Before launching into why I believe stock prices will be lower in 2008, let's look at how my 2007 stock market forecast fared. I was basically bearish on stocks for most of 2007. Back on December 18, 2006, I wrote: "The year 2007 won't be a big one for the stock market." And as we all know, it wasn't. The S&P 500 was up 3.5% in 2007. If you extend 2007 by only a few days into 2008, the stock market was actually flat last year.

IN 2008, I BELIEVE INVESTORS WILL FARE BETTER BEING INVESTED IN THE T-BILLS AS OPPOSED TO THE GENERAL STOCK MARKET. (Of course, small-cap stocks that are special situations are not included in this forecast, as new products, technologies and new management can always bring a small-cap stock to life.)

Back in late 2006, I also expressed by bullishness for one particular stock market, writing: "The only stock market I'm bullish on for 2007 is the Toronto Stock Exchange (Canada's equivalent to the NYSE)." The Toronto market was up 7.2% in 2007.

I'm bearish on the general stock market for 2008 for three main reasons:

Firstly, borrowing money in 2008 will become more difficult for consumers, even if interest rates decline sharply. The banks are tightening their purse strings because of the financial hit most banks have experienced due to the subprime fallout. American consumers are tapped out. The savings rate in the U.S. is near record lows and the typical American is not only spending more than she/he makes, but the average debt-to-personal-income ratio is near a record high. Consumer spending in the U.S. is drying up, which will push down corporate profits.

Secondly, homebuilding in the U.S. will enter a quasi depression state in 2008 and the construction industry, one of the largest employers in the U.S., will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008, creating a picture of "better deals ahead" for consumers who really need/want to buy homes but are now waiting for better prices.

Finally, the decline in the value of the U.S. dollar in 2008 compared to other world currencies and the rise in gold prices (which will become a media event in 2008) will cause confusion among consumers and investors, resulting in deferred consumer spending.

The only stocks I would invest in: Those interest-rate-sensitive stocks that go up when interest rates go down (as I expect the Fed to aggressively reduce interest rates in 2008) and quality gold producer stocks (and I would only buy them on the Toronto Stock Exchange).