The DOW swung over 100 points yesterday so the volatility isn't gone. However, there wasn't much volume as most Wall Street traders are on a well-deserved vacation. The year may be ending but news still seems to be driving some of the market movement. Israeli attacks on Hamas pushed gold and oil a little higher but its effect seemed to be minimal. The bigger event seemed to be a withdrawn joint venture by Kuwait with Dow Chemical. Dow was hoping to receive $7 billion from the deal but Kuwait backed out. This left Dow in a precarious position to fund its acquisition of Rohm & Haas. This acquisition is fully financed with a $13 billion 1-year bridge loan from banks and an equity investment from Warren Buffett. This transaction will put a lot of leverage on Dow's balance sheet. Perhaps Dow can get Rohm & Haas to cut the price a little while also offering Berkshire a sweetened equity deal if they put up additional money to replace some of the debt. This is a tense situation but should be resolved in January.
The last story of focus is that GMAC became a bank holding company and received $6B from Tarp and the Federal Government. This should stabilize it for now and allow the company to finance automobile inventories at dealers as well as the purchase of new cars by consumers.
Don't expect much more from the markets this year as everybody winds down and gets ready for the new year.
Tuesday, December 30, 2008
Sunday, December 28, 2008
2008 Is Coming To An End
This week should be relatively quiet for the markets as we wind down a dismal year. The new Israeli conflict leaves us somewhat concerned as one of the unexpected risks for 2009 is growing political instability which could lead to unforeseen wars. High oil prices gave Russia, Iran, Venezuela, and most of the Middle East new found economic power. The reversal of oil's price is starting to create new turmoil and financial stress amongst these countries. Civil wars could break out and greater global tension could be a negative theme for awhile. We hope to be wrong about this possibility but it could result in supply cuts for oil, higher oil prices, increased inflation expectations, and soaring gold prices. Stocks overall probably won't benefit and consumer confidence may remain depressed.
We would like to see a quick resolution to the Israeli fighting before other countries become involved. At this point the fighting is limited in scope and the markets should still be focused on the depth and length of the economic decline.
We would like to see a quick resolution to the Israeli fighting before other countries become involved. At this point the fighting is limited in scope and the markets should still be focused on the depth and length of the economic decline.
Wednesday, December 24, 2008
Investing for 2009 and Beyond
We don't know when the stock market will begin to move up but we know it will. There are many stocks that are down 50% or more and plenty of industries that have been pummeled this year. Investing takes time and work and we try to pick stocks that will benefit from the turnaround in the economy but be safe from destruction in a weakened financial system, from overleveraged businesses and from a poorer consumer.
The housing sector has brought the financial system to its knees but the Government has injected capital into many of the faltering financial enterprises while the Federal Reserve has provided enough capital to ultimately stimulate the economy and improve the bank lending system. Housing will bottom and begin to turnaround. We want to be positioned for that occurrence.
Oil prices are down about $100 per barrel but last we looked nobody has discovered any new supply. When economic demand improves, energy sources will be needed. It is important to have a portfolio that is prepared for this inevitability.
Technology drives efficiency and innovation. It is the core to pushing the economic engine forward. Consumers migrate to new phones, computers, and gadgets that make life easier and entertaining. Businesses strive for efficiency and competitive advantages. Technology is the key to solving both consumer and business problems. Every portfolio should own technology companies.
We have been saying that improved corporate credit conditions will drive higher stock prices. Owning fixed income instruments will not only provide good current income but as corporate spreads improve, one will also see capital appreciation in bond prices. Now is the time to own loans and bonds.
Below we will list some of the stocks we own as we prepare for 2009 and beyond. We don't know how well each of these stocks will perform in 2009 but we are pretty confident that within 3 to 5 years most of them will provide very good returns.
Energy- Williams Companies(WMB) and Sandridge Energy(SD)
Both of these companies are primarily natural gas plays. Sandridge is only for those
who want to take more risk.
Housing- Masco(MAS), USG Corporation(USG), Temple Inland(TIN)
Each of these companies are building products enterprises.
Technology- Oracle Corporation(ORCL), Cisco Systems(CSCO), EMC Corp(EMC)
Each of these companies focuses on helping companies run efficiently.
Internet- Google Inc.(GOOG)
We view this company as a play on the advertising environment but it is a virtual
monopoly for search on the internet. This company is innovative and a cash cow.
Software/Utility- Microsoft(MSFT)
This company has a virtual monopoly with all computers. It is in the enviable position of having $20 Billion plus of cash to take advantage of distressed market opportunities, buy back stock or increase its dividend. Its 2.7% dividend is better than treasury bills and it is as safe as a utility.
Industrial/Consumer- Owens Illinois(OI)
This company is the world's largest glass bottle manufacturer serving
the beverage and pharmaceutical industries. This company produces
free cash flow, benefits from low oil prices and a weak dollar, and has
a relatively recession resistant customer base.
Defense-Alliant Techsystems Inc.(ATK)
This company produce advanced military weapons. It has a huge backlog and will
produce strong earnings in any economic environment.
Financial- Bank of America Preferred E(BACpE)
We have limited our direct investment in most financial companies. We are
concerned with the consumer loan problems Bank of America will likely face
in 2009 but the preferred stock has an 11.25% current yield and trades at 35%
of face value. If it were not for the structure of the Citigroup bailout, we would not
own this security.
Special Situations-Icahn Enterprise(IEP), Loews Corporation(L), Leucadia National Corp
The three companies have a few characteristics in common. They are
all run by leaders who have been through many economic cycles. Each
views themselves as a distressed buyer of assets and we expect they will
take advantage of the weak real estate market, soft energy prices,
impending corporate bankruptcies, declining commodities, and the
cheap values in the credit markets.
Commercial Real Estate-Forest City Enterprises (FCE/A)
We believe 2009 will be a very difficult year for commercial real
estate companies but Forest City's stock has dropped about 90%
this year. This is still a very risky investment but we believe the
company will be able to refinance the few loans they haven't been
able to restructure. The company has very experienced
management with a long history of real estate cycles.
Loans-ING Prime Rate Trust(PPR)
This closed end fund is a way to invest in the leveraged loan market.
Corporate Bonds-ISHARES IBOXX $ High Yield Corporate Bond(HYG), PIMCO Corporate
Income Fund(PCN), PIMCO Corporate Opportunity Fund(PTY)
HYG is a an exchange traded fund with a portfolio of high yield bonds with
an 11% current income trading at 74 cents on the dollar.
PCN is a leveraged closed end fund of corporate bonds (many are
investment grade financial institutions) with a current income of 12.7%.
The focus of this fund is high current income.
PTY is similar to PCN except its objective is to maximize total return
through a combination of current income and capital appreciation. Its
current income is 13.84%
Gold-SPDR Gold Trust(GLD)
We believe that inflation is on the horizon as the Federal Reserve has flooded the
economy with liquidity and the Government will need to raise a significant amount
of debt to pay for all its stimulus programs enacted and forthcoming. GLD is an
investment fund holds gold bullion and it is a proxy for the price movement of gold.
Holding gold will be a good hedge for the portfolio if the value of the dollar declines
over time and inflation resumes.
The housing sector has brought the financial system to its knees but the Government has injected capital into many of the faltering financial enterprises while the Federal Reserve has provided enough capital to ultimately stimulate the economy and improve the bank lending system. Housing will bottom and begin to turnaround. We want to be positioned for that occurrence.
Oil prices are down about $100 per barrel but last we looked nobody has discovered any new supply. When economic demand improves, energy sources will be needed. It is important to have a portfolio that is prepared for this inevitability.
Technology drives efficiency and innovation. It is the core to pushing the economic engine forward. Consumers migrate to new phones, computers, and gadgets that make life easier and entertaining. Businesses strive for efficiency and competitive advantages. Technology is the key to solving both consumer and business problems. Every portfolio should own technology companies.
We have been saying that improved corporate credit conditions will drive higher stock prices. Owning fixed income instruments will not only provide good current income but as corporate spreads improve, one will also see capital appreciation in bond prices. Now is the time to own loans and bonds.
Below we will list some of the stocks we own as we prepare for 2009 and beyond. We don't know how well each of these stocks will perform in 2009 but we are pretty confident that within 3 to 5 years most of them will provide very good returns.
Energy- Williams Companies(WMB) and Sandridge Energy(SD)
Both of these companies are primarily natural gas plays. Sandridge is only for those
who want to take more risk.
Housing- Masco(MAS), USG Corporation(USG), Temple Inland(TIN)
Each of these companies are building products enterprises.
Technology- Oracle Corporation(ORCL), Cisco Systems(CSCO), EMC Corp(EMC)
Each of these companies focuses on helping companies run efficiently.
Internet- Google Inc.(GOOG)
We view this company as a play on the advertising environment but it is a virtual
monopoly for search on the internet. This company is innovative and a cash cow.
Software/Utility- Microsoft(MSFT)
This company has a virtual monopoly with all computers. It is in the enviable position of having $20 Billion plus of cash to take advantage of distressed market opportunities, buy back stock or increase its dividend. Its 2.7% dividend is better than treasury bills and it is as safe as a utility.
Industrial/Consumer- Owens Illinois(OI)
This company is the world's largest glass bottle manufacturer serving
the beverage and pharmaceutical industries. This company produces
free cash flow, benefits from low oil prices and a weak dollar, and has
a relatively recession resistant customer base.
Defense-Alliant Techsystems Inc.(ATK)
This company produce advanced military weapons. It has a huge backlog and will
produce strong earnings in any economic environment.
Financial- Bank of America Preferred E(BACpE)
We have limited our direct investment in most financial companies. We are
concerned with the consumer loan problems Bank of America will likely face
in 2009 but the preferred stock has an 11.25% current yield and trades at 35%
of face value. If it were not for the structure of the Citigroup bailout, we would not
own this security.
Special Situations-Icahn Enterprise(IEP), Loews Corporation(L), Leucadia National Corp
The three companies have a few characteristics in common. They are
all run by leaders who have been through many economic cycles. Each
views themselves as a distressed buyer of assets and we expect they will
take advantage of the weak real estate market, soft energy prices,
impending corporate bankruptcies, declining commodities, and the
cheap values in the credit markets.
Commercial Real Estate-Forest City Enterprises (FCE/A)
We believe 2009 will be a very difficult year for commercial real
estate companies but Forest City's stock has dropped about 90%
this year. This is still a very risky investment but we believe the
company will be able to refinance the few loans they haven't been
able to restructure. The company has very experienced
management with a long history of real estate cycles.
Loans-ING Prime Rate Trust(PPR)
This closed end fund is a way to invest in the leveraged loan market.
Corporate Bonds-ISHARES IBOXX $ High Yield Corporate Bond(HYG), PIMCO Corporate
Income Fund(PCN), PIMCO Corporate Opportunity Fund(PTY)
HYG is a an exchange traded fund with a portfolio of high yield bonds with
an 11% current income trading at 74 cents on the dollar.
PCN is a leveraged closed end fund of corporate bonds (many are
investment grade financial institutions) with a current income of 12.7%.
The focus of this fund is high current income.
PTY is similar to PCN except its objective is to maximize total return
through a combination of current income and capital appreciation. Its
current income is 13.84%
Gold-SPDR Gold Trust(GLD)
We believe that inflation is on the horizon as the Federal Reserve has flooded the
economy with liquidity and the Government will need to raise a significant amount
of debt to pay for all its stimulus programs enacted and forthcoming. GLD is an
investment fund holds gold bullion and it is a proxy for the price movement of gold.
Holding gold will be a good hedge for the portfolio if the value of the dollar declines
over time and inflation resumes.
The Holiday Swoon
The economy is weak and getting weaker. Jobless claims are rising and durable goods orders are contracting. There is no good news anywhere we look and negative fallout from the Madoff affair. Stocks have been drifting for five days when investors have been hoping for the Christmas rally. It may not be coming this year but on the positive side, the volume on the stock exchanges has been very light. Perhaps a big buy order will come in and bully the traders to let stocks rise. Either way, the year is almost over and it will soon be on to 2009.
Too many people are expecting a January rally which makes us a little nervous. At Wall Street firms, traders typically use this time to sell all unwanted inventory of stocks and bonds while also making sure their remaining inventory is priced very conservatively. 2008 produced losses for everyone so it is the time to take as many losses as possible to give one the fighting chance of maximizing profits next year.
Corporate America is likely following Wall Street's lead as they cut expenses and payrolls as fast as possible. Everybody is trying to forget 2008 but be ready for better times in 2009. Unfortunately, exogenous events always appear to try and spoil the good intentions. The auto company restructurings will be a big concern for the first three months of the year. The bondholders won't roll over easy and we expect a major battle for the majority of the equity of GM. In fact, the government may have to compromise and give the bondholders some of their 20% of the company.
At some point investors will begin to ignore the bad news and look to the future. It is holiday season so let's hope it happens soon so we can all enjoy the new year.
Merry Christmas, Happy Chanukkah, and Happy New Year
Too many people are expecting a January rally which makes us a little nervous. At Wall Street firms, traders typically use this time to sell all unwanted inventory of stocks and bonds while also making sure their remaining inventory is priced very conservatively. 2008 produced losses for everyone so it is the time to take as many losses as possible to give one the fighting chance of maximizing profits next year.
Corporate America is likely following Wall Street's lead as they cut expenses and payrolls as fast as possible. Everybody is trying to forget 2008 but be ready for better times in 2009. Unfortunately, exogenous events always appear to try and spoil the good intentions. The auto company restructurings will be a big concern for the first three months of the year. The bondholders won't roll over easy and we expect a major battle for the majority of the equity of GM. In fact, the government may have to compromise and give the bondholders some of their 20% of the company.
At some point investors will begin to ignore the bad news and look to the future. It is holiday season so let's hope it happens soon so we can all enjoy the new year.
Merry Christmas, Happy Chanukkah, and Happy New Year
Monday, December 22, 2008
The Top Ten Reasons For a 2009 Market Rally
At this point, it is very uncertain as to the direction of the markets for 2009. Earlier we penned the Top 10 dangers for 2009 and now we will attempt to outline the events that could propel the market higher.
1. Low mortgage rates have finally appeared. Declining housing prices, falling housing starts, fewer house sales, and growing inventories have made 2008 a dismal year for anyone watching the destruction of value for the nations housing stock. The Federal Reserve has orchestrated a lower interest rate environment which has led to 5% and lower mortgages. It looks like the refinancing market has picked up considerably. However, should spring awaken with a zest from new buyers willing to take the chance of purchasing a very cheap house with an historically low mortgage rate, the housing market could get a long awaited lift. Such an event, will be positive for home builders, building products companies, real estate agents, and retailers like Lowes and Home Depot. This would clearly bring some excitement to the markets.
2. The auto Industry is clearly a mess. It is over levered, has a bloated cost structure and currently lacks enough viable products. The Government gave GM and Chrysler a life line with many contingencies. If these two companies can successful exchange the bulk of their debt into equity, renegotiate a competitive labor agreement, and relieve themselves of some legacy healthcare and pension costs, perhaps profitability can return to this industry. An impactful restructuring will be viewed very positively by the markets.
3. The corporate loan and bond markets have seen some life recently. If this trend continues, the capital markets could reopen and companies can begin to borrow again. This would clearly benefit the stock market which will take its lead from the credit markets.
4. The Federal Reserve is growing the monetary base and has pledged to do whatever is necessary to stimulate our economy. It is very concerned about deflation and was willing to drop rates to zero. The dollar subsequently began to lose its value again to the yen and the euro. If the Fed suddenly determines deflation is not a risk anymore, the dollar will stabilize and any fears of a depression will dissipate. If the Fed is ready to raise rates, growth will be on the horizon and markets will be moving up.
5. The financial crisis is not over. It appears that many of the weak financial institutions have been fixed but one never know when a Madoff event could appear. One big concern we still have is the stability of Citigroup. The Government truly bailed out Citigroup with a bad deal for taxpayers but a good result for creditors and stockholders. However, we believe such a move is the precursor to an acquisition of Citigroup by another financial company. Citi can not survive in its current form by itself. It needs to dismantle its pieces or sell itself. An announcement of a Citi transaction will be very positively received by the markets.
6. AIG finally sold an asset today but the proceeds hardly put a dent in the loan owed to the Government. This company has become an albatross on the taxpayer's back. Additional sales of assets which will meaningfully reduce the Government loan will please Congress and be perceived by investors as a positive sign that the financial crisis may be moving in the right direction.
7. Unemployment is rising each week and there is no slowdown in sight. Eventually, companies will pare their workforces down to levels needed to remain in business. A slowdown in the growth of unemployment will be a good sign that an economic bottom is around the corner. If the market hasn't risen by this point, it certainly will become a raging bull.
8. The announcement of Mergers and Acquisitions have been sparse. As financially strong companies peruse their competitors, value is being seen everywhere. It is hard to execute an acquisition in these markets even if both parties come to an agreement because stock prices are too volatile. As the volatility declines, the pace of acquisitions will pick up. Investors will start to sense there is plenty of value in the market and they won't want to miss the opportunity.
9. China's growth is clearly slowing but its government is not sitting on its hands. A huge stimulus package was implemented to keep the economy moving. Most investors expect the country to continue to grow but at a much slower pace than the last few years. If the Chinese Government can figure out a plan to propel its economy back to the double digit growth, the global economy will get a jump start and markets will follow.
10. President-Elect Obama is gearing up for his own stimulus package. His economic team is well versed in economic history and the financial markets. A creative plan could clearly give a boost to our souring economy.
There is no right answer to when, how , and why the markets will finally start its upward march again but the above ideas can prove to be some of the factors that drive the markets higher and bring smiles to investor's faces.
1. Low mortgage rates have finally appeared. Declining housing prices, falling housing starts, fewer house sales, and growing inventories have made 2008 a dismal year for anyone watching the destruction of value for the nations housing stock. The Federal Reserve has orchestrated a lower interest rate environment which has led to 5% and lower mortgages. It looks like the refinancing market has picked up considerably. However, should spring awaken with a zest from new buyers willing to take the chance of purchasing a very cheap house with an historically low mortgage rate, the housing market could get a long awaited lift. Such an event, will be positive for home builders, building products companies, real estate agents, and retailers like Lowes and Home Depot. This would clearly bring some excitement to the markets.
2. The auto Industry is clearly a mess. It is over levered, has a bloated cost structure and currently lacks enough viable products. The Government gave GM and Chrysler a life line with many contingencies. If these two companies can successful exchange the bulk of their debt into equity, renegotiate a competitive labor agreement, and relieve themselves of some legacy healthcare and pension costs, perhaps profitability can return to this industry. An impactful restructuring will be viewed very positively by the markets.
3. The corporate loan and bond markets have seen some life recently. If this trend continues, the capital markets could reopen and companies can begin to borrow again. This would clearly benefit the stock market which will take its lead from the credit markets.
4. The Federal Reserve is growing the monetary base and has pledged to do whatever is necessary to stimulate our economy. It is very concerned about deflation and was willing to drop rates to zero. The dollar subsequently began to lose its value again to the yen and the euro. If the Fed suddenly determines deflation is not a risk anymore, the dollar will stabilize and any fears of a depression will dissipate. If the Fed is ready to raise rates, growth will be on the horizon and markets will be moving up.
5. The financial crisis is not over. It appears that many of the weak financial institutions have been fixed but one never know when a Madoff event could appear. One big concern we still have is the stability of Citigroup. The Government truly bailed out Citigroup with a bad deal for taxpayers but a good result for creditors and stockholders. However, we believe such a move is the precursor to an acquisition of Citigroup by another financial company. Citi can not survive in its current form by itself. It needs to dismantle its pieces or sell itself. An announcement of a Citi transaction will be very positively received by the markets.
6. AIG finally sold an asset today but the proceeds hardly put a dent in the loan owed to the Government. This company has become an albatross on the taxpayer's back. Additional sales of assets which will meaningfully reduce the Government loan will please Congress and be perceived by investors as a positive sign that the financial crisis may be moving in the right direction.
7. Unemployment is rising each week and there is no slowdown in sight. Eventually, companies will pare their workforces down to levels needed to remain in business. A slowdown in the growth of unemployment will be a good sign that an economic bottom is around the corner. If the market hasn't risen by this point, it certainly will become a raging bull.
8. The announcement of Mergers and Acquisitions have been sparse. As financially strong companies peruse their competitors, value is being seen everywhere. It is hard to execute an acquisition in these markets even if both parties come to an agreement because stock prices are too volatile. As the volatility declines, the pace of acquisitions will pick up. Investors will start to sense there is plenty of value in the market and they won't want to miss the opportunity.
9. China's growth is clearly slowing but its government is not sitting on its hands. A huge stimulus package was implemented to keep the economy moving. Most investors expect the country to continue to grow but at a much slower pace than the last few years. If the Chinese Government can figure out a plan to propel its economy back to the double digit growth, the global economy will get a jump start and markets will follow.
10. President-Elect Obama is gearing up for his own stimulus package. His economic team is well versed in economic history and the financial markets. A creative plan could clearly give a boost to our souring economy.
There is no right answer to when, how , and why the markets will finally start its upward march again but the above ideas can prove to be some of the factors that drive the markets higher and bring smiles to investor's faces.
The Pre-Christmas Blues
After rising last week, the markets started off poorly today. The S&P was down 1.8% while the DOW was down .7%. There was plenty of negative news starting with Toyota's forecast of losing money this year. If Toyota can't earn a profit, how can GM, Chrysler or Ford. Next came the Wall Street Journal article discussing the commercial real estate markets. Leaders of this industry have been petitioning the Government to provide a life line of $200mm to refinance the maturing debt coming due in 2009 and 2010. Commercial real estate properties are heading lower as the over levered industry faces declining rents and a scarcity of lenders. Met Life took a dive as investors fret about the $36 billion of commercial real estate they own. Finally, Walgreen's, the cream of the drug store industry, reported lower than consensus earnings as their sales slowed down. The management expects a weak 2009 and is curtailing new store expansion next year.
The trend of bad news continues and earnings reports for the next few months should be just as dismal. The weak will get weaker and the strong will survive and pick up market share. Although the VIX fear index continues to fall, the Dow still had over a 100 point swing today. Volatility is here for a while as the uncertainly prevails. Investors are praying for a Christmas and New Year's rally but so far it has not arrived. Hope is usually not the best form of investing.
The trend of bad news continues and earnings reports for the next few months should be just as dismal. The weak will get weaker and the strong will survive and pick up market share. Although the VIX fear index continues to fall, the Dow still had over a 100 point swing today. Volatility is here for a while as the uncertainly prevails. Investors are praying for a Christmas and New Year's rally but so far it has not arrived. Hope is usually not the best form of investing.
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.
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.
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