• Be cautious about doing business in China.
• Get out of the stock market before the end of the year, or 30% of your wealth could disappear by the end of 2008.
• Get into any line of business having to do with elder care: medicines, living facilities, vacations.
• Get into higher education. People go back to school when they lose their jobs.
• Get into any line of business that has to do with energy: “It’s going to be largely bullet proof; coal will remain popular, nuclear will get more popular,” he said.

FORECAST: A couple of more quarters of prosperity in the U.S., then the economy will falter; it will weaken measurably in 2009 and be in recession by 2010.

The Wall Street Perspective: Most End Markets Shining

Right now, the nation is looking at “very healthy industrial capacity,” and most end markets are doing well, according to Scott Graham, managing director, Bear Stearns, Inc.

Spending in this nation is up, with industrial production and capacity utilization close to cycle highs, but spending is moderating, Graham said. Capital expenditures and maintenance, repair and operating (capex/MRO) together stand at about 3 to 4%, which is part of a three-year trend (beginning in 2007) that Graham doesn’t expect to change until after 2009.

Capital expenditures alone count for about 1%, which Graham said he found “a little troubling,” but MRO stands at a healthy 5%. Capital spending is positively affected by the chemical, power, water, commercial construction, metals machinery and other industries, but negatively affected by residential construction and auto-related industries, as well as coal, paper and textiles.

In Europe, industrial production and capacity utilization is improving with capex/MRO spending currently at about 6 to 7% compared to 5% a year ago. There, the market is currently driven by heavy industry (capital goods, machinery, metal, construction, rubber, etc.) and negatively affected by the power and energy industries and textiles, a condition he expects to continue through the rest of this year.

As far as specific markets, Graham says a favorable place to be right now is the oil and gas industry. “Since 2004, this is the market you want to be in. Dollars spent annually are about $200 to $300 billion a year, and it’s spent everywhere: upstream/downstream/ midstream.” He believes this market represents “huge opportunities” for valve makers.

Although there is still opportunity abroad, the U.S. is where a good deal of the money in the market is being spent, he said. “The U.S. is in the fifth inning, while Europe would be about in the second,” he said.

The chemical market, which suffered great decreases in capex spending several years ago, “is back with a vengeance,” Graham said. “Seven years ago, chemical was just awful, declining by about 40% in the late 90s,” Graham said. But both MRO/capex and pricing are positive currently and should remain that way.

Every aspect of power in the world right now is “going forward,” which has created “very favorable” market conditions, Graham says. Spending domestically is running about 15-20%, while in Europe it’s running about 10%. And China, which is expected to invest about $800 billion on shoring up its power grid in the coming years, presents a great opportunity.

There are also many opportunities in water spending both here and abroad, Graham said. In the U.S., there is a great need for infrastructure upgrades and retrofittings made even more critical by new, clean water regulations. Abroad, there are the opportunities presented by the many places in the world that don’t have adequate water supplies, and the World Bank is really stepping up efforts to help less fortunate areas of the world, he said.

Overall, Graham said the best opportunities today lie in petroleum, power and water. And while the residential market has “very long arms” that could potentially hurt the domestic situation, “I’m less worried about a credit crunch than the “r” word (recession).” Still, he predicted “because we’ve been so productive as a market in the U.S., I don’t think the market downturn will be severe.”

FORECAST: Globally, spending on oil and gas will increase by at least 10% upstream (and more likely 15%); up 5% midstream; and up 5 to 10% downstream in 2008. Domestic spending on chemicals should be up 5 to 10%, while European spending will increase about 5% and in the rest of the world will be up 5 to 10%. Power spending will increase again at about 15% domestically, 5 to 10% in Europe and about 10% in the rest of the world. Domestic spending on water, along with foreign opportunities, should increase about 10%.

The Global Economy: A Bright Picture

The world economy is “growing at about its speed limit,” according to Sara Johnson, managing director of Global Insight, Inc. Still, the outlook is “very bright” with growth continuing at a fairly rapid clip, especially outside North America. Overall, the global economy will grow about 3.6% this year, down from 3.9% last year.

 The world is near full employment potential and the output gaps (the difference between potential and real GDP) show little spare capacity. Once an economy reaches past its potential, inflation comes into play, Johnson explained. In the U.S., the economy reached past its potential just this year, but good employment rates have kept inflation mostly out of the picture here, she said.

The major risk around the world is corrections in equity and property values, Johnson said. Regionally:

U.S. growth has picked up, but housing is still declining. Johnson said the economy will slow to a growth of about 2 to 3% mostly because of housing markets. Although U.S. housing prices rose rapidly over the last 10 years, they rose much more in many other counties, including South Africa, Ireland, the United Kingdom, Spain, Australia and France. Johnson also said “the worst is over” for real GDP growth in the U.S., business investments are back on track, inventory corrections have been completed, and the export markets looks bright.

In Canada, the economy is operating near full capacity with about 2.4% growth this year, which will pick up next year. Exports have been hurt by the rise of the Canadian dollar (about 40% since 2002). Business investments are decelerating, and core inflation has risen to 2.5%. The western provinces will be strengthened by the oil shale industry.

In Mexico, the economy is slowing down to about 4.3% this year from 4.8% last year, oil production is declining, inflation is rising from record lows in 2006, and the country is competing against China and India.

In the Eurozone, unemployment stands at 6.9% but that situation will improve, boosting consumer spending. Consumer confidence there is high. Rising interest rates and the euro will slow growth momentum. Overheated housing markets pose risks in Spain, Ireland and France.

In India, foreign investments have nearly tripled. Overheating is a risk because inflation is at 6 to 7%, but the country is helped by its demographics: the working-age population is rising sharply.

Western Europe, which has seen better performance in the last few years, will be more sluggish going forward, as will Japan.

Japan is shifting from an export-led economy to a domestic economy. Deflation of early 2007 will soon be reversed.

Other than in Japan, Asia is seeing the fastest growing markets, followed by emerging Europe. Emerging Asia is powering much of the global growth. Emerging Europe is attracting investments from around the world.

China’s investment is overheating: the stock market saw a 140% growth last year, which will drop to about 42% this year. China’s huge trade surplus has created financial and political pressures.

Latin America, Africa and the Middle East are experiencing strong growth in trade and high commodity growth rates.

In South America, Brazil’s economy is improving as interest rates fall from 20% to about 11%; Argentina and Venezuela, which have high double-digit inflation, are suffering as nationalization discourages investments, as are Bolivia, Ecuador and Venezuela. Chile, Peru and Columbia are the star performers of that area.

FORECAST: In the U.S., the housing recovery will start in spring 2008, and the worst is over for the U.S. economy. Around the globe, inflationary pressures will lead to higher interest rates; emerging markets in Asia and Europe will experience the fastest growth; and the major risk is a boom-bust cycle. The outlook for the services, manufacturing and real estate finance markets is “quite bright.”