Market Predictions for 2008:

Before I start on any new predictions and forecasts I should review last year’s effort. Looking over my forecasts I find that I was close on most of my targets in the equity market in Canada, not bullish enough on the US markets, but I was far too bullish on the bond market and not bullish enough on energy prices.

I expected the TSX to reach a high of 14,000 in the second or third quarter and that was quite close, I also predicted that commodities would once again be the driving force pushing the TSX to a new high. I did not expect the Dow Jones Industrial Average to perform as well as it did expecting it to top out at 13,250 when it went just over 14,000. I expected a major reaction to the option back dating scandal in the technology sector and had forecast the NASDAQ would fall by 10%, backdating ended up being a non issue for investors and the NASDAQ was up approximately 10% for the year.

I was expecting the US economy to be much slower in 2007 and that interest rates would have to fall in order to avoid a recession, I think I was a year ahead of events, so rates did not fall as much as forecast.

I was not expecting a credit crunch of the magnitude that has developed, this is likely to be a long term story for the markets and there are still surprises to come in 2008.

I have been forecasting the Canadian Dollar at par to the US dollar but was surprised at how rapidly that target was met and then surpassed. The strength in the Canadian dollar was one of the major stories for the Canadian markets in 2007 along with the huge number of takeovers that developed in the first half of the year.

Now for some thoughts on what may develop in 2008.

Looking forward in to 2008 after the tumultuous year of 2007 makes predictions a little hazardous to say the least. 2007 had many surprises that will have lingering effects well into next year and possibly longer. The global economy is only starting to feel the effects of the current credit crunch and depending on how the Central Banks around the world deal with the current situation will have a major impact on equity markets.

It appears that the Central Banks have decided that inflation is not going to be a problem so they are concentrating on keeping the credit markets functioning at any cost. The recent coordinated effort by the major Central Banks to increase the liquidity is likely to have long term ramifications on the pace of inflation globally. There will be a lot of pain to be endured in order to turn the tide of higher inflation which will be compounded by this increase in liquidity and lower interest rates. We are likely headed for a sustained period of rising inflation and slowing economic activity which will not be pretty for equity of bond investors.

The commodity markets are indicating an inflation surge with food prices rising, fuel prices rising and gold prices rising. The CPI in both Canada and the United States is moving up out of the target range set by the Bank of Canada and the US Federal Reserve. At the same time both are injecting money in to the financial system and moving to lower interest rates which will tend to fuel the increase in prices over the longer term. This could be a very interesting year for investors as it will be one of the first times in the past couple of decades when inflation could become a real factor in the global economy.

If the central banks continue to fuel the financial system with liquidity and if rates do trend lower the precious metal sector looks very attractive going forward. Gold has traditionally been used as a hedge against inflation and financial uncertainty both of which have been increasing over the past few months. It looks like the financial uncertainty is going o be with us for a while, the estimates regarding the size of the subprime, CDO and SIV problem continue to increase and the numbers are startling, now over a half a trillion dollars. The major gold producers should find investor support over the next year or so, companies like Barrick Gold (ABX-T), Kinross Gold (K - T), Gold Corp (G-T) and some of the emerging producers such as Minefinders (MFL -T) and Gammon Gold (GAM-T) look interesting with gold at $800.00 plus an ounce.

The financial services industry is going to be an under performing sector over the next 12 months as the write offs mount. Stay away for any banks or insurers with exposure to any of he subprime, CDO, ABCP or SIV markets this is likely going to get very ugly before it is over. The only Canadian Financial services company that looks even remotely interesting to me is the Canadian Western Bank (CWB -T) which appears to have avoided the subprime fiasco and operates in western Canada the fastest growing region of the country.

The push by the US to try and reduce its dependence on foreign oil has been a huge boon to the agricultural business in North America. The politicians are pushing the country towards higher ethanol and bio-fuel use which has increased the price of corn and other grains as the pressure on the supply increases. The demand for corn will continue to grow as more money is thrown at the alternate fuel industry creating an opportunity for agricultural companies such as Agrium (AGU-T) Potash (POT-T) and Deere (DE-N)

The price of crude oil is likely to remain elevated through out next year unless the Peoples Bank of China can succeed in slowing the torrid pace of growth. They are working diligently to reign in the growth on fears that pace of inflation will accelerate. If the Chinese economy and the US economy slow dramatically the demand for crude oil will decline forcing prices lower. In the energy sector I would be looking at companies in the oil sands, this sector has the potential to out perform due to the huge reserves available. Over the long run investors will be wiling to pay a premium for secure supply and this will become a focus of valuation. Suncor (SU-T) is the leader in this area and should continue to be an outperformer in this sector.

The Canadian dollar has been on the move higher and will remain at a historically high level through out next year. The strong economic fundamentals will support a strong currency relative to other major currencies offering Canadian investors an opportunity to diversify in to foreign markets. The currency risk of investing outside of Canada has not been this low in three decades. The proliferation of Exchange Traded Funds (ETFs) offers a low cost and easy way to access a diversified portfolio in specific regions of the world.

Asia has been and will continue to be a growth area and the a numerous ETFs available to access this region such as the ishares MSCI Pacific ex-Japan index fund (EPP-N) which invests in pacific rim countries of Australia, Hong Kong, New Zealand and Singapore or the newly launched ishares S&P Asia 50 index fund (AIA-N) which invests in the 50 largest companies in Asia offering more exposure to China for those who can accept the increased volatility that market brings to the unit.

There may be some surprising news that could throw this prediction off track, like the melt down in the credit markets did this year, but for those investors looking at a long term strategy diversification and fundamental value will pay off over the long term.

I hope you all have a very Happy and Profitable 2008.