CNBC'S Domm: Our "Crystal Ball" For 2007
CNBC Executive News Editor
Showing up for the first trading day of the New Year is a little like arriving for the first day of school. Good grades from last year no longer count, and the books are no longer relevant. That feeling is especially strong when the old year rang in some very comfortable double digit gains for stocks, and the path to the next year's profits is not so clear.
The first week of 2007 is awash in data, including the Friday jobs report, auto sales, retailers' December sales, and ISM manufacturing data. There are also Fed speakers and opening day for the new Congress.
But we sadly begin the week Tuesday with a day of mourning for former President Gerald Ford. Most markets will be closed with some exceptions, including an abridged bond trading session, part day interest rates and currency futures trading and all day electronic trading in energy. Treasury also holds an auction at 11 a.m.
OUTLOOK '07: CNBC will have day long coverage Tuesday of the '07 outlook for the markets and business with special focus on airlines with Phil Lebeau, technology with Jim Goldman, real estate with Diana Olick, and media and entertainment with Julia Boorstin, to name a few.
Our Big Money survey of the 2007 forecasts of major stock market analysts and strategists will be presented by Melissa Lee. Sharon Epperson will unveil the 2007 Energy outlook starting on Squawk Box. She and producer Jill Woerner surveyed a host of energy experts on where they see prices heading in the coming year.
Speaking of energy, oil closed out 2006 at $61.05, just one cent higher than it began the year, despite its wild ride. Remember July's high of $78.40? Take a look at stocks in comparison. The Dow gained 16.3 percent for the year, the S&P was up 13.6 percent, and Nasdaq was up 9.5 percent. Remember too, stocks were not performing all that well when oil was riding high.
BACK TO BUSINESS: Trading in all markets resumes Wednesday and investors will be met by a double dose of data, some of which was originally scheduled for Tuesday. ISM, December auto sales, construction spending are due in the morning. The FOMC minutes are released at 2 p.m. ADP that day will give its forecast on the jobs number.
On Thursday, pending home sales are due, as are factory orders, ISM non manufacturing data and jobless claims. Chain stores should report sales for the important month of December. President Bush meets that day with German Chancellor Merkel in Washington, and the new Democrat majority Congress descends on Washington.
The big numbers of the week will be the jobs data on Friday morning. We will also hear from Fed Chairman Ben Bernanke who speaks in Chicago at 1:45 p.m. et on "Central banking and bank supervision in the U.S." Not sure how newsy it will be, but you can bet we'll be watching. Chicago Fed President Michael Moskow speaks later in the day on "labor issues."
As you watch CNBC, you know we ask analysts and strategists their long, short and in between views of the markets. How can we make money next year? What's on the horizon with the Fed? We know you want to know, and we want to know, too.
OUR OWN BEST GUESSES: I thought I'd ask some of our seasoned correspondents what they see in their crystal balls for next year. Keep in mind these crystal balls have been shaped by years of experience watching markets and watching market watchers, and weighing all information with a fair amount of skepticism.
First, Bob Pisani and Steve Liesman see a strikingly similar scenario when it comes to corporate profits. Both told me confidentially they would be going out on a limb with their predictions, but they happened to find limbs on the same tree it seems to me.
"I will guarantee that corporate profit margins will decline in 2007. The percent of corporate profits as a percent of GDP will come down from their 50 year high," Liesman says.
He swears he didn't talk to Pisani who says he feels a bit contrarian compared to some market players he knows. "Q4 and Q1 earnings warnings will be more pronounced than bulls had counted on. Already, we have had warnings or disappointing commentary from economically sensitive stocks.
These include transports like FedEx ,
Landstar and YRC Worldwide ,
Also--steel companies like Nucor and Worthington .
There's tech and electronic firms like Jabil Circuit , Texas Instruments , National Semi and Lattice Semiconductor .
And manufacturers like Illinois Tool Works and Black and Decker .
The poor commentary from transports was the main reason for a roughly 4% drop in the Dow Jones Transportation Index in December."
RATING RATES: We also got into interest rates. Rick Santelli, a technician in his own right, looked across the charts in his crystal ball to see a jump in rates. "I think that the high yield for '07 in the 10-year will be 5.38 percent, which isn't really that bad...And I think it will close below that. I think you are going to hit that high yield toward the middle of the year, and it will moderate toward the end of the year."
Now the Fed.
Liesman says, "There's a 50 percent chance the yield curve uninverts, or is at least flat."
"There's a zero percent chance the Fed cuts rates in the first quarter, 30 percent chance in the second quarter and 50 percent in
the second half," says Liesman.
Santelli disagrees, and he says his guess comes straight from the gut. "I don't think they'll have one change of rates for the entire ' 07," Santelli says, noting the inching up of rates in the market will do the Fed's work for it. Santelli says based on Fed fund futures, no rate cuts are priced in with an above 50 percent probability for the first half.
I also asked CNBC Managing Editor, Tyler Mathisen to give us one story he sees on the horizon for '07. We want to know what Mathisen thinks for a couple of reasons. For one, he's the managing editor. But another is that he made a very important forecast to the CNBC newsroom late last summer. "This is the perfect storm for the markets," he said...and he meant a perfectly good storm. He was right, given the performance of the stock market since then. His forecast for next year? Not so cheery. He believes there's a 50 percent chance that there is some minefield somewhere in the financial markets that will explode, whether in the derivatives markets or hedge funds or some private equity deal. He certainly seems to think there could be a blowup coming.
And my forecast. It's an easy one. The flood of liquidity that's driving the stock markets will be around into the first quarter of '07 and maybe longer. The takeover boom will be crazier than ever and will quite likely peak next year. The deals will be bigger, more complex and the auctions will be more dramatic. The easy targets in this M and A cycle are quickly being picked off and the tougher to do deals are left. The quality names will have more bidders, and more foreign companies will look to get into the U.S.
Let's hope all your best forecasts for 2007 come true. Have a very happy New Year.