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Outside the Box: Five Potential Surprises into Year-End


This year has been a perfect storm, but how will the story end?

"I took the road less traveled and that made all the difference."
--Robert Frost

Groucho Marx once said that he didn't care to belong to a club that accepted people like him as members. As recession ranks swell and desperation sets in, truer words have never been spoken.

2008 will forever be remembered as the year the perfect storm finally arrived. The toxic combination of financial engineering, debt dependency and immediate gratification commingled like a clap of thunder on an otherwise sunny day.

The script played out precisely as written, although that hardly made it easier to digest.

We've long offered that time and price were the only true medicines for the cumulative imbalances that steadily built through the years. Much like a forest fire, the painful process of price discovery is a necessary precursor for fertile rebirthing and greener pastures.

With a conscious nod that the ultimate market bottom is likely a few years away as debt is destroyed and social mood shifts, we wanted to share five vibes that could manifest into year-end as conventional wisdom catches up with reality.

Reversal of Fortune

As the world worried about inflation entering 2008, deflation was a central theme in Minyanville. We were early as the dollar dripped lower and commodities drifted higher into the summer.

Since July, the greenback has appreciated 21% versus a basket of foreign currencies and commodities are down an eye-popping 48%. All roads lead to deflation, we know, but the path of maximum frustration is often paved with detours.

Keep close tabs on the dollar, which recently registered several technical exhaustion signals. If it reverses lower, it'll pave the way for commodities to enjoy a spirited counter-trend sprint.

Retail Therapy

We suggested in August that retail therapy-or, the need for retailers to visit their therapists-would be necessary as we edged towards the holiday season.

Since that time, Sears (SHLD) has lost 70%, Target (TGT) is off 45%, Amazon (AMZN) is 60% lower and Home Depot (HD) has taken a 30% haircut.

There's no denying that the consumer is on the ropes and spending is on sabbatical. That's front-page news, however, and the market rarely rewards the obvious, if only for a trade.

Seismic Readjustment

Equilibrium between asset classes is askew as evidenced by insane volatility in equities, credit, commodities and currencies.

Some analysts believe that given the current state of credit, fair value on the S&P is close to 600. In a finance-based global economy, further dislocation could conceivably lead to social unrest and geopolitical conflict. Remember, world wars are historically bred from economic hardship.
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