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Bizarr07: The Price and Paradox of Predicting


In this business it's not about the number of times you make or miss, it's about how much you win when you make and lose when you miss.

What exactly is the Bizzar07 list?

The list below is 20 of 2006's most popular headlines and agreed upon investment or economic themes. Following each is the 'bizarro' turn I can imagine for 2007. Bizarro comes originally from a comic book character drawn up as the "inversion of Superman in every way." In the Stock Market it's not a bad place to start drawing as well, before starting some homework because it forces attention toward risk, which in my experience has most often been sitting comfortably next to what is most universally agreed upon. So my list was first comprised by what is most popular. Then I whittled it down by what my firm's work leads us to believe is likely to end on that list. Then I whittled it down again by only selecting 20 ideas that could not only end, but completely reverse course in 2007.

What This List Is Not

The list items are not outlandish predictions so we can say: "See, we called it!" when one of the 20 happens to work out. I don't like surprise lists like that. I had a friend growing up who, at the end of every half of basketball when somebody heaves it from half court, always would say…"It's good!" When a couple times each season one went through he'd scream "I called it!" He hoped to be hosting at least one new friend who didn't know his handicapping process so he could appear to be able to see things. A list of half-court predictions, these are not.

These are not contrarian calls. It's close, but I prefer to be called an apatharian. To simply always trade against the crowd is to ensure you'll never make money. The dirty little secret that "smart money" doesn't often acknowledge publicly is that a crowd is needed to push the price up or down depending on your position, at some point. Not to mention the very idea of being a contrarian, as Yogi Berra once said (about a Florida restaurant) "…got so popular nobody goes there anymore." When a so-called contrarian fund reaches almost $70 billion in assets under management, holds Google (GOOG) as its largest position by far, and becomes one of the most popular funds in the world, you know contrarians are rolling under in their graves. A list of contrarian calls, these are not.

What This List Is

Being an apatharian instead of a contrarian, to me, means finding what is "not felt" yet. I don't want to be lined up against the crowds just for the sake of it, rather I'd like them to join me eventually in places my firm stakes out a position before most would consider it. I want to be right but am willing to be early (i.e. wrong for a while). In this business it's not about the number of times you make or miss on your trading log, it's about how much you win when you make and lose when you miss. For my firm, that has always led an adventure to stake out positions with substantial upside thanks to very little agreement, and with a limited amount of downside because its price is born from apathy.

And now, onto the list…

2006: When will Crude Oil reach $100?
Bizarr07: Oil prices fall, and perhaps quite a bit. Energy's secular bull market is intact, but crude and natural gas both flirt with 4 handles. Not since the Frank Reich rally have the Oilers been as sick about a number like 35. Supply + Slowdown – Terror = if you get all three you could see $35 oil.

2006: Politics of the War in Iraq.
Bizarr07: Headlines are grabbed by the politics of a Civil War in the U.S. between two generations. One wants be taken care of but their medical bills cannot be afforded by the second group, who cannot work hard enough or long enough…simply because there are less of them and that math doesn't work and comes to a head. A large company is vilified for eliminating health care coverage for its retirees. Another large company that makes cars stages a vicious strike in the Fall.

2006: Health Care was the worst performing sector for the year, up +6%.
Bizarr07: One of, or perhaps the best performing sector is Health Care, rallying sharply after a Congressional inspired sell-off early in the year. Michael Lewis writes a book about Nancy Pelosi's doctor called "MedicineBall," where it is revealed that she secretly believes in profits. The book describes doctors as the most undervalued talent in the U.S.

2006: Emerging Markets stage remarkable rallies across the board.
Bizarr07: Emerging Risk reminds players that the board is not level. There are a few tremendous sell-offs around the world. Meanwhile Japan, the worst international market in 2006, is among the best in '07.

2006: Hedge Funds are widely predicted to lower fees because of growing numbers and muted performance.
Bizarr07: Whispers emerge about performance at certain funds…shhh…being phenomenal. The exodus of talent from banks and brokerage firms to hedge funds continues to produce star performers. When a Fortune reporter questions clients of several funds about their fees near the end of '07, she is told. "All I care about is my net, they could double fees given the performance and the biggest problem would still be how to get into the funds not out of them." Meanwhile brokerage firms' margins continue to erode and one of the two biggest brokerage firms announces a plan to begin acquiring hedge fund operations, signing the traders to long term deals.

2006: Individualized health plans (H.S.A.'s) for the "ownership society."
Bizarr07: A "Mass plan" takes off instead, for a society of very few responsible owners. Massachusetts was the first mover towards socialized medicine, but the real headlines will come in the second week of January when Governor Schwarzenegger defines the cornerstone of his legacy will be to insure every citizen of California.

2006: Wall Street rocks! A bonus of $16 billion at one firm alone marks a tremendous year at financial services firms.
Bizarr07: Wall Street walks. Massive layoffs start in banking by force, and slowly continue on the brokerage side by defection, now next door to each other in many cases. The largest sector of the S&P by far, financials, under-performs.

2006: Steelers win the Super Bowl.
Bizarr07: Their beautiful new stadium, which cost taxpayers more than $140 million, is home to a town hall meeting where the solutions are debated about recent rumors that the city may face bankruptcy according to new rules forcing municipalities to disclose future liabilities. Another windy city, Chicago, joins the debates after announcing an even greater unfunded liability just after Soriano strikes out three times in the opener.

2006: Wal-Mart (WMT) announces $4 prescription drugs.
Bizarr07: This headline does not light a fire in other pharmacies/stores as expected, it disappears instead. A combination of perceived losers in the deal – Walgreens (WAG) and drug companies – are not doomed after all, and rally to have good years.

2006: China Boom – the best performing market in the world, up +101.7%.
Bizarr07: China's boom is interrupted by brief doom. Social unrest captures the headlines and politicians' interest for a while, instead of manufacturing. Cheap labor wants to be a little less cheap, and have slightly better working conditions. "60 Minutes" goes to Chinese coal mines where it reports that over 6,000 people died in 2006 alone.

2006: The Dollar Decline became "A foregone conclusion" according Mark Haines at a recent opening bell, speaking about one of the most agreed upon trades of the year.
Bizarr07: The Dollar rallies sharply. Haines retires. The dollar resumes secular erosion in value.

2006: Private Equity Deals are the biggest ever.
Bizarr07: They get bigger than you can imagine. A spoof of Barbarians at the Gates is released chronicling an attempt by Bill Gates to take Microsoft (MSFT) private with his pal, the Oracle of Omaha, Warren Buffett. Never to-be-outdone Lawrence Ellison, who plays himself in the film, answers with a leveraged buyout of the other 29 DOW stocks from his yacht named "I gotcher Oracle right here" before he is capsized by a ship of pirates and former hedgers out to save the population of stocks and Chilean Sea Bass.

2006: Annual debate of Large Cap vs. Small Cap by Wall Street Strategists.
Bizarr07: Mid-cap outperforms both on a risk-adjusted basis.

2006: Pressure mounts at Citigroup (C), still run by a Prince, after the king of consolidation handed him the keys.
Bizarr07: A different Prince helps mediate the divorce. After historically tearing down the wall between banks and brokerages, Citi leads once again, in going the other direction. A different Prince who owns more shares wins support for the breakup and is quoted as saying, "They failed to recognize that very rich people do not have a hard time getting loans. The next time I hear about so many synergies on my satellite, I will short shares during the wedding's press conference."

2006: The Housing Market Decline is national.
Bizarr07: Markets are local. Certain markets climb in value instead. Texas and much of the South finish up year-over-year, thanks in part to a sizable population from the Northeast migrating down.

2006: Calculations showing re-sets from Adjustable Rate Mortgages in early 2007 will wipe consumers out.
Bizarr07: Lower interest rates allow lower resets, the lone wildcard not pictured in charts on the mortgage debt swallowing the U.S. economy. The new exotic mortgage to take off in popularity is a 50-year fixed mortgage. Forecasts are pushed back again; the American consumer is now feared dead on arrival in 2008 instead.

2006: Best/Worst Industries: Steel and REITS were #1 & #2, up 78% and 57%, respectively. Managed Care and Semiconductors were among the worst, (7%) and (9%), respectively.
Bizarr07: Managed Care and Semiconductors rally sharply and finish with a good year, Steel and REITS under-perform for the year.

2006: Immigration Debate rages on, inspiring a fence along Texas border.
Bizarr07: Even more alarming to the "natives" are the first whispers about a state income tax in Austin in order to pay for, among other things, the largest number of people without health insurance in the country. But quietly growing whispers begin about immigrants as a better solution to aging populations and unfunded liabilities than higher taxes. A surprise presidential candidate for '08 uses Texas as the example of how flat-tax on consumption solves both problems and tabs Kay Bailey Hutchison as his choice for VP.

2006: General Motors (GM) rallies 58% for the year, leading the DOW.
Bizarr07: Planes, Trains, & Automobiles. Performance, in that order for '07, reverses the order from the year before for these three industry groups. Boeing (BA) leads the Dow for much of the year.

2006: Stocks & Oil were spotlighted early and often, linked together. (About 22.4 million Google (GOOG) searches combine the two.)
Bizarr07: A pound of uranium will be worth more than a barrel of oil (they were both around $60 in late '06) and by the end of the year worth more than two barrels. The Dow Jones Industrial '06 year-end total was worth just less than 20 ounces of Gold. By the end of 07, it'll take less than 16 ounces to buy the Dow.

And last but not least, here is #21.
Minyan Medha is my winner for the best bizarro entry over the past couple of weeks to complete this list. I am paraphrasing because the un-edited original frightened me just a bit. Sink your teeth into our final Bizarr07 (but I have in-laws that are years ahead of your solution, Medha).

Bush increases troops, Dems fail to block more military funding, insurgency escalates. Bush withdraws troops, imposes sanctions on Iran, who retaliates by selling more oil in Euros to finance Iraq. Israel bombs Iran. All that combined with more debt and a weaker dollar sends the American consumer into a tailspin of depression. They start aggressively acquiring donuts in response. Sales at Krispy Kreme (KKD) revive the franchise, sending shares soaring. In related events, the ban on trans-fat in NYC is not followed by other states with the South leading the renaissance of chicken fried steaks.

Turning to the 2007 Lifestyle Section:

In Sports…

The Saints defeat the Chargers in the Super Bowl but not before a bizarre ending. Philip Rivers (who Minyans might recall was my lone preseason mis-priced fantasy tip of the year) takes three straight knees to end the game. But, the Chargers trailed by 3. John Madden explains that Schottenheimer didn't want anything bad to happen. Only later will Marty confirm he wasn't really just being conservative this time. He was still fuming over the decision to let Brees go. He is fired, but immediately hired by his old team the Cleveland Browns. Schottenheimer selects John Elway III, a high school senior, in the first round.

The Bizarro-Moneyballer himself, Alex Rodriguez, has a big "contract year" in 2007, before his free agency looms again. He statistically proves that production-per-dollar he was actually a bargain in 2007 compared to many other players getting closer and closer to his $25 million per year. Rodriguez signs with the Angels over the winter. Just up the coast, Billy Beane brings Scott Hatteberg back to the A's but retires as GM amid a scandal revealing a clause in Hatteberg's contract paid him to kneecap Scott Boras with a Lewisville Slugger (a cheaper version). The plot was discovered by the new pilot for Matsusaka in town to thank Boras for his client's 90 new flight plans he worked into the contract. Hatteberg had challenged the pilot to a vision contest, and instead of swinging at Boras he took a walk.

The Yankees, led by Andy Pettite, beat the Red Sox in the ALCS, with Matsui driving in the winning run off Roger Clemens in Fenway only after the Red Sox staged a furious run with one month to go in the season after convincing Manny Ramirez he had been traded to the Red Sox. In the World Series the Yanks fall to the old Brooklyn Dodgers who finally rediscover the postseason in LA as Saito strikes out Matsui to end the series in seven. During the post game interview, Saito challenges MLB to hold a true world series in Japan, asking Joe Buck to say "Yen baby" while he touches his throat.

And in Reality TV, there will be a failure and a blockbuster…

A new show called the True American Idol searches for the kind of unusual story that can result from two people both graduating high school and then getting married years after that and raising children responsibly. They must love their jobs, teach their kids, cherish each weekend but be just as passionate about Mondays as well. Producers cannot find enough candidates to hold auditions.

Another new show called "Futures Farmers" is the runaway hit of the year.

Elliot Spitzer meets Lloyd Braun at a fundraiser and hatches a plan to launch their own reality show only seen on the Internet. Instead of accusing commodity traders of manipulating certain illiquid agricultural markets, Spitzer agrees to cut a deal with the five largest holders of futures contracts in each pit, and turn them over to Braun's show where they must survive on a working farm raising those same crops and animals until Dec '07 expiration.

In the End

While you may have found a wink and smile in a few spots, these are mostly my firm's ideas of what might actually happen this year but may not be priced as likely as we believe they are. Anytime a name is mentioned it is to merely lend an illustration – so take all of those as pure works of fiction (well, maybe not all). If I am right about any Bizarr07 ideas, there are probably mis-priced trades nearby. Remember, the odds are set by the players, only the outcome is set by the horses. In our business the odds are updated every second in flickering ticks. Most year-end predictions focus on the horses - the companies and economy without enough consideration given to the odds - and whether or not you are being paid enough even when you're right. So, a completely correct forecast of 2007 could prove less valuable than a partially correct list of mis-priced ideas. Such is the price and paradox of predicting. The inverse is often the answer that pays the most and costs the least.
No positions in stocks mentioned.
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