Lara Hoffmans
Inconvenient Truths

The Annual Hoff Report

By, 01/17/2007

The Hoff report is an annual forecast, not of capital markets, but impending news headlines. The MarketMinder editorial board has agreed to pay me ten bucks for every correctly predicted headline in 2007.* Should you see any of these headlines, rest assured the implied outcome is either fully priced into the market or just plain wrong. (That means it doesn't have any power to move stocks.)

There will be at least three different media sources publishing the headline "Big is Back!" touting the return of big cap dominance. This will be based on small cap stocks having run "long enough." An acceptable alternate is "Big is Beautiful!"

Inconvenient truth: Small cap has had a long period of outperformance, but that doesn't mean big cap dominance is necessarily due. If everyone is heralding big cap's return, it's more likely small caps will continue to lead, or at least returns will be style-neutral.

Someone, somewhere, will dredge up that old Gap ad, "Fall into the Gap," to describe the "ever widening income gap." The implication will be the income gap will cause economic slowdown and you personally are its next victim. Additionally, journalists will demand the government to "do something" to "close the gap." Generally, this means redistributing wealth from those who earn it to those who deserve it.

Inconvenient truth: Income for the "rich" has increased at a faster pace than the lowest income earners for all of eternity. This is why they are rich. It is nothing new, and it doesn't hurt. If the "rich" have more money, they start more businesses, employ more people, and spend more money buying the goods and services others produce, which is good for everybody.

Tired of having predicted runaway inflation for the last four years, and nothing of the sort having materialized, plucky editorial boards will nonetheless greenlight a three-part series entitled something like, "Earning More and Still Not Getting Ahead: How Higher Wages Aren't Helping the Middle Class." Yes, due to the ravages of inflation, suckers who thought they were getting a nice raise this year will still find themselves unable to upgrade to premium cable. Some particularly crafty journalist will find a way to blame this on higher oil prices and remind us that 8 years ago, Dick Cheney was CEO of Halliburton. Infer what you will, dear reader.

Inconvenient truth: Inflation has been low and is likely to continue to be so this year, as evidenced by benign global long-term rates and TIPS spreads. Additionally, Halliburton does not control inflation, the world's oil supply, or the weather.

Someone is sure to report that "Fifty percent of those polled believe we are in a recession!" The article will conveniently not report that, in response to the follow-up question, "Do you know what a recession is, and how it is measured?" 49.9% responded, "No" and 0.1% wrote in "ketchup." Somehow, feeling bummed that one did not get as massive a bonus as the Goldman Sachs CEO will be linked directly to the national consensus on whether we're experiencing a broad economic slowdown.

Inconvenient truth: A recession is not a matter of "feeling." Different groups define recession in different ways, but most agree a major indicator is negative GDP growth. American and global GDP growth has been robust since the recovery started in 2002, and is likely to continue to be so in 2007, i.e., no recession.

DOW hits 12,800 for the first time. DOW hits 13,300 for the first time. DOW hits 14,100 for the first time. When I see these headlines, I cannot help but wonder, "Come on, don't you guys have an income gap to complain about?" How is this news? No matter, journalists will be dragging this one out until the next downturn, when they'll predictably assert the DOW will never see its previous highs again.

Inconvenient truth: The DOW is broken. It's a lemon of an index. Stop looking at it, obsessing about it, and noting its record highs. For those who are correctly clocking capitalization-weighted indexes, stop obsessing about record highs there too. Unless Capitalism breaks, properly constructed indexes will generally keep appreciating in price, however haphazardly. Dog bites man.

It's only a matter of time before somebody runs a cartoon of a yawning bull alongside the headline "Tired Bull" or maybe, "No More Bull" implying the current bull market is over. As evidence, they'll report, "Bull markets typically only last blah blah blah." Pre-empting rational questions about why the 90's bull market lasted so long, they'll say, "Of course, the tech bubble bull market was unusual." Nevermind the tech bubble didn't really start inflating until the end of the decade. If asked why the near-decade long bull market in the 80's was so long, they'll say something disparaging about Ronald Reagan to distract us.

Inconvenient truth: Bull markets do not obey a time frame. Some are long, others are longer, but in general, they run longer than most folks can fathom. Also, the Gipper rules!

Other headlines will touch on oil being too high. (Wait, no, too low. Wait, no, too addicting and aggravatingly located in the Middle East.) Real estate will still be in a bubble. CEOs will be overpaid. The U.S. economy is over.

Capital markets may be hard to predict, but the media is not. Here's to more predictably hysteria-inducing yet inaccurate headlines in 2007.

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*Technically, they didn't actually agree to anything of the sort.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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