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Weekly Insight

Accentuate the positive

VANCOUVER (GlobeinvestorGOLD) — You know it’s been a heckuva year when the biggest story in the United States was a hurricane. The other major tropical depression was President George W. Bush’s approval ratings. Seriously, Mother Nature was particularly cruel over the past 12 months or so with a tsunami near the end of 2004 and an earthquake devastating populations in Indonesia and Pakistan. It’s difficult to view terrorism as the major concern in the world when these three combined to kill close to a half a million people.

The scary part is that 2006 is just around the corner. In my last column, I wrote about my biggest worries for the coming year and potential financial disasters. Now, I say we go in a different direction and look at a top-10 cheerful list for 2006.

1. 2005 is over. See above. However, hurricane season is just six months away.

2. Oil, gasoline, and natural gas prices have dropped from their Katrina highs. As of this writing, oil is down about 16 per cent, unleaded gasoline off 19 per cent, and natural gas is down 26 per cent from their respective peaks. With higher short-term interest rates, we know that the massive boost to 2005 consumer spending from the housing sector won’t be there in 2006. However, lower energy costs will help.

3. As of this writing, no Michael Jackson trial on the horizon.

4. Low U.S. unemployment and high productivity. It helps consumer spending when consumers have a paycheque. From a peak of 6.3 per cent in June of 2003, the unemployment rate has steadily fallen to its current 5 per cent. This will keep the U.S. housing market supported as well. Why? Housing is affected by two factors: interest rates and employment. Rates have moved up, but employment has remained firm. Productivity remains amazingly high and helps keep labour costs under control.

5. Kevin Federline is going to have his own website. If you don’t know who he is, consider yourself lucky.

6. Japan. This was the surprise story for most in 2005 as this island nation experienced faster-than-expected economic growth. Most economists picked less than 1 per cent and got 2.6 per cent instead. In my view, any growth out of Japan would’ve been a surprise given the decade-long mess they made of their economy. Recent data have shown that the deflation that has gripped that country may be gone. The stock market has soared and should continue into 2006 along with their real estate market. Forward momentum from 2005: Japanese companies have sealed a record 2,713 mergers and acquisitions. The risk to this story is that Japan may drive demand for scarce resources that push inflation and interest rates higher.

7. Unlike MJ, Enron executives will have their day in court for 2006. Footage of the perp walks will be a crowd pleaser.

8. China. Inexpensive manufactured goods from this country are a major reason why inflation around the world remains tame. Is China running a massive surplus with the U.S.? Absolutely. Are they accumulating massive amounts of U.S. dollars in the process? Definitely. Is their fast-growing economy sucking in commodities and driving prices for copper, oil and gold higher? No question. Is the entire structure unstable and inherently dangerous? Yup. However, cheap goods are cheap goods. It increases the spending power of U.S. consumers and therefore their living standards. Don’t forget, the recycled U.S. dollars buy U.S. Treasuries, Fannie Mae, Freddie Mac, and other interest rate products that keep U.S. yields lower than they should. This helps fuel the housing market.

9. Potential 2006 U.S. mid-term election Democrat slogan: “We Should Be Ahead, But We Have No Idea Why.”

10. Capital expenditure. As mentioned above, consumer spending was boosted in 2004 and 2005 by homeowners taking money out of their rapidly appreciating houses. Home equity loan applications have dropped and so should this stimulus to spending. However, analysts expect businesses to expand their capital expenditures by 9 to 10 per cent in 2006. Since there was very little hiring or capital spending in the two years after the recession, there should be pent-up demand should be unleashed. Any upside surprise in the U.S. stock market would further fuel this spending.

Cheerful, but with caveats. As I wrote last time, the coming year will be redolent in risk because of factors such as an inverted U.S. yield curve, a rookie Federal Reserve chairman, and a potential shift in central bank reserves. However, my top ten is a reminder not to solely focus on the negative. There are big potholes, but potentially big payoffs. May all of us be rewarded for the risks we take in 2006!

This article first appeared on GlobeinvestorGOLD.com. If you'd like to profit from the insight of more than 30 financial experts and columnists, including Andrew Busch — sign up for a free trial to GlobeinvestorGOLD.com.

© 2007 The Globe and Mail. All rights reserved.

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