The Recession Marches On

The markets were down over 4% this week and everybody seems surprised. The credit markets continue to improve but until loans and bonds move up another 15 or 20 points, it is unlikely we will get a sustained rally in stocks. The recession is going to be longer and deeper than most people think and the next few months will be the worst time for the economy.

The jobs report showed official unemployment stood at 7.2% but in reality it is much higher as many people who lost their jobs have given up looking for new ones. We expect the official number to rise above 10%. The consumer is not spending and manufacturing is coming to a screeching halt. Eventually the housing market will bottom but first prices will likely decline a little more so that combined with low mortgage rates, the housing stock will start to look very compelling. A bottom in housing and strong credit markets will be the beginning of an economic recovery.

One positive note this week is Citigroup. We have been saying for a long time that Citi still has many problems and the government rescue was structured to force Citigroup to merge with another entity or start to sell assets. It looks like the first phase in that process is happening as Morgan Stanley prepares to buy a majority of Smith Barney. Expect Citi to sell its asset management unit and a bunch of other non critical assets. Citibank is going to return to having a commercial bank emphasis with a much smaller footprint.

Stocks will head higher again but not before it is evident that the recession is going to end within 6 to 9 months. It is possible that 2009 remains weak and the recession lasts into 2010. We expect to see rallies in the market in the next six months that get tempered by the economic realities. Money can be made in the market but one needs to be smart and careful. 2009 will bring many corporate bankruptcies so avoid companies with big debt maturities.

Continue to buy large liquid companies and diversify amongst industries. Our suggested portfolio at the end of the year had fixed income ideas as well as gold and some special situations. Individuals can't always take advantage of the distressed opportunities in the credit markets so we rely on stocks where the managers focus on those areas. This is a tough market for any professional so be conservative as you invest and maintain plenty of cash as we march through uncertain times.