Sunday, August 12, 2007 Predictions for the Rest of the Year

1. The residential real estate market will get far worse, and not just due to the sub-prime mortgage problem. Many middle class borrowers that have loans which started out with teaser rates are also suffering. The home inventory (the number of houses on the market) is huge and the number of sales have tanked in most of the major real estate area of the United States.

2. Politicians will probably pass laws to severely limit the number of sub-prime mortgages in the future, eliminating no-equity loans, 125% loan to value loans, low teaser rate loans, etc. This will drive a stake through the heart of the real estate market, destroying the potential for the working class to buy starter homes, eliminating the move-up real estate market. It will also eliminate the possibility of sub-prime borrowers to refinance.

3. Many “real estate investors” who have never invested in real estate before are now talking about finding bargains in the real estate market. That means that the real estate market is far from the bottom. These “investors” will get burned, making the market worse and adding fodder to the press about the real estate mess. Never try to catch a falling boulder.

4. The Federal Reserve Board will eventually lower rates but it will do almost nothing to help the real estate or mortgage market.

5. A few major hedge funds will go under, and at least one major investment firm will experience severe problems causing either its collapse or a forced takeover. The government will do a lot of saber rattling about more regulation of hedge funds but will do nothing about more regulation (and should do nothing about more regulation) because they will realize that it was primarily the wealthy that lost money in them. The press will really play this up, trying to find reasons for passing blame on the wealthy for investing in such funds in the first place, saying that the wealthy deserve what they got, and insinuating blame for most the other economic problems.

6. More mortgage companies will declare bankruptcy and at least one major homebuilder will go under.

7. The stocks of investment brokers and investment banks will stagnate, at least for the next couple months, and probably for the rest of the year.

8. The bank stocks will also languish despite their high yields.

9. The Good News: Many stocks which have nothing to do with mortgages or real estate with be significantly higher by year end, making all time highs. The yields on stocks will have gotten so high and financial ratios (price to earnings, price to sales, and price earnings to growth) will have gotten so low, that astute investors will take advantage of these bargains. When these stocks start to rise, you will read in the press that it is a temporary bounce, a short squeeze or just a short term rise before a bigger fall. But it won’t be any of these; it will be a real bull market in these stocks. The press will all but ignore this good news, as most of the headlines about financial topics will be about people losing their homes, mortgage companies going under, and hedge funds collapsing.

10. Seven stocks which should be much higher by year end, which I am not recommending but suggesting for further research, are:

Lafarge SA (LR) at 39.19, is a France based company which sells construction materials

URS Corp. (URS) at 50.24, provides engineering and technical design services

Pepsico (PEP) at 67.95, manufactures Pepsi, Mountain Dew, Diet Pepsi, Gatorade, Tropicana Pure Premium, Aquafina water, Sierra Mist and many other beverages

Kimberly-Clark (KMB) at 68.21, makes and sells health and hygiene products, such as Kleenix, Kotex, Depend, Cottonelle, and Viva towels

Johnson & Johnson (JNJ) at 61.15, makes health care products including Band-Aids, Neutrogena, Splenda, Tylenol, Listerine, and Sudafed

UIL Holdings (UIL), at 30.78, a utility in the southwestern part of the state of Connecticut

Anheuser-Busch Companies (BUD) at 48.73, the large brewer

Author does not own any of the above.

By Fred Fuld at

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