From the WSJ
http://online.wsj.com/article/SB116747082411663405.html?mod=pj_main_hs_coll
Surprises Brewing for Market in 2007
By GREGORY ZUCKERMAN
December 31, 2006

As investors celebrate this year's stock gains, it's time to ponder developments that could produce surprisingly big gains or big headaches in 2007.

The stock market powered ahead in 2006, fueled by impressive earnings growth, improving corporate balance sheets, and relatively low interest rates and inflation. Another factor: a rash of mergers that brought windfalls to investors in a number of companies.

For the year, the Dow Jones Industrial Average rose 16.3%, while the Nasdaq Composite Index rose 9.5%. The gains came despite a weakening housing market, a falling U.S. dollar and a U.S. economy that slowed in the last half of the year.

As for 2007, most strategists predict the market will rise between 5% and 10%, as interest rates stay low and the economy experiences steady and somewhat subdued growth. Most experts anticipate a strong year for U.S. large stocks in particular, a stance that makes sense because these shares tend to do better when economic growth slows and the dollar weakens.

But what might catch investors by surprise in the new year?

Below are some predictions, including an unexpectedly bright prognosis for health-care stocks and possible problems in a key corner of the bond market.

A Boost from Abroad

With the U.S. economy expanding at an annual pace of 2% in the third quarter, and most economists predicting a 2.5% rate in 2007 and 2008 amid the housing slowdown, some experts suspect global stock markets won't do as well as they did in 2006. They cite the U.S.'s role in powering global growth in recent years.

But investing today is a global game. Global economic growth is expected to be a robust 4.1% in 2007. Major emerging-market nations sport economies that currently are growing at an annual pace of about 6.5%, contributing over 50% of the global economic growth, according to investment firm Bridgewater Associates.

That means that 2007 may be the year that the rest of the world helps pull up the U.S. stock market.

"Every major emerging economy is booming, and all but one" is growing faster than any major developed economy, according to a recent report from Bridgewater. It notes that Brazil, Chile, Turkey, and Hungary are the only emerging-market economies growing at an annual rate of less than 4.5%, and even those nations are growing around 3.5%.

If global growth continues, it can help offset any weakness in the U.S. and Europe, aiding U.S. companies that have heavy exposure to foreign markets, such as General Electric (GE), Altria Group (MO) and Colgate-Palmolive (CL). These companies also will be helped if the dollar continues to weaken, because they get the bulk of their sales in foreign currencies.

But it is time to be more cautious of many emerging-market stocks and bonds, such as Indian shares, some analysts say, because those markets already have climbed to expensive levels.

Health-Care Turnaround

In many years, there's a stock sector that goes from investors' doghouse to their penthouse. In 2006 it was cable stocks that suddenly were en vogue, helping Comcast shares soar more than 60%.

For 2007, some savvy investors predict that health-care stocks will regain their vigor. Drug-store chains like CVS (CVS) and Walgreen (WAG) have faced worries about competition from Wal-Mart Stores, while health insurer UnitedHealth Group (UNH) has been the center of an inquiry into possible backdating of options. While CVS shares gained 17% in 2006, Walgreen is up just 3.7% and UnitedHealth fell 14%.

But a number of investors with top track records, such as Legg Mason's Bill Miller, are fans of these shares, arguing that they are inexpensive and will have good long-term growth as the nation ages.

Wheeling and Dealing

Hoping to profit from 2007 takeover activity? Richard Freeman, a senior money manager at ClearBridge Advisors, anticipates a spate of mergers in the energy patch. Many oil companies are sitting on cash hoards after several good years but are facing challenges keeping production up, so they may want to buy competitors.

While Mr. Freeman isn't naming names, some analysts point to Devon Energy (DVN) and Suncor Energy (SU) as possible targets.

Private-equity firms hold about $250 billion of money ready to make new purchases, suggesting that the deal surge will continue.

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From the Chicago Tribune

http://www.chicagotribune.com/business/chi-0612310050de...oll=chi-business-hed

U.S. market forecasters taking a singular view

By Tom Petruno
Tribune Newspapers: Los Angeles Times
Published December 31, 2006

Many professional investors' stock market forecasts for 2007 follow a time-honored strategy: Restrain your expectations and you're less likely to be disappointed.

The typical outlook of money managers and market strategists is for a high-single-digit percentage gain in U.S. blue-chip stocks, weaker returns on small-company stocks, and a general hankering for higher-quality investments over riskier ones.

Yes, indeed, you've heard this all before. A year ago, in fact.

Those restrained expectations for 2006 were comfortably exceeded, for the most part. Instead of a single-digit return, the blue-chip Standard & Poor's 500 index gained about 16 percent this year, including dividends.

Smaller stocks? The Russell 2000 index of that universe produced a return of 17 percent for the year, beating blue chips.

Higher-quality investments over riskier ones? For sure, it was a good year to stay away from Saudi Arabian stocks, which plummeted 52 percent. But that was the glaring exception in another stellar year for emerging markets. The average emerging-market stock mutual fund soared more than 31 percent, according to Lipper Inc.

The consensus forecasts for 2006 were wrong, but few investors are likely to complain. The rising tide lifted all boats, although some were lifted higher than others.

Click link to continue
http://www.chicagotribune.com/business/chi-0612310050de...oll=chi-business-hed

Other interesting articles.

http://www.chicagotribune.com/business/chi-0612310310de...oll=chi-business-hed

http://www.chicagotribune.com/business/yourmoney/chi-06...oll=chi-business-hed

http://biz.yahoo.com/weekend/economyquestion_1.html

http://online.wsj.com/article/SB116744048624263075.html...ersonal_journal_left (subscription required)

Jim Cramer article
http://nymag.com/news/businessfinance/bottomline/25990/index.html

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