Chapter 24. 2007: Another Broken Record

"When earnings yields are bigger than bond yields, institutional investors can make a profit by using borrowed money to acquire shares of stock. The process can continue for years, until equity prices are bid higher or the cost of money gets higher."

"Takeover Targets," March 26, 2007

It is a demonstrable fact that people are more displeased by a loss than they are pleased with a gain. In fact, behaviorists have quantified this phenomenon: To offset an unexpected loss of magnitude x, the average American needs a windfall gain of 2.5x. Apply this rule to the zero-sum nature of tax and economic legislation and you have a recipe for unhappiness with every enactment."

"Thanks for Not Legislating," June 4, 2007

Ken expected good things from stocks in 2007, and he got them—for most of the year at least. Despite that, the market peaked late in the year, and Ken didn't foresee that. His 2007 forecast was identical to 2006. "I'm starting to sound like a broken record. My 2007 forecast is for the global stock market, as measured by the Morgan Stanley World Index, to be up somewhere between 10% and 40%, while the S&P 500 will be up but by a lesser amount." ("A Broken Record," January 29, 2007.)

Stocks moved higher in choppy action in 2007, suffering two steep pullbacks through August. But two months later in October, both the S&P 500 and MSCI World Index reached all-time highs. Stocks then retreated in the final months of the year, bringing 2007 returns ...

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