2007 analysis.

2007. Let's ignore what I said two weeks ago and start over. The Moore Inflation Predictor from Fintrend.com predicts disappearing inflation this year. Every time I've been tempted to ignore it, it's come back to bite me in the ass. Here's the chart:The chart only tells half the story, however. The chart from August predicted that the Janruary spike in inflation would peak at 5.75%. Now it's at 2.75%. That's a serious downtrend.


My first prediction is falling oil. $40/barrel sometime this year. I've already taken advantage of this by buying United Airlines (UAUA). But what's next? As oil prices fall, we're now in a vicious cycle that's causing everyone to dump their oil before prices fall further. Who's buying? Refiners. Every year, gasoline spikes in the spring. Look for this year to be different. How about gas for a $1.50? (Right now Gasbuddy.com reports the average US price at $2.29.) That will help automakers, such as Ford (F).


GDP should be much higher with inflation down. Last quarter it was 2%. Inflation was at 2% and housing took away 1.2%. Add in a point for inflation, half of housing, and a bounce of 0.6% and you have 4.2% growth next year. Compare this to the consensus of about 2.5%.


Let's put strong GDP and low inflation together. We get steady to slightly higher interest rates. I predict 5.5% at the end of the year. This will be bad for dividend stocks. Last year, they gained 21.6% without dividends! Allied Capital (ALD), for example, went from $27 to $33 from August to December.

What about the dollar? If rates are up, the dollar will be up. Add a strong economy on top of this. Also, Europe will probably stop raising ratesA strong dollar plus falling commodity prices means that emerging markets will be pummelled.

Falling inflation is, however, bad for the stock market. A good economy should limit the downside. A higher dollar is bad for the market. What the market will do is actually pretty foggy for me. Is there enough liquidity to raise the market? Earnings growth from a good economy doesn't raise the market without liquidity flowing in. My guess is that the market will be pretty flat, maybe a single digit gain this year.


Gold will fall back to around $500. A strong dollar and a strong economy are bad for gold. On the upside, however, gold production is unexpectedly down, and the world could easily become less stable and more dangerous.

Housing? Should keep sliding, albeit at a slower rate. I don't see any big bounce in housing any time soon, especially if rates increase. I think the market won't be terrible, just mediocre.