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Moths to a Flame


...herd mentalities and blind bets won't grasp the brass ring when the dust settles.


"I visited the cats, combed them, cleaned their dishes, emptied your dishwasher and got the mail. Too bad about your bedroom fire--you were lucky. I think some of that artwork can be salvaged, maybe fixed in some way. Be alert kiddo. Sometimes you are a tad too attracted to the fire. Enjoy the rest of your trip! Mom"

So there I was, lazily lounging on vacation last week as I checked my Blackberry for the first time in days.

News of a mini-blaze didn't make for the most relaxing respite but it somehow seemed strangely familiar. As I reflected on the unexpected email, I realized that I dreamt of a fire in my apartment two nights earlier.

My initial angst was quickly replaced with a sense of relief. It could have been worse-a lot worse-and my grandfather taught me never to get upset over anything that can be replaced.

The fact that I subconsciously envisioned the event thousands of miles away stuck with me. It was the first time I could remember dreaming of fire and, with the benefit of hindsight, I knew that it wasn't a coincidence.

These types of premonitions have transpired before-I couldn't sleep the night of September 10th, 2001-and there are similar stories littered throughout my life. I'm not into black magic or voodoo but I certainly believe in intuition.

I'm not sure that our minds can qualify these thoughts but my sense is that there is a method to the madness. We've all been there. Serendipity. Déjà vu. Gut instincts. They come in many forms but leave a lasting impression.

I arrived home in search of stellar vibes to scribe, something that would stand out amongst the litany of dribble that pundits have scribbled. We've all read the prognostications and predictions for 2007, most of which toggle between constructive and conventional.

That's the safest stride on the Street-map a scenario that has the highest probability of occurrence and stay in the game for another calendar year. Jeff Saut, the tremendously talented strategist at Raymond James, once told me that where you stand is a function of where you sit.

From where I'm sitting, most folks are standing on the same side of the market table.

With that said, and with a humility that can only procure as a function of experience, I'll offer ten themes that I believe could unfold in the forthcoming year.

  • Dollar Debasement: While a near-term rally in the dollar is possible as a function of negative sentiment, the broader trend of nationalization should continue as foreigners, particularly petrol-nations, look to denominate assets in local currencies or Euros.

  • Leadership Shift: Large cap should outperform small and mid-caps, on a relative basis, and energy and metals will take the leadership baton from tech and financials.

  • The Elasticity of Debt: It's no secret that debt has powered the most recent leg of our economic "expansion" at the expense of savings and wage growth. That tipping point may come to bear as upwards of $2 trillion in adjustable rate mortgages reset in 2007.

  • The Hump Back Market: The market action was fantastic into the home stretch of 2006 as positive data points were embraced and bad news was shrugged off. That momentum could continue into the front end of '07 before giving way to the weight of an unsure world.

  • "Haves" vs. "Have Nots": We've seen this dynamic proliferate in societal circles and can expect it to manifest in the hedge fund community. If I were trading hedge funds as an asset class, I'd be long the quality and short the quantity.

  • Commodity Consolidation: Merger & Acquisition activity should pick-up in the hard asset space as smaller niche players are absorbed in a global effort to scale.

  • Life Stage Marketing: Just as social networking was the catch phrase of '06, look for life stage marketing within sector verticals to emerge as the media play in the coming year.

  • Rate Reversal: While the equal weighted commodity index continues to tickle all-time highs and there is pressure from abroad to raise rates, look for the FOMC to lower interest rates this year to offset ARM resets and a slower growth environment.

  • The Real Real Estate Market: As most folks monitor homebuilders as a proxy for real estate, expect the broader commercial and residential markets to accelerate their softening phase.

  • The Return of Volatility: The flush of global liquidity has dampened the relative momentum of individual stocks as reflected by implied volatilities. 2007 should see an uptick in overall market volatility.

There was a lot of chatter into year-end regarding the "what" vs. "why" of 2006, particularly as it related to the coordinated efforts by central banks to keep global markets afloat. In the end, the ultimate arbiter-the bottom line-dictated that the financial markets were just fine, thank you very much.

In Minyanville, our mission is to educate, inform and enlighten folks about the market machination. We saw-and continue to see-an incessant effort to infuse liquidity and optimism at every turn. That's not a bad thing, per se, but it has created a false sense of security in the marketplace.

As we roll up our sleeves for a new year of flickering ticks, I'll ask each Minyan to remember that capital preservation, risk management and defined discipline are the hallmarks of financial longevity.

For if we can bank on one dynamic coming to bear in the coming year, it's that herd mentalities and blind bets won't grasp the brass ring when the dust settles.

Just call it a hunch. And make sure you've got some insurance in case we stumble across an unexpected spark in the dark.

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