We had a fairly decent move across the board – especially the RUT which got right to the 500 mark. What is in store for us in 2009? Here are some of my predictions.
1. Many companies will find a bottom to their balance sheet – but it will not happen quickly.
2. The recession will deepen as the jobless rate increases – and the GDP (2/3rds consumer spending) will contract.
3. Oil, and other energy prices will see more volatility and will head higher and lower as the balance of supply and demand both expand and contract.
4. Increase in taxes, as well as new excise taxes – government deficit spending will continue and the national debt will continue to expand.
5. A sector driven market – unlike traditional markets where they generally all move higher with some outperforming (to the up side) others, this year will be a year of 3s – a few gainers, many flat, and a few losers. We may see higher turnover in sectors as investors chase yield.
6. A year of more regulations – yet the enforcement of those regulations (as per always) will be weak.
7. A year of more mergers – banks, autos, airlines, even technology.
8. A year of more volatility shocks – expect the VIX to head lower to the high 20s – but also expect 70 as well.
9. A year of mending as well as testing foreign nations. Russia is flexing their muscle, so is China – Obama will work on mending relationships - or will he be pushed around. Expect many lines in the sand drawn and rather than open conflict, this administration will be one of economic entanglements.
10. And finally the year of the dollar? We have now pumped the dollar to epic levels – moved into a quantitative easing (fed buying our own treasuries), massive debt and rates set at zero. This is the test of faith – if there ever was one.
I was spending time thumbing through some books and doing some research on other fiat based currencies – all roads have lead to the same place and they all look similar to our current state of affairs. The decision (fork in the road) is how Congress, Fed, Treasury, and new Administration deals with the dollar, if they even do. Or do they push forth a bailout, stimulus, new deal approach and rely on “hope and faith” as the risk management that the dollar stays in check. That will be the question of 2009 (for me anyway). Three outcomes – the balloon gets way bigger, it pops, or the government takes an active hand in reducing the debt and deficit – while strengthening the dollar.
As I mentioned before about FDR comparisons to Obama – FDR didn’t have to rely on China (and other nations) to buy debt to float us. He also didn’t have to rely on foreign raw materials, oil, gas. The currency was also based on a gold standard (even though the official price of gold was manipulated by the government – raised from $20 to $35 an ounce during the depression - to cushion the affects.) Thus – Obama’s new deal policies will have a lot more variables to contend with – which means mending and building relationships, but at the same time having to make concessions because of this nations foreign dependence. No doubt it will make for some interesting political wrangling.
Will the market be up or down? The CNBC poll predicts up 10-20%, I say whatever – they also predicted that last year and seriously got it wrong. My expectations are for less surprises (that was 2008) and more struggling. Sure a couple of shocks here or there – but we are not going to see a bottom and back to normality this year.
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Completion of the two big deals.
Well, it’s official B of A has fully absorbed Merrill Lynch, making it the biggest financial services company in the world. With over 300,000 employees worldwide and many of those jobs overlapping – layoffs of 30 to 40 thousand are expected for 2009.
Wells Fargo also now fully owns Wachovia –the signs should be coming down in this East meets West merger. Wells Fargo was one of the few that managed to ride the home credit crisis better than others – not jumping in the deep in of the pool.
What about others – I still think several others will be forced to merger or collapse – Sun Trust in the south has issues, which will either surface or be absorbed in a merger. Citigroup is also in a questionable situation – mainly because it is in so many businesses. Thus we might see some spin-offs, instead of mergers.
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OIL action
Oil was down to the mid-low 30s, rallied above 40, came off to 38, shot up to 45, and is pulling off again to 43. Between the GAZA fighting, Russia cutting off the Ukraine (natural gas, but oil could be next) as Ukraine is being pulled to the West to join them – against previous agreements – and Russia is playing the economic squeeze play (which could escalate). The supply and demand question remains and will all the members in OPEC play in the same sandbox. I expect to see some volatility action in oil – additionally the forward futures (larger holdings than normal by those that take delivery) come due – will they stay weighted in the spot market, or will we see a rise in future purchases? I think it certainly will be higher than traditional hedging.
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The first economic data of 2009
It is already looking fairly weak and looks like (at least through the next two quarters) a bumpy ride. Europe’s PMI index (survey by purchasing) fell below 50 (meaning contraction). Economist expects the ECB to lower their rate to 1 or 1.5% as several economic outlook data shows contractions throughout the region. Euro’s big problem is that while some countries might do well, others may falter – you are only as good as the weakest link. Expectations are for the Euro to see some contraction against the dollar if Euro region become weaker over the course of 2009.
Asia is a bigger question mark, no doubt China is slowing down – but unlike many nations will still be in a growth mode. The big issue with them is trade, as a net exporter (especially in this country). Additionally they have a huge hand in floating our debt – which plays a double edge sword, stronger dollar vs. trade balance vs. dollar holdings and interest rates. Congress has already started to heat-up and it will be interesting how Obama plays his cards with China. Japan on the other hand is predicted to see the yen strengthen in 2009 as the attraction to take leverage risk (via the carry) is on the decline.
So far – all economic data, based on consumer spending and jobless predictions are looking to head lower in the beginning of 2009.
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Futures pre-market
Fairly mixed. I think smart money will sit out the opening for now.
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Support / Resistance
I don’t know how much weight you want to give Wednesday’s move on light volume – but we did test some areas. We could see a beginning rally in the first quarter of 2009 as HOPE drives the market in the face of bad news. The question will be the strength on the rally – less money and less leverage in the face of continual bad news might not have the legs to keep it going. Additionally – we saw a massive pop in the 10 year yields – meaning money could being coming out of the bond market and back into equities – but I don’t think it will be a big move.
INDU 8000 (8500) 9000 (Moved up but not to resistance – yet!)
NDX 1100 / 1200-1250 (We are in that upper band again.)
SPX 800 (850) 900 (we closed at resistance – do we head higher and break through or ….?)
RUT 400 (450) 500 (Back up at resistance – it was the biggest percentage move on Wednesday – but light volume – was it a real test?)
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Conclusion
I received quite a few emails from my 2008 round-up, some agreeing, some disagreeing, some not knowing what to make of it. Please remember these are my opinions, I certainly welcome disagreement – however please explain in detail why you think I am wrong, rather than just stating my conclusions are wrong. Be wrong comes with the territory – especially when I email and post my view to the masses.
I was certainly wrong about oil prices – (maintaining that 70-80 range as a low) – thanks to two friends that pointed out the error of my math and positioning. I was also not expecting the summer rally after Bear Stearns, which in the end was nothing more than euphoric optimism as the market began to fall off again. So we can’t always be right and if you find error in my logic or reasoning – please feel free to let me know (please include some detail). Fare warning – rhetoric and quotes are never a convincer of math in my book.
So will I be wrong in my 2009 predictions? Probably some of them. My big prediction is the dollar inflation bubble – which is lurking behind the government data (which doesn’t seem to be reflecting my hypothesis) – so while my observation my fly in the face of government data, may I point out how wrong the government has been in 2007 and 2008 – take a look around. That doesn’t mean I will be right, but it should give you pause as to whether the government’s data is accurate.
If I was right about ONE thing last year – it was my constant banging the hammer on getting HEDGED! Those that did – survived minimum losses or even made small gains.
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Please note I write this in 30 mins every morning – and spelling and grammar mistakes make their way in – it’s about content and timeliness = little time for editing. Think of this a going out raw.
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