Certain Markets Will Boom,
But Many Will Go Bust in 2008!
Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert.
Dear A-Letter Reader,
As we shortly close out another year in the markets, it's fair to conclude the best of America's economic growth cycle lies behind us.
Growth peaked in the second quarter along with broader stock market later on July 19th. On November 21st, Dow Theory triggered a bear market sell signal as more stocks continue to breakdown and hit new lows.
The next few months will confirm whether the world's largest economy is now contracting or mired in a slowdown. That's a key trendsetter because it'll determine how you should position your investment portfolio in 2008.
Small is Struggling, Sub-prime Spreading
Smaller companies, the backbone of corporate America, have already peaked since last spring. Now they're cutting back on capital spending. Signs also point to less hiring as slower growth forces more companies to shed redundant labor. But labor trends, a lagging indicator, typically shows up late after a recession has already started. In late 2007, the unemployment rate is still historically low. But as the New Year progresses, more Americans will be out of work as this sub-prime infection spreads to the non-financial economy.
Housing is one major source of instability. Right now, the bleeding residential market threatens to delay the economy's recovery. And it's not just in the United States.
Residential investment is falling hard since mid-2006 in the United States. But housing has only started to decline in "bubble" markets in Europe, mainly Spain, Ireland and the United Kingdom.
Housing in the United States is still hemorrhaging with no signs of a bottom. Bank lending is contracting amid the worst credit crisis since 1998. And with the exception of exports, every facet of the economy is now in a downtrend. The economic picture doesn't look too pretty for the first half of 2008.
Over US$1 Trillion - and Counting
In addition to housing, the sub-prime crisis is deepening. Central banks have now committed over US$1 trillion to money-markets since August 9th. The European Central Bank (ECB) is responsible for more than half of those funds. The ECB has been attacking the inter-bank lending freeze across the Eurozone. They poured US$500 billion into the banking system on just December 17th alone.
Although Euribor and Libor rates have declined as a result, spreads remain well above central bank targets as banks are reluctant to lend overnight.
To the casual observer, Libor and Euribor might not matter much. Yet, in reality these inter-bank lending rates are extremely important. These rates affect global lending rates and trends in institutional and corporate borrowing. And they've been stuck in a virtual freeze since August. Even if rates were to normalize tomorrow, the lasting impact has already been felt across the global economy, especially over the last 30 days.
The Consumer and Employment are Wildcards
The United States might escape a severe recession in 2008, defined as two consecutive quarterly declines in output. But one more major shock and a real bust might tip the scales into a deeper economic contraction.
With domestic consumption in the United States at 70% of gross domestic product and big business providing another serious chunk of change to economic growth, the odds are rising that a soft recession has already started in late 2007.
Corporate earnings are too optimistic for 2008. Capital spending is already declining. Once the Christmas sales jolt ends, look for consumption to face a temporary freeze. Domestic consumption is also likely to stall combined with weak GDP data for the fourth quarter. And that will dent already fragile consumer confidence.
The Mighty Fed Fights Stagflation and Deflation
Meanwhile, the Fed is fighting a toxic cocktail of rising inflation and growing deflation in housing. That's a major policy challenge for any central bank. The Europeans also face the same problem. Right now, the ECB remains reluctant to cut short-term lending rates amid high inflation, mainly in energy and food prices.
In an environment where global economic growth is slowing, especially in the United States, Japan and the United Kingdom, the time to hedge your investment portfolio is now.
It's not too late to add alternative investments like reverse-index funds, Japanese yen and other Asian currencies, and hedge funds specializing in distressed debt and busted credits.
Plus, commodities, though likely to face some downward pressure (oil and the base metals) still offer great hedges in the grains, soft commodities, livestock and the precious metals as supplies continue to tighten.
ERIC ROSEMAN, Investment Director
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In spite of the massive liquidity being provided by the major central banks, credit conditions are not yet back to normal. 
