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Mile High Insights

How Many Bubbles in 2008?


Wall Street joined the rest of us and closed the books on the year 2007. It has been a wild ride that produced screaming rallies, heart stopping drops and some broken bones and promises in the process. We know that the markets fall on average twice as fast as they rise and that leads to an increase in volatility, which is in essence the expectation of future price moves (up and down). Rising volatility is therefore the expectation that prices rise higher and faster and fall further and faster than in the past. The year 2007 was just such a journey. No wonder investors in this country are glad the year is over. Stock markets in other countries had gangbuster performances, again. The table at the end shows you the preliminary year-to-date and 3-year performance as published by the Wall Street Journal. Please note that all rankings are in U.S. Dollar terms and not in local currencies. The Standard and Poors 500 rose by 3.53% and ranks therefore at the bottom of the comparative performance ladder. The NASDAQ rose by 9.81% and ranks somewhere in the middle between Poland and Taiwan. Nevertheless, we still finished the year with gains, so it was still a decent year. You will also note that the top three spots are occupied by three Chinese Indices, while the price of oil would have come in fourth with a 57% gain. Predictions are a dime a dozen these days and I admire everybody who has the guts to engage in it. Below you will find my personal version, which is not my own entirely but is based on the predictions of Standard and Poors and my own assumptions about 10 year treasury notes (give or take stable 4.5% throughout the year) and the Index performance, which I assumed (simplifying a lot, I know) that it would rise 2.5% per quarter or 10% for the year 2008. Take a look.

It seems clear that the Federal Reserve needs to loosen monetary policy. 10-year notes are currently trading at distress levels of 4.04%. I assume that they will rise throughout the year to about 4.5%. I also assume that the earnings estimates provided by Standard and Poors are as reasonable as any other and that the S&P; 500 Index is going to rise from currently 1468 to around 1620. The result of these assumptions is represented above in the form of the well known Fed-Model. I think that all these assumptions are realistic, IF the U.S. economy can avoid a recession. I believe that it can, but I reserve the right to change my opinion on that. The real-estate bubble is deflating as we speak and the derivative bubble that was built on it was pricked in 2007. The table below shows us some more bubble-cadets, I am sure.

It will be interesting to watch, whether 2008 will show us a World full of bubble-contagion or whether the U.S. bubble was the only one worth deflating.

Hermann Vohs

"Moral excellence comes about as a result of habit. We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts."

Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.