the shameful secret every private-equity firm carries is that its management fees begin to go away if it doesn't spend the money. They're all time bombs of massive leveraged buyouts waiting to happen.

Doug's specific call that Goldman is going to go private definitely won't happen, though, particularly with Warren Buffett behind it.

2. Citigroup changes

. I found this item very stimulating: Kass says that Bob Rubin, former Goldman Sachs chief and Treasury secretary under President Clinton, will become CEO of Salomon Brothers if ("when," as Kass says) Citi decides to spin it off.

I believe there's zero chance of this, but with so many people calling for Chuck Prince's head, I wouldn't be surprised to see Rubin, currently Citi's chairman, become CEO as well.

3. Stabilizing housing

. Kass says: "Based on misleading government statistics, the housing market appears to stabilize in the first quarter of 2007." With interest rates so low and prices in many areas already plunging, why

wouldn't

the housing market stabilize? I agree with his conclusions, but without the conspiracy theory.

4. "The Great Housing Depression of 2007."

I just don't see it, not with 4.5% rates on 10-year yields and short-term interest rates getting cut at any sign of a more severe downturn in housing. Although, that said, I do somewhat agree with No. 5.

5. "Foreclosures steadily rise."

I do believe that the subprime, BBB-rated category of homeowners is in trouble. These are people who have

never

been granted loans before and now they're getting mortgages at almost the same rate a herd of Bob Rubins would get them. However, these also are exactly the sort of people who don't have a huge effect on the economy one way or the other when they abandon their homes.

Kass says that the asset-backed securities, or ABS, market will be fractured by the volume of foreclosures at the subprime level. I've spent some time doing due diligence on very smart funds on both sides of this trade. I have no idea who is right(Nobel-level economists were doing the modeling on each side, so who am I to argue?). However, if the ABS market does start to fracture, enough hedge funds and banks are short the subprime tranche that a short squeeze would buffer any fall.

6. and 7. The hedge fund and derivatives industries.

These are scary "surprises" worth pondering. If the subprime market falls apart, banks such as

JPMorgan Chase

(JPM) - Get Report

could be exposed to trillions of dollars in counterparty risk. This is a doomsday scenario, and I know at least one multibillion-dollar hedge fund that told me it has taken out credit insurance on JPMorgan as a bet that this actually will happen. But there's a reason this type of insurance trades for pennies on the dollar: Most people believe this doomsday scenario is extremely unlikely. I'm in that camp.

8. Commodities.

Kass says they'll collapse, and I agree that commodities will go down like they always do. Check out my column on the

Madagascar Vanilla market to learn why.

9. Flat corporate profits

. I just don't see how this is possible, given the extreme dollars that are going to be spewing at

Microsoft

(MSFT) - Get Report

because of Vista and

Exxon Mobil

(XOM) - Get Report

because oil is nonstop, and

Google

(GOOG) - Get Report

because online advertising is going up another $6 billion and it'll be the main beneficiary -- just to name a few.

But this is a hard thing to model out with precision, and almost everyone I spoke to at the beginning of 2006 (you know who you are) was wrong about where we would be now in terms of corporate earnings.

10. Volatility rises exponentially

. This one really interests me because the reality is, volatility confuses me. It's usually measured by the VIX indicator. In the 10 years I've been trading, the VIX has never been even remotely as low as it has been this year. And right now, this second, it's basically at an all-time low, or near it:

VIX Swings Low
It hasn't been this low in a decade

Historically, this has been a mean-reverting indicator; in other words, when the VIX very high when compared with historical averages, it invariably comes down (as in 2001 and 2002) and when it's very low, it invariably goes higher. Very roughly, without going through the math on this, the VIX being at 10 right now means investors are assuming the markets are going to be almost flat over the next year with a very tiny range throughout the year.

This is almost certainly false; I agree with Kass that volatility will go up. We could even experience massive corrections along the way, since an increase in the VIX is usually associated with a decline in the market.

However, the VIX is

so

low that I don't know if we can really use any historical results to make a prediction here. After all, the markets and the VIX rose in tandem from 1995-99. And now more than ever before, hedge funds that use put-selling strategies have flooded billions into how this indicator is calculated, artificially lowering it. The VIX could go up, but I don't necessarily know if this will cause panic in the markets.

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.

Kass starts to get into Nostradamus mode with surprises 14 through 25; take 14, for instance:

14. "A well-known corporate raider finds himself with a concentrated portfolio ... and suffers large losses."

Every year we're going to experience an Amaranth or two. The important thing about these big losers is that our economy has shown an astonishing ability to bandage itself when there are holes. Long Term Capital Management's disaster was enough to cause chaos back in 1998. In 2006, Amaranth -- which had significantly larger losses -- caused barely a ripple. Same will go for the big losers of 2007.

15. Cyberterrorism.

These bad apples are trying and failing, trying and failing. I can guarantee that on July 4, 2007, the Internet will not be ineffective due to cyberterrorism. Doug, I will instant message you on July 4 to wish you a happy Independence Day.

16. Newt Gingrich for president?

I sincerely hope not.

17. SAC Capital Partners' Steve Cohen acquires majority control of the New York Yankees.

It would be great for the Yankees and NYC if Stevie Cohen took over. Kass, I hope you're right; if this comes to pass, I might actually attend the third baseball game of my life.

18. Wal-Mart's funk continues.

Kass specifies that

Wal-Mart

(WMT) - Get Report

will report five consecutive months of negative same-store sales. I don't even understand how this could happen, mathematically. And where would everybody be shopping in that case?

Target

(TGT) - Get Report

?

Dollar General

(DG) - Get Report

?

Kass is saying that a combination of deflationary winds blowing plus a general consumer slowdown that could affect high-end purchases will cause problems. Maybe, but why didn't that happen this year when all the car companies fell apart and housing prices slumped? Incomes went up, the stock market went up, and global expansion continued, which all ultimately drive sales to companies such as Wal-Mart.

19. "Google marches on ... and dramatically exceeds ... expectations."

I agree, but only because of the trend that online advertising, fueled by a growing economy, is going to keep booming, and

Google

(GOOG) - Get Report

gets the bulk of that revenue.

However, I believe

Yahoo!

(YHOO)

is the better bet in 2007.

Kass also believes legislators will question Google's monopoly in 2007. I guess anything can happen, but right now there are many, many choices of online ad platforms, and growing competitors such as Yahoo!'s Panama, Adbrite and even StumbleUpon will force Google to keep being competitive.

20. Saddam Hussein and Osama bin Laden found dead.

Maybe.

21. Corruption scandals in Russia hit emerging markets in 2007.

Uh, haven't there been nonstop corruption scandals there already? The government walked in and took over the biggest oil company and sold off all the assets -- and that

still

didn't scare people out of doing business there.

22. "A large hedge fund lowers its ... fees ... lead ing to a 50% reduction in the number of hedge funds."

I totally agree with this one. Hedge funds are beginning to resemble large money management firms and even institutions like banks. And, in fact, the bigger funds are getting bought by banks and going public. You can't charge 2 and 20 in an environment like this. Particularly, you can't charge it when firms like

WisdomTree

are going to introduce actively managed ETFs that consistently outperform the hedge funds.

It's over, guys. I feel bad for the reverse commuters reading

The Wall Street Journal

on the train to Greenwich, Conn.

23. Ugh, I can't even type about stocks anymore. Kass predicted something about stocks here, but my eyes can't focus anymore.

24. Maria Bartiromo goes to The View.

Doug, I hope you're right. I'll start watching it then. If Ellen DeGeneres goes with her, it's a clincher for me.

25. "Mad Money" goes prime-time on CBS in early 2007.

I don't know anything about Cramer's contract with

CNBC

, but I have to think before anything like that happens that Cramer will first do a reality show where he allocates aspiring young hedge fund managers some of his personal money and then drills them, Lightning Round style, on their picks. We follow the contestants while they visit companies and CEOs, talk to analysts, visit some of the great hedge funds and watch them trade, and the eventual winner gets his own hedge fund. I would watch such a show religiously.

Final note to Kass: Try not to worry so much. In March-April 2003, I felt like

we were Butch Cassidy and the Sundance Kid, both bullish when everything looked like it was falling apart. What happened, Doug?

What happened?!

At the time of publication, Altucher and/or his fund had no positions in any of the stocks mentioned in this column, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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