Sunday, January 4, 2009

2009: BACK TO THE FUTURE


2008 Recap.

The best thing about 2008 is that it's over, a tough year for markets and economies worldwide. Paying attention to the stock market, equities, and our portfolios was as much fun as watching a cancer patient on chemotherapy. The majority of "experts" and pundits did not predict the downturn, and were caught off-guard by its severity and rapid decline.

But with the benefit of hindsight we now know for sure:

- This is a recession, which started in December 2007, and is now entering its 14th month. Our thanks to the U.S. Bureau of Economic Research for their December 1, 2008 report notifying us of this fact. We are looking forward to their next report stating the recession is over, a year after the fact.
- The stock market "correction" of August 2007 was not a correction but the start of a new bear market, preceding the recession by 4 months.

The U.S. stock market established a bottom on October 10, 2008 with the Dow at 7,900, and in a typical bear market move re-tested it a month later at 7,500. I expect future rallies to be short lived, and the lows re-tested a few times before the next secular bull market, which should be sometimes around Fall of this year.

Where are we headed now?

The longest recession on record was 43 months, following the 1929 stock market crash. The same "experts" who were wondering whether this was a recession, are now debating if this one will be like the Great Depression, Japan's self inflicted 18 years downturn, or a 1973-1974 style recession with a recovery late this year. I am betting on the latter.

The several $ trillions injected in the form of fiscal stimulus, financial and auto industry bailouts, near zero interest rates, and upcoming new infrastructure investments will find their way into the economy and start a new cycle, eventually. 2009 will be a year of transition on the way to recovery, with the next economic cycle driven by a back-to-basics focus on infrastructure, alternative energy technologies, and corporate capital investments as opposed to consumer spending.

The American consumer is bruised but not dead, and will shop again. Lower interest rates and fuel prices will provide more discretionary income, which will go toward debt reduction and slowly restore houselhold financial health. Jobs will drive consumption as opposed to the other way around.

Families continue to multiply and need new housing. This, along with a 75% reduction in new construction, lower interest rates, and return-to-normal bank lending, will help supply and demand get in check, eventually restoring real estate prices. It is important to note that, although we have been struggling with an over-supply due to excessive building, new foreclosed inventory, and qualified home buyers kept out of the market by frozen lending, demand for housing is still stable at roughly 5 million homes a year. The 2 million houses in foreclosure will be absorbed this year as banks liquidate them, finishing the end of the real estate downturn and restoring the balance between supply and demand .

Corporate profits will improve thanks to swift layoffs early during the recession, and as demand picks up so will new hiring. None of this will happen overnight, but conditions will improve day by day. The economy is cyclical, the world is not coming to an end, this down cycle will end like they all do.

The negatives

They are all around you. With the press competing to quickly document the rush of bad news, layoff's, dwindling portfolios, foreclosures, lack of loans, collapses of the auto and financial industry, it is easy to see no end to the tunnel. If you want all the reasons why the economy will continue to collapse, pick up the daily news and keep reading.

The positives

The collapse in the price of oil and commodities will have an enormously positive impact on the entire economy. A decline in oil from $147 to $40 a barrel puts $125 a month in the pockets of the average consumer, money that goes towards consumption or debt reduction.

Corporate America is not sitting still. Massive layoff's, while painful for the consumer losing his job, will restore companies' profitability and contribute to a healthy economy.

Interest rates are near zero, and will stay there for several years as the government embarks on a large borrowing program to fund infrastructure investments. Low rates help consumers stay afloat by keeping credit cards and mortgage payments low, and incentivize businesses to invest.

The new admistration will hit the ground running and quickly invest in massive new infrastructure and alternative energy programs, determined to make us more competitive and create new jobs. As an example of what these can do for the job market, California's new high speed train initiative will create 450,000 jobs. If every state embarked on similar programs, over 4 million jobs would be created.

Stock valuations are low with forward-looking P/E ratios under 10, a number that by traditional measures leaves plenty of upside. A lot of cash is sitting on the sidelines, with the average American portfolio sporting a record 42% in cash funds. Once the fears subside and business conditions return to normal, this money will flow back into stocks and mutual funds to generate higher returns.

While all of this may take some time to show its way through the economy, it eventually will and is very good for America's future.

2009 predictions

1. The top 10 performing U.S. traded equities are Altria (Phillip Morris' parent), General Electric, Apple, Intel, Microsoft, Pfizer, Deere, Citigroup, FXI (China ETF) and Harvest Energy (Canadian oil trust).
2. The Dow hits bottom at 7,200 but finishes 2009 with a 20% gain.
3. Chrysler goes bust, GM downsizes, Ford turns the corner.
4. The U.S. dollar settles at $1.20 Euro.
5. Gold ends 2009 under $500 an ounce.
6. After reaching $30 a barrel and $1.25 a gallon at the pump, oil trades in a $50 to $75 a barrel range and stays there for several years, with supply and demand in sync.
7. Fed Funds rates stay near zero.
8. The bubble in treasuries and bonds bursts and yields return to normal.
9. Residential housing continues to depreciate; reaches bottom some time in late 2009, flat lines for a few years, and starts appreciating significantly in Spring 2013.
10. Lending returns to normal in the summer and mortgage rates stabilize between 4 and 5%.
11. China and Japan lead a worldwide stock market recovery.
12. Osama bin Laden is captured on a tip from someone in his inside circle.
13. The war in Iraq ends abruptly this Summer with a chaotic Vietnam-like exit, at which point the U.S. dollar starts rising.
14. The recession ends in September.
15. Unemployment peaks at 9.8% toward the end of the year.
16. And, according to my wife GayLyn, people will wear more colorful clothing to make themselves look and feel better, and alcohol consumption shall of course be on the rise.

10 comments:

Tom Drasler said...

I agree with you and would just add, as a real estate finance person, I'm seeing many 1st time home buyers entering the purchase market. There are tremendous FHA programs, with tax credit incentives to encourage residence home buyers into the market to buy up the excess inventory of bank owned, short sales and remaining builder homes. FHA, VA and CALHFA program all offer down payment requirements of 3.5% or less. I believe we will see a significant DOW correction before the end of the year, with a couple small rally's prior, before we see a nice long term trend. We may experience more consumer confidence and buying resilliency in 2010.

Anonymous said...

Simon Hing said....I agree with you nearly all counts, except Gold will finish at 900 to 1100 dollar range.
The massive increase in M3 by 8.5 trillion dollars from an Austrian Economic point of view is classical monetary inflation or hyperinflationary as this case may very well be...

slowsmile said...

I'm afraid I do not agree with your predictions simply because you don't give sufficient reasons for an upside return. As well, you seem a little blind to what is economically coming for America.

Below is a comment I put on the Motley Fool describing my "predictions":

The above article criticizes the optimistic predictions of other marketeers and fund managers. Then, at the end, the author just cannot resist making his own predictions of a 7% - 8% rise in the S&P 500 - without any real justifications or reasons for this - it's just pure guesswork - and so he makes exactly the same mistakes as those that he criticizes.

Unfortunately, fund managers and investors are NOT economists. The reasons I think that 2009 could well be as bad as 2007-8 are as follows:

1. Peak Oil. This is predicted to hit us within the next 2 years. The price of oil is due to skyrocket again this year. And when oil goes up, the dollar usually crashes. How will the markets respond to this ?

2. The dollar is due to collapse this year - in fact very soon. The US Treasury and Fed purchased £630 billion worth of swap pairs on the currency markets in October 2009 to prop up the dollar - these swaps are due to expire very soon, so the dollar will crash from its current false and wll-overvalued position. How will this affect the US markets ?

3. America's huge Fiscal Debt of £60 trillion. Currently, both Asia and Europe pay this debt for America via the continual purchase of Treasury Bills. But it is very likely that countries like China and Russia will get fed up of supporting the pathetic dollar and will eventually contribute to its demise. How will this affect the US markets?

4. Climate Change. Business impacts and costs.

The key to all this is the US Greenback. My market advice is quite simple. Do not invest in America, do not invest in dollar denominated stocks. Invest in Asia, this is a far better prospect than America. Jim Rogers and Marc Faber advise this, and I agree with them. Also, hedge your dollars and buy gold to maintain your capital value.

Any other investment strategy - as I see it - would be pretty dumb.

Robert Pharisien said...
This comment has been removed by a blog administrator.
Robert said...

I always liked to read your predictions, and stuff. It takes guts to predict. It's so much easier to speak "after the fact".

On this subject, I would like to offer my thinking on one of your predictions: Apple.... It seems to me that the probability that Apple stock will be higher at the end of the year is pretty slim, because I don't think Steve Jobs is going to be around very much longer. If you saw him, you would not give him long... The description of "hormonal imbalance" to excuse his absence is complete hogwash. Pancreatic cancer is what is ailing him, and it's "terminal". The Apple board, apparently, does not feel compelled to disclose that information, probably, because they fear that the stock will crater when the news come out. Apple without Steve Jobs could be a leadership vacuum or at least a hard act to follow... On top of that, competition on cell phones is increasing, many new phones have or will have the Iphone look and feel and features. The Ipod market is saturated, and consumers are holding onto their wallets when it comes to computers. Not a great combo for Apple. If I had to bet, I would bet that Apple drops by 50%.... Yet, I would not short them, because shorting is pretty risky... You could be wrong... and time is not on your side.

Incidentally I agree with Gaylyn on the subject of alcohol sales and consumption...

Rene Pharisien, Blue Lake Ventures, LLC said...

Well Robert, your timing on the Apple issue was remarkable...

John said...

Yes that was A call Robert !
Rene, your analysis is very interesting although I wonder how we can go back into a positive cycle for the economy that quickly (2009/2010) with strong growth.

My take is that once the recession passes (agree it'll be somewhere around 2010), US growth is going to stay thin for many years. If i had to state a maximum; I would say 2%, with inflation getting back in the 3 to 5% very quickly.

Then what ! FED will hike again, and i hope the "borrowing binge" will have stopped, unlike the early in this 21st century, otherwise the end of the US as Superpower (economicaly speaking) will be much quicker than anyone is expecting.

If I have one advice to give to Americans, just one... STOP SPENDING MORE THAN YOU EARN AND START SAVING ! If the public doesnt understand that, the 2008 massacre will happen again, but it'll be much harder this time.

Have a great year everyone.

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