What are the Top 10 Dangers for 2009?

It is unlikely that 2009 can be worse than 2008 for stocks. If it is, we probably are in a depression. The housing market still holds the keys to a recovery but there are many potential obstacles to a better economy and global prosperity. Investing in these markets requires one to analyze many markets both domestically and globally. Where does trouble lie ahead?



1. 2009 should be the year when commercial real estate values decline. Refinancing risk will result in some bankruptcies, weak corporate earnings, and stretched consumers. This should result in higher vacancies and lower rents.



2. Lower oil prices may be a good sign for consumers but what about the oil producing countries. Russia, Iran, and Venezuela will be in focus as their oil riches, which led to their bold political statements and aggressiveness, are now reversing. Those countries could create instability in the emerging markets while magnifying the global economic problems, political dangers, and the financial crisis.



3. Corporate bankruptcies will dramatically rise in 2009. The past decade had unprecedented growth in leveraged lending and non-investment grade bonds. The LBO era may be over but the fallout is just about to begin. We expect to see bankruptcies in the range of 10-20% of all non-investment grade companies. The result will be more unemployment, some liquidations, and a pick-up in mergers and acquisitions.



4. The consumer has been weakened but the full effect has not been seen yet. We anticipate a large increase in late payments or defaults for credit cards, student loans, home equity loans and auto loans in 2009. This will not only be bad for the consumer but many financial institutions will have to focus on this new battle ground. Banks have been suffering for over a year and BankAmerica, Wells Fargo, and J.P. Morgan have distinguished themselves from the pack. However, the consumer loan problems will clearly be a challenge for these stronger entities.

5. China is the engine driving global growth. It is clearly slowing but most optimists believe it will maintain a good growth path. What happens if China only grows 2-3% or worse, flattens out? This would create a new shock to the global economy as exports would dry up in the U.S. and most countries would see a weaker economic environment.

6. The weak economy in the United States is causing tax revenues to fall off a cliff. States and Cities around the country are facing rising deficits. The red ink and weak financial profiles could lead to downgrades of their municipal debt. This debt is already trading at attractive historical yields but weak capital markets and a desperate need to raise new capital could lead to another leg down in the municipal bond market.

7. The aftermath of the Madoff scandal has yet to unfold. Will investors globally become more cautious in doling out their money? We believe diversification of money managers is going to be the trend of the future. Many hedge funds may see a new wave of withdrawals as investors set limits of investable assets given to any one professional investor. The concern for new Ponzi schemes as well as poor risk management will lead to increased due diligence by investors and perhaps a new more conservative style of investing.

8. The dollar had a big rally in the fall but has shown some weakness lately. We believe the increased liquidity created by the Fed, government support through Tarp, the other government bailouts, and the forthcoming stimulus package will result in a much weaker balance sheet for the United States. Will the rating agencies have the guts to lower the ratings on U.S. Treasuries? Unlikely, but the government will need to issues trillions of new bonds and foreign investors will need to buy them. The ratings may say Triple-A but the U.S. balance sheet is anything but. The dollar will remain weak, gold will rise, and long-term bond yields will ultimately have much higher rates to entice investors to buy them.

9. The recession is getting worse every day. At this point most economists and strategists expect the economy to hit bottom in late 2009 or early 2010 but what if housing remains weak, unemployment approaches 15%, new banking troubles abound, and corporations anticipate more weakness in their businesses? This would result in higher savings rates, more bankruptcies, a steep contraction in GDP, and a recovery that doesn't appear until late 2010 or well into 2011. The stock market will take a turn for the worse and the best stock pickers will be the only winners in 2009.

10. Corporate loans and bonds have seen a little bit of a rally in December. We believe this market is one of the keys for stocks to improve in 2009. The best value is in these markets but what if this rally is just a result of short covering and there is no follow through into 2009? A drop off in the price of loans and bonds results in higher yields and less liquidity. The economy needs strong businesses to prosper. These companies need access to the capital markets but a weak corporate bond market and limited liquidity in the loan market will forestall the growth in the economy and keep the United States in a deep recession.

2009 is an uncertain year for investors. A long-term view will no doubt produce solid returns but there could still be much pain in the short-term. It is essential to be cognizant of the potential pitfalls ahead and the best portfolios will be diversified in many markets. Continue to only own highly liquid companies with minimal debt requirements. Include loans and bonds in your portfolio as well as gold. A loss in one market can hopefully be made up with gains from another.