Byron Wien's Ten Surprises of 2007

1. The S&P 500 exceeds 1600 surprising even optimistic strategists and investors. The combination of strong earnings, reasonable valuations and excess liquidity throughout the world drives the U.S. market higher. Market volatility increases substantially with the VIX index rising to 20.
2. Secretary of the Treasury Paulsonís trips together with the forthcoming Olympics move China to a more accommodative attitude toward the United States and the West. China revalues the yuan by 10% and eases terms for Western partnerships with Chinese companies.
3. Despite a world-wide economic slowdown, crude oil remains in short supply because of Asian demand and the price per barrel returns to $80. Development of alternative sources of energy and sales of hybrid cars remain disappointing. There is a movement in Congress to encourage the construction of nuclear powered electric utility plants and local resistance seems to be softening as the ìgreen waveî starts to take hold.
4. As the standard of living rises around the world, agricultural commodity prices continue to soar. Corn goes to $5.00 a bushel, wheat to $7.00, soybeans to $9.00 and cotton to $.80 a pound. The volatility of cattle prices also attracts investor attention.
5. S&P 500 earnings grow by more than 10% for another year, exceeding analystsí estimates. Profit margins hold their own as productivity continues to improve.
6. The Federal Reserve does not lower rates in the spring. The 10-year U.S. Treasury yield goes to 5.5% as higher wages cause inflationary pressures to increase and the yield curve turns positive. Real growth in the U.S. approaches 3% once again as housing begins to recover. Credit spreads widen as defaults increase in a service oriented, competitive economy that is brutal to manufacturing companies.
7. The price of gold goes to $800 and silver approaches $18. The dollar is stable against the euro because of renewed economic growth in the U.S. and higher interest rates.
8. Economic conditions in Japan continue to improve. After being one of the worst equity markets in a developed country during 2006, the Nikkei 225 rises 15%. In this market large capitalization stocks do outperform their smaller brethren.
9. The emerging markets of Asia take a rest. Attention shifts heavily to Latin America and Brazil stands out. It is a country with vast natural resources and reasonable labor costs. The country moves closer to an investment grade rating and the Bovespa rises to 55,000.
10. Neither of the current frontrunners for the 2008 presidential election in the U.S. proves to have staying power. Rudy Giuliani pulls ahead for the Republicans as fears of terrorism heat up again and Barack Obama gains momentum as he demonstrates that inexperience isnít a terminal liability.