Here are my 2009 predictions. None that are too far out there. Just a basic assessment of what I think might happen in 2009.
POLITICS
Barack the Celebrity
Obama’s approval ratings remain historically high but lower than the inauguration euphoria – Obama’s ability to inspire change and leadership at such a dour time in America gives him public leeway not seen since, well, 9/11. However, Obama’s pragmatism will help him keep the country on course and inspired throughout 2009. He has already made key changes in ethics regulations and state diplomacy in his first days in office. The only thing that will stop him will be… Congress.
Don’t expect much from Congress – Congress had lower approval ratings than President Bush in 2008, even with the Democratic majority and push for change. Expect the same from Pelosi and Reid, who are not strong leaders and have plenty of personal ambitions to prove Congressional strength to the Executive strength. Couple with the Republicans fight for relevancy, expect a 2009 of posturing and tit-for-tats. 2010 seems like a better year for Congress because the public will side with Obama over the frustrating bureaucracy in Congress in 2009.
ECONOMICS
The market moves sideways – There will be strong forces pulling the economy from both the recession side and the growth side. It is what I call the economic paradox. As the economy falls, oil prices drop and the US Dollar rises (somewhat surprisingly). However, as global growth resumes, oil demand and commodity prices rise again and the US Dollar falls (since investors will begin investing in riskier assets instead of US Treasuries). Both are problems for America. Obama seems focused on passing bills and bailouts that will help light a fire under the economy, especially job market. However, the more he does the more inflation becomes a risk. Expect several major rises and several major slides, but by the end of 2009, the Dow Jones will still be in the 7500-9000 range.
Gold surpasses $1000/oz again – Because of the economic paradox, gold will continue to maintain its safe haven status in 2009. One of these days, gold will surpass $1000/oz again. In looking at the GLD chart, gold hit a low in mid-Nov 08 and has since built a nice rising linear resistance that it bounded in early Dec 08 and mid Jan 09. If gold breaks the upper linear resistance of $900/oz expect $1000/oz in Feb 09. If it does not expect a pullback. Aside from the technicals, 2009 is still a year of unforeseen economic strife and that will keep the price of gold high. Depending on where the economic paradox is at the end of 2009, gold will either be well above $1000/oz or testing it’s multi-year lows of $700/oz again.
Gold (GLD) prices from Jan 2008 to Jan 2009 (12-EMA green, 50-EMA red)
There will only be one viable American automaker by year’s end – The Big Three is already, in essence, the Small Two. Chrysler’s recent gift of 35% stake to Fiat for its access to technology and services is a desperation move to prove to the U.S. government that it has a viable plan to survive. However, the U.S. government is not going to perpetually support a half-foreign owned company at taxpayers expense. As for GM and Ford, 2009 will still be a very tough market. Any uptick by buyers will simply be for fuel efficient cars built by Toyota, Honda and even Hyundai. GM is effectively surviving on federal assistance, which runs out every few months. A radical solution has to found soon. Don’t fret though, because of the uniqueness of this market, hopes abound for small automakers that can make a difference in “green” vehicles.
SPORTS
Yankees back in business – Sorry non-Yankees fans, but 2009 is appearing to be the Year of the Yankees. A new stadium, a team salary in excess of $200 million, a re-focused Arod with Mark Texeira pushing him, injury free Posada, Matsui and Chamberlain? It’s gonna be a great three-team AL East battle all summer. Yankees will win the division and make it to the World Series once again.
10. Yahoo rejects Microsoft’s $45 billion takeover offer – February 11, 2008. This one has to rank as one of the most stupid business decisions ever. Since Yahoo practically started the internet search business back in the 1990s, they have quickly given up their dominant position to Google in the past ten years without a major fight. By the middle of 2007, Google had a 53.6% market share of the search engine business, versus Yahoo’s rapidly shrinking 19.9%. Microsoft’s $44.6 billion in cash and stock offer was literally a lifeboat and gave Yahoo the best chance for long-term survival. Yahoo rejected the offer and a later offer in May valued each Yahoo share price at $33. Yahoo’s share price had been languishing around $19 in recent years. Yahoo’s CEO and founder Jerry Yang demanded $37/shr! Eventually Microsoft got tired of Yahoo’s demands and pulled all negotiations off the table. What is Yahoo today, end of 2008? The share price is $13.03 and Yang was ousted in November. Although Microsoft still has lukewarm interest in Yahoo’s search business, the main opportunity for Yahoo has passed.
9. Housing prices continue to go down town – It’s amazing how so many analysts and normal people knew that the meteoric rise of housing prices was due to risky ARMs and other loans that were impractical and ticking time bombs. It’s amazing the federal government did not see this coming or chose to not do anything about it. Because of the dot com bust from a few years ago and the recession soon after, the Feds turned a blind eye and let free credit run rampant. The bomb went off in 2006, and median housing prices have gone on a free-fall from an inflation-adjusted high of $275,000 in 2005 to near $200,000 at the end of 2008. It will take a good while to sort this thing out. Housing prices are still historically high and with high unemployment rates, increasing foreclosures will continue to flood an already over-supplied realty market.
8. Unemployment rate – The United States has been pretty lucky in terms of unemployment rates for the past two decades or so. Ever since the recovery from the high inflation, 9.0+% unemployment rates of the early 1980s, the rate has stayed well below 8.0%. Since 1995, the rate has performed even better, only touching above 6.0% once during the short recession recovery in 2003. In January 2008, the rate was around 5.0% but had already been steadily rising throughout 2007. Since this January, the rate has put on the rocket boosters and is now at 6.7% nationally, with no signs of slowing down. Several states, such as Michigan (9.6%) and Rhode Island (9.3%) already have unemployments rates above 9.0%! Another five states have rates above 8.0%! Stats were from Nov 2008 and look to be higher when December stats come out.
7. What happened to the commodities bull market? – Oil, gold, silver, platinum and copper. All were at multi-decade highs in 2007 and even in 2008. Since then? Crude oil prices have dropped from $150+/bl to $37/bl! Most commodities lost more than half their values. Exchange-traded funds such as SLV, GSG, and XLE all dropped more than 50%. The one exception so far has been gold. Although gold prices have dropped from a high over $1000/oz, they have not dropped below $700/oz, and have recovered into the $800s since then. Gold is an unique commodity and it appears that it mostly trades as a safe-haven currency than a physical commodity. In looking at the chart of GLD (below), gold prices have solidly bottomed out at $70/shr and is looking like it will have a strong 2009.
6. Remember the $168 billion original stimulus package? – That amount seems so little nowadays especially when Obama is bandying around an $800B to $1 trillion stimulus package. Add to that the $750B bailout package given to financial companies and automobile companies. This is a year of bailouts and stimuluses and so far they have not helped the economy. Instead, the state of the economy is at its worst at the end of 2008. The expected package by Obama will be an early focus of the Obama administration. I think most people could use an extra few hundred dollars in their pockets.
5. The survival of American automobile companies – General Motors, Ford Motor Co. and Chrysler became the poster child of the current economic crisis hitting main street. On display was the millions of jobs, especially blue-collar jobs, in America at risk of disappearing due to the recent decades of mismanagement, overhead and foreign competition of the US auto industry. With the finance industry easily getting a $750B bailout, it seemed absurd that an industry that for decades represented hard working Americans and unions had to literally beg for a few billion dollars to survive. It was obvious where the attention of politicians were. Although Bush recently said that $18B of the $750B bailout would be immediately used to prop up GM and Chrysler, the long fought battle was wasted time and energy by the attention garnering and bureaucratic Congress.
4. Bernard Madoff arrested on $50B Ponzi fraud scheme – When the $50 billion Ponzi fraud scheme by Bernard Madoff was revealed in early December, it was the main headline of major news websites for a mere few hours. Since then, as more details trickle out, the fraud continues to take a back seat to the macro-economic recession covering the globe. In any other year, the news of a legendary and consummate businessman (and a former NASDAQ chairman) being arrested for a fraud-scheme covering possibly the largest dollar amount in Wall Street history would ripple for weeks, if not months. However, with white collar crimes dominating the post-dot-com era (Enron, Worldcom, Martha Stewart, Tyco and the 2008 unraveling of the hedge fund industry), the public is now immune to financial fraud. Quite unfortunate. (See here for What is a Ponzi scheme)
Corporate bankruptcies on the rise in 2008.
3. Bankruptcies and those near it – It has been a sad year for many corporations as they head towards bankruptcy. Many of them well-known with years of solid profits. The list continues to grow and the impact of the recession on the consumer and his/her buying habits is only beginning. Circuit City, Linens ‘N Things, KB Toys, Frontier Airlines, Mrs. Field Cookies, Steve & Barry’s, Whitehall Jewelers, Mervyns, Sharper Image and Waffle House are some of the big name bankruptcies. And this list doesn’t even mention financial companies, which I discuss in #2. See this list for a more comprehensive list of corporate bankruptcies in 2008.
2. The demise of the hedge fund and mortgage finance industry – The derivatives market has become a multi-billion (if not, trillion) dollar investment industry that is complicated and largely misunderstood, even by the most astute financial advisors. Derivatives, as its name suggests, are investment products that are created off of actual traditional investment products. That means their intrinsic value is conjured up and their existence puts them closer to full-blown gambling. The current financial laws and oversight are not suited for such trading. Over the years hedge funds and derivatives took on more and more of the investment strategy of major financial corporations. Derivatives that were based on risky mortgages and insurance eventually collapsed as housing prices plummeted with lendees’ inability to pay the mortgages. The result has been a credit lockup unforeseen in decades. Major financial companies toppled and its effects are still not fully known. Major companies that totally collapsed include Bear Sterns, Lehman Brothers, Washington Mutual, ANB Financial, Fannie Mae, Freddie Mac, and AIG. See this list for a more comprehensive list of financial collapses in 2008.
KBW Philadelphia Bank Index - performance since 2004
U.S. Recessions since WWII (Courtesy of CNN)
1. Recession or Depression – Which leads to the number one financial news in 2008. Are we in a deep and difficult recession or a depression? In early December, it became official that the U.S. went into a recession in December 2007. To some analysts, this is good news because it means we are closer to coming out of it. As you look at the chart on the right, most recessions last around one year. Based on the official Dec 2007 start date, historically we would already be on the tail end of the recession. However, to other analysts, this is bad news because the worst is yet to come, and we are already twelve months into it. With no light seemingly at the end of the tunnel, these analysts portend a long recession. Bad news from around the world keep coming in and the bottom of the current economic crisis still has not occurred. Oil prices continue to drop, gold prices have since rebounded (bad for economy), and the dollar index has begun dropping again. Signs of major inflation on the horizon are evident, especially with the massive bailouts and the Feds lowering the overnight interest rate to its lowest level ever, 0%-0.25%.
The entire 2008 Top 10 in Finance is all bad news. Most of them have to do with the current economic crisis. The key hope is that the Bush administration is finally over and 2009 brings a more adept and intellectual administration that will do just about anything to get America out of the economic dump. An administration that seems focused on the middle class and job creation. However, with it comes more and more national debt and the mortgaging of the future. There seems to be no alternative. This will most likely lead to long-term inflation when countries such as China, India, Russia and other Asian countries continue their rise to redefine the existing economic world order. This is not to say that the United States is doomed to be a second-bit player, as we know that is unlikely. However, the country needs to refocus on what made it a superpower in the first place, investments in technology, jobs, science, and innovation.
Yankees back in business – Sorry non-Yankees fans, but 2009 is appearing to be the Year of the Yankees. A new stadium, a team salary in excess of $200 million, a re-focused Arod with Mark Texeira pushing him, injury free Posada, Matsui and Chamberlain? It’s gonna be a great three-team AL East battle all summer. Yankees will win the division and make it to the World Series once again.
Silent Archimedes 
