Guiding theory for 2008

As we prepare to pick our five stocks for next year, it's good to start with a view of where the economy is going. In general, most analysts think the U.S. will skirt a recession but that there is a lot of pain yet to be felt in the homebuilding and financial sectors.
If the Goldman Sachs analysis of $400 billion in financial writeoffs is correct, there's a lot of pain to come. But thus far, institutions have been able to avoid bankruptcy by getting new capital, as Countrywide did from Bank of America and Citigroup did from the United Arab Emirates.
Those kinds of bailouts come with a cost to stockholders -- their investments are diluted by the convertibility of the investments into common shares. Hence, we'll be looking higher up the capital ladder for financial investments, to busted preferreds that are going to be nursed back to health.