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Analyst: ‘Appetite For Risk’ Could Be Problem In ‘07

This morning, the Dow futures are up another 28 points after a record close on Friday of 12,416.76. That was the second record close in a week. “This too shall pass,” say the wise – even a good thing. So investors have to be wondering how long this trend will continue. Regular CNBC guest Liz Ann Sonders spoke with Joe Kernen this morning on “Squawk Box” to give us her take on what will happen next.

Sonders is the chief investment strategist at Charles Schwab. She says the fast money in small-caps and emerging markets these days shows an “appetite for risk” that could backfire on investors next year. There aren’t many individual investors in these markets, though, so those people should be safe from whatever crisis ends this speculation – and that’s often how these trends end, she says.

As for next year, the first quarter will depend on the overall economy. Sonders will be watching for volatility in the structure of derivatives and the health of mortgage-backed securities market. If those – and interest rates – are low, the market should perform at status quo, she says.

Sonders bets the S&P will see more volatility in 2007, but there’s “a good chance” the year will end above 2006 levels.