What To Watch For In 2009

The new year holds a lot in store for our economy, financial markets, and consumers themselves. 2009 will start off the same way 2008 ended...lots of fear, a struggling economy, and a beaten down stock market. The economy will be down for most of 2009 with maybe an increase in productivity towards the end. We must be patient and allow all the initiatives taken by the government time to work. Recessions just don't end abruptly. It takes a little time. As for consumers, confidence will remain low until a pickup in the economy and/or stock market is seen. I would have to say that consumer confidence would have to be the first to pick up since the consumer is what drives the economy. Until then we will see depressed earnings in retail, housing, and some technology. Industrial companies would also see continued slowing growth of earnings as they move with the economy. Financial markets will also take a while to recover as they absorb losses of acquired companies, begin to lend more money, and inspire growth within consumers. All of this will take patience and at least 6 more months to see any sort of change. The patient investor is the one who benefits most. Have a happy new year and may 2009 be the best yet!

Fear: The New King on the Street

It almost seems as if there is more depressing news about the economy and the financial markets now more than ever. Bad news about Company A should have some sort of impact on Company B if they were competitors. However, should the bad news about Company A have an impact on Company X in a totally different sector? Not necessarily, but lately there has been an impact. We see this with the volatility index being at all time highs. Spikes in this index have occured on the pure basis of fear and nothing else. How is the common investor supposed to act with the constant ups and downs of the market?

Benjamin Graham wrote in his book The Intelligent Investor, "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage." This gives us the basics for long-term value investing. We need to invest in a company for its long term growth and management. At this point we can then invest in said company for the long term and should be able to go a significant amount of time without having to look, or worry, about the current stock price. Besides, at times like this when the market is significantly depressed that we see value stocks at their greatest. Warren Buffett once said, "Be fearful when others are greedy, and greedy only when others are fearful." If you ask me, we are at wrong point to be fearful. We should be embracing this market as a seldom chance to find truly great companies at a cheap price. If there was ever a chance or reason to be greedy, this is it. Take advantage.

Are the Regulators Even Around Anymore?

There always seems to be some type of scandal going down on Wall Street. Some bigger than others. Still, is there some type of regulation going on or do we choose to just let things go on until someone has to step in? Most recently, I'm sure everyone has seen or read about the Madoff scandal. Sure things like this happen, but should it really have ended 10 years and $50 billion dollars later? What about the financial crisis? Should the government really have stepped in after companies announced that they were going bankrupt? Why did we not see these things earlier?

I think it all starts off with greed. In reference to the financial crisis, companies knew they were leveraging more than they probably should have. Lenders knew that they were allowing more than usual sub-prime loans. The money kept rolling in and soon these fears were put into a closet only to come out when everything backfired. If I gave my money to Bernie Madoff and got constant high-than-expected returns every single year, I might just look away and let my savings continue to pile up. Money makes people do things they wouldn't normally do.

Where was the SEC in all of this? It seems like the primary agency for regulation was missing until it was too late to do anything. Wouldn't they say something when firms were over-leveraging or handing money out to people with bad credit reports. Wouldn't they say something when a fund has constant returns with no volatility at all, especially during a bear market? It seems to me like people just don't want to do their jobs anymore. If you don't like your job then get a new one. Don't let the American people suffer just because you sit on your butt all day behind a desk apparently doing nothing but feeling sorry for yourselves!

People, including myself, complained when the government stepped in and started bailing everyone out. Don't get me wrong, it had to be done. But if they just did their jobs to begin with, it wouldn't have put America into a deeper recession, credit wouldn't be frozen, investors wouldn't be committing suicide over a giant Ponzi scheme. If I was getting higher commissions or bonuses, I might not say anything either. However, the SEC does not get any commission from these sort of deals so what were they doing? Wasting our tax dollars...point blank.

Holiday Sales: Will Discounts Make All the Difference?

While trying to stay ahead of competitors (and the economy), retail stores are offering huge discounts to keep themselves in the black. Shoppers are desperately taking advantage of these markdowns while still clinging to savings to beat out the recession. But will these steep discounts really do all that much to help retailers stay in the black?

All these discounts certainly have enticed a few more shoppers to spend a little more money, but does that mean that retailers will be able to turn around and come out ahead this season? The answer is no. Steep discounts may entices more buyers, but that does not exactly mean any profit in the end. These discounts will more than likely cancel out any profits the retailer could have made. They will essentially be selling to try and just come out even. Any retailer that just comes out even in a time like this is worth a second look. However, for investing purposes, stay away from retailers until the economy shows any promising signs of recovery. Until then, be patient and keep your money close.

USD: Is the Reign Over?

The dollar has hit another decline as interest rates were cut to new lows. As interest rates decrease, so does the value of the dollar as an accelerated money supply makes each bill worth a little bit less. Investors then run to other currencies with higher interest. However, a cheaper USD would encourage other countries to buy our cheaper goods. The question then becomes, what should we invest in if not the USD?

There are two main things one could invest in to hedge against the dollar: other currencies and precious metals. When the dollar declines, other currencies rise. The euro, yen, and pound are all formidable options. It is even being said that the euro will eventually replace the dollar as the world's reserve currency. With that said, the euro still has a way to go as the dollar is still the world's leading reserve currency by an overwhelming margin. Precious metals, mainly gold, are a common source of hedging. Gold is deemed a solid asset and is bought in tough economic times to hedge against the decline in other assets. Gold is thought to be one thing that has solid value, thus creating an illusion of stability. In a market of record volatility, stability is something that investors look to flock to.

In conclusion, look toward currencies and precious metals when betting and/or hedging against the USD. I think the euro and gold are the best in these categories and will be for some time. Just know whatever conclusions your research discovers, investing is for the long-term. Be patient and keep looking for that illusion of stability.

Deflation

Deflation is a decrease in the general price levels. So paying less money for something is good, right? Not exactly. Deflation is connected with the Great Depression. Who wants to see that again? We are used to seeing inflation and worrying whether our annual income will keep up with everyday prices. Now we are actually seeing prices decline. At first glance this looks almost as good as gas under $1.50 per gallon. In reality this is bad for the economy. Lower prices gives companies lower revenues. This results in companies laying employees off and thus further weakening the economy.

It has been understood that the Fed feels deflation is not much of an issue at this point. However, low interest rates help combat deflation by encouraging consumers to borrow and then spend. When spending increases, so do prices. Increasing prices results in inflation and gets rid of deflation. The Consumer Price Index (CPI) has declined for the second straight month signaling deflationary issues. Short-term Treasury yields have been pushed to zero and even negative in some cases. The uncertainty of the economy right now has led people to actually paying the government to hold their money. Seems risky to me since lately the government has been spending all our taxes. At any rate, if deflation issues strengthen, we can be rest assured that low interest rates are one step the Fed has already taken that could help out in the near term. Who knows, maybe it is all we need to combat deflation.

Stimulating the Economy

All the usual procedures taken to stimulate the economy just doesn't seem to be working. The Fed cut the funds rate to a range between 0.0% - 0.25% from 1%, the lowest it has ever been. Our government recently voted on a $700 billion package to avoid the collapse of the financial system. We have seen a couple stimulus packages and numerous tax breaks. This is supposed to have helped our economy right?

Time is what we need right now. Obviously it will take time for the economy to sort itself out. I think the bailout package is what will get us out of this but it will take several more months to take affect. We have to be patient. Plus the Fed has also pledged to further assist by buying mortgage backed securities and possibly purchasing open sales to further inflate the money supply. Fundamentally, low interest rates spur on the risk of inflation. However, we are currently experiencing a time of deflation (to be blogged about soon). So lower interest rates pose low risk and force the consumer to borrow money and spend. Should this not stimulate the economy? Consumer confidence is at a low, unemployment is the highest it has been in 15 years (6.7%), and the economy had its largest contraction in 7 years (0.3%). We have all time interest rate lows, pledged assistance for homeowners, and other stimulus plans. The government's policies and actions have what is called, an outside lag. This is the time is takes for that policy to start working. I do not believe we have given these things enough time to work and have an effect on the economy. This is the greatest country on earth. Just be patient and allow our leaders and their policies to have an effect and turn around this economy.

A Safe Haven

When domestic stocks are beaten down with no clear bullish outlook, it is sensible to look at international markets as a safe haven. However, this recession is not just domestic, it is global. A lot of third quarter earnings reports talked about international revenue growth and how much international exposure affects earnings. With a global recession, could we not say that earnings will be negatively affected as we see the whole world struggling? On the flip side, the sudden decline in commodities could lower costs for companies so that it all evens out in the end. With this said, where are the safe havens?

The BRIC countries are the safest plays internationally as even with a GDP decline, we are still looking at solid growth with greater demand. Domestically, the safe haven relies with the healthcare industry. As the baby boomers are reaching retirement and are the single largest age group right now in America, healthcare will see increasing earnings growth over the next 20 years. Recession or not, the elderly will need their drugs. As always when looking to invest, make sure you research everything. Whichever way you decide to go, know that you are investing for the long term as domestic and international markets try to recover.

Bailouts

There has been a lot of talk lately about bailouts. I'm all for free markets and letting companies, who get greedy and leverage more than they should, fail. However the government has stepped in decided to use Main Street's money to bailout Wall Street. As much as I disagree with this and think that the government should have seen this coming and regulated better, it has to happen. If we let financial companies fail, the economy would completely fall apart. Credit would completely freeze, housing would not be able to recover, consumer confidence would sink to all time lows, we could possibly even relive the Great Depression or at least mimic Japan's economy of the 90s.

Now the bailout might be extended to auto companies. If Congress allows this to happen where will it stop? It is said that 1 in 10 jobs are linked to the auto industry. If GM and Ford fail, unemployment will surely increase and the recession might be further prolonged. But how can we just give these companies more money when they blow through a billion dollars a month and are not innovative enough to keep up with foreign automakers. Do we really know that this money will keep them alive for another year when they are showing no signs of creating autos that the consumer really wants?
Regardless of what happens, consumer confidence will remain low, it will be a while before we see the positive signs of the bailout, and the recession will be here longer than you think.

Box Office Futures

I read an article about the possibility of box office futures. Futures are only good for those people who follow something very closely and can usually predict whats going to happen next. For everyone else, futures does nothing but lose you money. No one really knows whats going to happen to certain prices over the next 6 months. Futures are nothing but speculation and that is what makes this game fun. Speculation drives up prices and people can then make lots of money. The problem arises when people get too greedy and dont want to get back out (tech bubble, recent oil surge, etc.). Prices fall twice as far as they rise. Its fun and sometimes rewarding to ride the surge. One just needs to realize when to take profits and start searching for the next investment opportunity.