This blog post originally appeared on RealMoney Silver on Aug. 5 at 7:45 a.m. EDT.
Of all the columns I write, I have the most fun constructing my annual surprises lists.
For a little background, in late December/early January for each of the past six years, I have taken a page from my friend and former Morgan Stanley strategist Byron Wien (now the chief investment strategist at Pequot Capital Management) and prepared a list of possible surprises for the coming year.
"I'm astounded by people who want to 'know' the universe when it's hard enough to find your way around Chinatown." -- Woody Allen
The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events, with the potential for large payoffs, and to disprove Nietzsche, who said that we live the same life over and over again. After all, Wall Street research is still very much conventional, almost universally bullish and consisting of nonvariant "groupthink" despite the attempts of reform over the past several years.
Mainstream and consensus expectations are just that, and, in most cases, they are deeply imbedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile.
Here are some items from our surprises lists of 2008, 2007, 2006 and 2004 that have recently come to fruition.
Surprise No. 4:
With a continuation of the credit and liquidity crises and an increased recognition that financial retrenchment will take years (not months), volatility pushes even higher. Daily moves of 1%-2% become more commonplace, serving to further alienate the individual investor.
As I have recently
, last week's three consecutive days of 200-point moves in both directions (and, for that matter, similar action over the past few months) demonstrate that the market has too much tumult.
Surprise No. 6:
Growth in the Western European economies deteriorates throughout the year, and the markets in England and France drop at twice the rate of the U.S. market.
Over there, growth is weakening, and the declines in the European bourses have accelerated.
Surprise No. 9:
Several high-profile housing-related bankruptcies occur in 2008, including Countrywide Financial, Beazer Homes (BZH) - Get Beazer Homes USA, Inc. Report, Hovnanian (HOV) - Get Hovnanian Enterprises, Inc. Class A Report, Standard Pacific (SPF) , WCI Communities (WCI) and Radian Group (RDN) - Get Radian Group Inc. Report.
Surprise No. 20:
The politics of trade become more fractious (even in the Republican Party) as angst about globalization escalates in the U.S., reflecting inequalities and a cyclical contraction in our domestic economy. Doha dies.
Trade talks have
Surprise No. 4:
The continued heavy cancellations of home contracts -- which are included in the government releases on homes sold and lead to an erroneous inventory of unsold units for sale -- lead to: Sales of existing and new homes take another sharp leg lower as we enter what I've dubbed "The Great Housing Depression of 2007." Importantly, the financial intermediaries that source mortgage financing/origination begin to feel the financial brunt of "The Great Mortgage Bubble of 2000-06" after years of creative but nonsensical, low- or non-documented lending behavior.
- a dumping of homes on the market in the spring;
- a quantum increase in the months of unsold housing inventory; and
- a dramatic drop in the average home selling price.
Res ipsa loquitur.
Surprise No. 5:
Foreclosures steadily rise over the course of the year to nearly 3 million homes in 2007 vs. about 1.2 million in 2006. Deep cracks in the subprime market spread to other credits in the asset-backed securities market as a lumpy and uneven period of domestic economic growth takes its toll. In a similarly abrupt and dramatic manner, credit spreads fly open and revert back to mean valuations, as previously nonchalant investors are awakened to the reality of credit risk.
Res ipsa loquitor (part deux).
Surprise No. 11:
Year 2006 brings three large-scale Long Term Capital-like failures (but not in U.S.-based institutions) -- two in Asia and one in Europe -- precipitated by an astonishingly large derivative loss that two major U.S. and several overseas money center banks are partially on the hook for.
The banking industry is now littered with disasters as financial writedowns move toward a trillion dollars.
Surprise No. 17:
Reflecting the need to shore up its capital base, SunTrust has
nearly 50 million shares of its much-coveted Coca-Cola stock position.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were short Beazer Homes, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.