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- Gold reached $740 in May 2006. Our expectation of a sharp drop in the U.S. dollar was also realized. We accurately assessed the Federal Reserve's continued interest rate increases (despite the general view that the Fed would pause) earlier in the year. At the same time, our variant view that bond yields would rise in the first half of 2006 and then decline in the year's second half -- in the face of a deceleration in the rate of domestic growth -- was spot on. We were spot on that the rate of growth in retail sales would slow in the second quarter of 2006 and that several highflying specialty retailers like Williams-Sonoma ( WSM) and Urban Outfitters ( URBN) would have disappointing same-store sales, although a large drop in crude oil and natural gas restored retail strength in the early fall. As we suggested, a Long Term Capital-like hedge fund failure did occur, as Connecticut-based Amaranth's losses were on a par with the losses generated at LTC. As forecast, China and India's economic growth surprisingly continued in an uninterrupted fashion, but the outgrowth of weak median incomes for the average American worker stimulated more than 27 separate pieces of anti-China trade legislation in Congress.
25 Possible Surprises in 20071. Private-equity deals begin the year in a spectacular fashion, with two separate $50 billion acquisitions in January. A consortium of Silver Lake Partners, The Blackstone Group, Kohlberg Kravis Roberts, Texas Pacific, Bain Capital and Goldman Sachs ( GS) acquire Texas Instruments ( TXN). Kohlberg Kravis Roberts leads a syndicate in the takeover of Caterpillar ( CAT), the 55th largest company in the S&P 500. Later in the month, one of the largest buyouts in the history of the media and entertainment industry is made by Bain Capital and Thomas H. Lee Partners when they acquire CBS ( CBS) for $30 billion. In early February, Goldman Sachs (teaming up with Warren Buffett's Berkshire Hathaway ( BRKA)) announces that it is considering a going-private transaction. The Goldman deal is abandoned three months later, as a fractured mortgage market leads to a standstill in deal-making as the capital markets (and underwriting activity) seize up.
- A dumping of homes on the market in the spring
- A quantum increase in the months of unsold housing inventory
- A dramatic drop in the average home selling price.
19. Google ( GOOG) marches on, proving its skeptics wrong, and dramatically exceeds sales, profit and cash-flow expectations. Its shares approach the $650 level by early spring, after rising by more than $100 the day after first-quarter earnings are announced. Though results continue to beat expectations in the second and third quarters, the shares take a large hit after its domination and monopolistic position in search is questioned by legislators in a series of congressional hearings later in the year.20. Saddam Hussein is assassinated in jail even before his appeal is concluded. Osama Bin Laden is found dead, and initial reports indicate he has been dead for more than 12 months. 21. A series of corruption scandals in Russia hits the emerging markets in 2007, which further exacerbates the impact of uneven worldwide economic conditions and difficulties in the mortgage markets. 22. A large hedge fund lowers its investment management fees (to 0.5%) and incentive fees (to 10%). This effort, combined with the overall market weakness in 2007, leads to a 50% reduction in the number of hedge funds over the next 12 months. 23. With the hedge fund ranks diminished, commodities dropping in value and the appeal for alternative investments (private equity, real estate, etc.) moderating, the bullish chorus for a global liquidity case for equities becomes a faint whisper. 24. Maria Bartiromo leaves CNBC to join Joy Behar, Rosie O'Donnell and Barbara Walters on ABC's