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We continue our tradition this year of positing 10 outrageous claims for the markets in the coming year. These claims are in many cases extreme - but we believe a valid case can be made for them actually coming true. We usually get 2-3 of the claims right. As always, we make these calls to stimulate thought and encourage our clients to think about their portfolios in new ways. This year’s Outrageous Claims are fairly closely correlated to the overall theme of the outlook: 1. US recession at year’s end 2007 Never before in modern history has there been a sharper deceleration in US home prices: Home Equity Loans, Mortgage Refinances, Construction... the housing boom has been a significant driver. International and historical experience with slowdowns as significant as this suggests that we will see a recession by year’s end 2007. 2. A “Big oil” company to be de-listed Next year should see yet another record in terms of private equity deals and we see an expansion in this playing field expand to include the oil-related sector, a group largely untouched so far. Also, we expect deal size to increase dramatically, leading to one of the truly big oil companies to be targeted. Home Depot is currently rumored to be in play, a $80B company, but we think a deal worth twice as much is possible next year. 3. Patterson (PTEN) to double We are bullish on oil services next year and believe the underperformance of the past year for this group was unwarranted. Increased demand for drilling etc. will underpin the sector and we have pegged several stocks that offer compelling value. Our favorite among the pack is Patterson, a stock that currently trades at 5.9 forward earnings and commands a conservative balance sheet. To us, this company could easily become a buy-out target next year. 4. AUDJPY to 100 then to 85 We expect the carry trade theme to continue through the first half of 2007. We also call an additional rate hike by the RBA, which will squeeze the pair higher. Then we predict most rate hike cycles from traditional high yields to peak, along with BoJ continuing their process of normalizing rates. |
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