Q2 Re-mark

Time to take a look again at my year-end predictions. I revisited these once before, at the end of March. Another quarter has gone by since then, so let’s take another look.

1. Domestic politics:

. I predict that the 2008 Presidential Election will be: McCain-Huckabee versus Obama-Webb.

No real change since the end of Q1: top of the ticket is done, bottom still uncertain, Webb is now the market-leader on Intrade, but it’s a very big field, Huckabee still looking relatively unlikely.

Points ii through x all show no change since the end of Q2, and most of these relate to the primaries and hence will never show any further change. That leaves:

xi. Senate: the Democrats will pick up Colorado, New Hampshire, New Mexico, Oregon and Virginia, and the next Senate will contain two Senators named “Udall.”

Latest poll averages from RCP:

Colorado: Udall up by 7 (average of all polls since beginning of April)
New Hampshire: Shaheen up by 12.5
New Mexico: Udall up by 26
Oregon: Smith up by 6, but still polling below 50% in all polls
Virginia: Warner up by 29

I may have gotten Oregon wrong, but I was clearly too conservative on the Senate; right now, the Democrats have pickup chances in Alaska and Mississippi as well, with more remote possibilities in Kentucky, Maine, Minnesota and North Carolina.

2. Oscars:

Water under the bridge.

3. Economy and Markets predictions:

i. The major domestic equity indices will be down on the year. They will still outperform the Asian indices, which will be weighed down by the unravelling of the Chinese bubble. But they will underperform the major European indices in local currency and dollar terms.

S&P-500: down 12.50% in USD

European Indices:

FTSE-100 (Britain): down 12.96% in GBP, 12.41% in USD
DAX-30 (Germany): down 20.96% in EUR, 15.36% in USD
CAC-40 (France): down 20.83% in EUR, 15.10% in USD

Asian Indices:

Topix-500 (Japan): down 9.71% in JPY, 3.45% in USD
Hang Seng (Hong Kong): down 17.72% in HKD, 17.66% in USD
CSI-300 (China): down 49.02% in local, down 45.68% in USD

Same conclusion as in Q1: I was over-optimistic on Europe, right on the impact of the unraveling of China, but should have specified non-Japan Asia.

ii. The dollar will spend the year debating whether to weaken or strengthen, having a volatile but ultimately inconclusive year.

In Q1, the dollar weakened against the Euro, going from 1.46 USD/EUR to 1.58. Since then, it has fluctuated between 1.53 and 1.60. Somewhat similar pattern against the Yen: we went from 112 JPY/USD to 99 in Q1, and since then have stayed between 99 and 109, currently at 106. Against the Pound, there’s been no pattern, starting the year at 1.98 USD/GBP and currently at 1.99 USD/GBP, never having gone above 2.04 nor below 1.93.

So far, victory!

iii. The housing market nationally will trough out in the third quarter, but will flatline from there for quite a while, so that won’t be the end of mortgage defaults.

At this point, that prediction would be a great outcome. From year-end 2007 through April month-end, the S&P/Case-Shiller 20-market housing price index is down more than 8%. The current level corresponds to the level of mid-2004. Mortgage rates are now going up again, even though interest rates are being held very low. Things are really bad on the housing front. Really, really bad.

iv. None of the major monoline insurers (MBIA, Ambac, FSA, FGIC, Security Capital) will go out of business, though most if not all will have to raise new capital. Nonetheless, at least one new monoline will be launched (presumably by Berkshire).

Again, this would be an extremely good outcome based on the current situation. MBIA, the largest monoline, is now rated A2 by Moody’s. FGIC and SCA are junk. We are in uncharted territory here.

v. Brazil will be one of the few emerging markets to have a good 2007 and a good 2008.

Bovespa: down 0.03% in local, up 10.54% in USD


Bolsa (Mexico): down 0.76% in local, up 4.15% in USD
Ipsa (Chile): up 0.05% in local, down 6.24% in USD
CSI-300 (China): down 49.02% in local, down 45.68% in USD
Sensex (India): down 35.77% in local, down 41.59% in USD
KRX-100 (South Korea): down 10.71% in local, down 20.56% in USD
Micex (Russia): down 10.36% in local, down 6.51% in USD

So far, victory!

vi. Slowing growth in Asia and the United States will keep oil prices generally below $100/barrel, but geopolitical factors and refining capacity tightness will keep it above $75/barrel.


4. Foreign affairs predictions:

. Neither the United States nor Israel will bomb Iran. The Iranian regime will not fall. There will be no “grand bargain” between the United States and Iran. Iran’s nuclear power plant will not open on schedule.

Among today’s top stories: Israel May Attack Iran, Pentagon Official Tells ABC. But it hasn’t happened yet.

ii. Pakistan will postpone its elections. Musharraf will be out of power by the end of the year, pushed out by the army. There will be no civil war. Nawaz Sharif will be the next Prime Minister of Pakistan. Not that it will do any good.

No change since end of Q1. Got the PM prediction wrong. Sure hope I remain right about civil war.

iii. Ehud Olmert will, emulating his nemesis, Bibi Netanyahu, shift focus from the Palestinian “track” to the Syrian “track” in 2008, with some initially promising talks, but there will be no signed peace between Israel and Syria in 2008.

Well, there hasn’t been a switch of tracks, but Olmert’s eagerness for a deal with Syria is palpable.

iv. The United States will withdraw all troops in 2008 from . . . Saudi Arabia.

Still sticking with this one.

v. There will be no international intervention to save Darfur.

And this one.

vi. I’ve been predicting for years that the German far-left will do something to try to capture more of the far-right vote. So I’m going to predict it again: the bigger, stronger, more united German far-left will do something to blur the distinction between far-left and far-right, which will get it a lot of bad press but will win it a slightly higher showing in the 2008 regional elections (though all these elections will actually be won by the conservatives – votes for the far left come from either otherwise disaffected voters or voters who would otherwise vote for the Greens or the SPD).

I should drop this. But I’d need to learn something about German politics to do so with honor.

vii. The “Blues” (KMT) will win a decisive victory in the Taiwanese elections. This will be received extremely favorably by Beijing in the run-up to the Olympics. The Olympics will proceed without incident.

Bingo, bingo, and looking good.

viii. Most of the world will continue to forget that North Korea is still out there, doing whatever it is it does.

Well, we did sign a new deal. But I think that actually confirms my prediction.

5. Other.

i. The kindle won’t do well enough to make a profit, but will do well enough to convince Apple to invest in a competing product.

Too soon to say, but I’m sticking with this one, in contrarian fashion. They’ve sold a lot more units than they expected, but if the bulls are predicting $750mm top-line in two years, then I can’t see how it’s profitable yet.

ii. Some kind of social-networking-based pyramid scheme will be a big enough story to prompt public debate.

I’m clueless enough that this could have happened and I missed it.

iii. Gregory Cochran will publish something impressive and controversial.

Can’t say anything yet.

iv. Grand New Party will do really, really well.

Looking good!