2009 Forecast issue – Part 1

January 9, 2009

We begin the year with some important changes that every investor must make to insure profits this year and an increase in net worth. Last year we emphasized that people would rather lose in company than win alone and 99% suffered major loses with the justification that everyone else lost. Why is it that all businesses work hard to never have a losing year but individuals accept poor performance as long as everyone loses as much or more? The key to surviving 2009 is to trade/invest in the market environment you have, NOT the one you wished you had. Throughout 2008 we heard from market forecasters, real estate agents, etc. that the credit crises was limited to only certain areas and most would not be affected by the slowing economy. Much like a business studies possible markets before entering new locations for stores everyone must do an analysis of past results before creating a strategy for this year. If a shoe seller purchases a huge amount of green shoes that don’t sell he immediately lowers the price and gets rid of the unwanted inventory without excuses that the price will come back or I can’t sell because my purchase price is higher or some other emotional reason for not facing reality. But individual investors spent last year frozen as their investment managers created excuse after excuse about the market coming back so that you wouldn’t have to take a loss. If a company used that strategy they would soon be out of business. Because investors bought into the buy and hold for life strategy they were crushed last year and 2009 promises to be a trading range year for almost all markets. This year will represent a pause for the worst economic bear market since the recession that began in 1873. Unless you are willing to be a disciplined trader that is not afraid to buy weakness and sell strength AND use stop losses on ALL positions I strongly urge a 100% cash position. Although everyone is worried about the inflationary implications of the government bail out there is very little chance of seeing any inflation for many years as unemployment is soaring and capacity utilization levels are far below what would cause a shortage of production of goods and services. As I warned two years ago this bear will be long and slow and won’t end until all players have left the arena.

Hold on tight if you have a job

Today’s jobs report showed another rise in the unemployment rate (7.2%) as we will arrive soon at my projected 8.0%. 524,000 jobs were lost in December and this number includes an additional 70,000 from the government’s birth/death model that hopefully will be put in storage by the new administration. December’s losses are sure to be revised higher as almost all revisions in the past few months have been worse than the original figures. The November job loss was revised up 51,000 and the October number down 103,000. One of the best indications of the severity of the employment situation comes from the temporary help services sector which lost another 81,000 positions in December following the 86,000 decline in November. 74.6% of private industries showed job losses and the unemployment rate would have been higher if not for the fact the labor force fell by 173,000 and the labor force participation rate fell to 65.7%. Finally the number of people working part time because they couldn’t find full time work rose 715,000 as employers continue to down size in an effort to stay in business. If the new President is able to create 3 million new jobs (doubtful) as planned it will represent only six months of job losses using today’s data. The individual state employment numbers will be released in two weeks and are sure to show dramatic increases led by California which is rapidly running out of funds for daily operations and closing most state offices on the first and third Friday’s of every month.Consumers are clearly worried about their future and spending on credit has all but ended as Thursday’s report of a $7.9 billion decline in consumer credit for November was the largest on record since data began in 1943. As spending continues to decrease we will see a sharp rise in the household savings rate but that will take many months and lengthen the pain for retail businesses.

2009 – Part 1

My 1st best bet for the year is the Japanese yield curve (2yr-10yr) will widen from its current level of 92 basis points to over 200 as the Japanese economy is the first to rebound from the global credit crises. The Japanese government announced plans this past week to lower the current 40% tax on capital gains for foreign investors to 0.00% effective April 1st. This should increase capital flows but the Bank of Japan will have to deal with the consequences of a stronger yen. Remember that many investment decisions are based on relative performance and Japan may not see a sharp increase in sales and production but it will show relative strength to many other industrialized countries of the world. I will be monitoring this investment idea frequently for nightly subscribers.

The 2nd best investment is more of a trading idea and comes from the land down under, Australia. The Aussie dollar has shown excellent relative performance against all currencies in the past couple of months and will offer excellent opportunities during the year for traders to play a move back to at least 80 cents. Stops must be used at all times to make sure that a winning trade NEVER turns into a losing trade or keeping losses small and manageable.

The 3rd best bet is not yet at the price I would consider “backing up the truck” but should be watched carefully over the next few months. TIPS or Treasury Inflation Protected Securities are a great buy at a 3.00% or greater yield for newly issued bonds with 10-year maturities. These should ONLY be purchased in retirement accounts (due to tax issues) but will be a great hedge against future inflation if held to maturity.

The U.S. economy will see a continuation of the deflationary trend that began last year. With unemployment soaring a wave of street crime not seen since the early 80’s will be an unfortunate consequence of this change in our economic structure. The good news is that deflation of both prices and asset values will hurt the lower income workers less than those who live off income generated by assets. A minimum wage worker who rents a “C” class apartment and has no assets (stocks, bonds, real estate) will see his spending power increase as his fixed wages give him more purchasing power with gas and food prices continuing their decline in 2009. Stock market investors will be hurt as they continue to try and pick a bottom only to realize that we have entered a broad trading range where volatility soars due to a lack of liquidity as a result of many traders and investors retreating to the sidelines due to a lack of funds or frozen investors that don’t want or can’t exit positions with big losses. Money managers have become similar to residential real estate agents who only look for the upside in price action because they don’t make $$$ when prices decline. The only asset that increases in value during deflation is CASH and 2009 will see many de-leveraging because it is required to survive financially. Others will continue to go back to the place that created wealth in the past because we only see the future from our own past experiences. 2008 was a hard lesson for those that would rather lose in company than win alone and hopefully this year will see many investors understand that stop losses must be used on all investments despite the protests of money managers that lost 30-40% of YOUR hard earned assets and retirement funds. Just because you lost less than the S&P last year is nothing to be proud of as a loss is a loss.

I urge all readers to carefully watch the reaction of markets to news this year and NOT focus on the news itself. Bad news that does not lead to lower prices is a market that has discounted the news and is ready to rally. Conversely good news that doesn’t produce higher prices is a market that is ready for lower prices. Most will find the year to be treacherous and only those that are disciplined traders can survive many of the markets that have discounted this year’s economic decline BUT not the deflation of 2011 and beyond.

It will be many years before the U.S. economy hits bottom (January 2013) and then another 5-10 more before we can sustain any kind of economic and credit growth. The federal government will not allow any major financial institution or corporation to go under BUT that will be accomplished by making sure that corporations are not allowed to grow at a rate the government can’t support. This could easily mean lower than normal profits or a break-up as a corporation grows too fast or far. Government regulation and size is the only growth industry for 2009. If you are seeking a job and have any skills in financial supervision or regulation send your resume now. I expect an increase in pay at many levels of government as their need for qualified personnel is at an all-time high and Congress will be very willing to spend money to build government infrastructure.

The Fed

Short-term interest rates hit zero as I wrote early last year (see archives) and Fed policy is now all about quantitative easing and those making big bets on sharply higher long-term rates will be disappointed because the Fed has the ability to print $$ to buy bonds issued by the Treasury. It will be like being in a card game where your opponent can see your cards but you can’t see theirs, you might win a few hands but in the end they will win all of your chips. For those that like to get up early each morning Fed Chairman Bernanke will be giving a speech in London on Tuesday, January 13th at 5am (Pacific Time) and most importantly will be taking questions from the audience. A live webcast can be found at: http://www.lse.ac.uk/. I will be watching live and taping for later analysis that will be sent to daily update subscribers.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.