Stocks, Bonds, Commodities and Currencies: My Predictions for 2009

2008 was a wild and hairy year, for sure. Volatility was the highest I’ve ever seen it and also the highest I can ever find on record.

The Dow dropped from over 14,000 down into the 7000s. Oil dropped from $147 down to just under $40. These were some of the fastest drops I’ve ever seen in my life.

So what’s in store for 2009 for stocks, bonds, commodities and currencies?

Prediction #1: Stocks Finally Stabilize and a Few “Select” Sectors Will Lead the Way Out

In stocks, you are going to see stabilization for 2009. In fact, it will likely “base” in a very wide sideways range for much of 2009 as it catches its breath to head higher into the next bull market in late 209 or 2010.

The transportation and technology stocks tend to lead the way higher out of recessions and bear markets. So I would suggest looking into the Transportation ETF (IYT) or UPS for an individual stock. In technology, I’d suggest looking to the Technology ETF (ROM). Keep in mind that this is an aggressive technology ETF and it will be very volatile.

Obama, it appears, will also make the infrastructure stocks hot once again as the government spends money on roads, bridges, etc. So I’d suggest the Infrastructure ETF (MFD) or CAT as an individual stock play. Keep in mind that individual stock plays carry far more risk than an ETF.

Believe it or not, Chinese stocks will once again outpace U.S. stocks. They are starting to recover already as China cuts interest rates, cuts taxes and cuts reserve requirements for the banks. These are all huge steps in the right direction for their economy.

They’ve been very aggressive lately in taking the necessary actions and it’s starting to draw money back into China even now. So I’d suggest FXI as the Chinese ETF to invest in. With such an aggressive emerging market, I won’t suggest an individual stock as I think it is wisest to stick to an ETF here.

Prediction #2: The Next Bubble Is in Bonds – Specifically Treasuries

Those are my top picks for stocks in 2009. What about bonds. Well, I’ll be brief here but with stabilization in stocks, I see the eventual “popping” of the “bond bubble” that has formed. That’s where the present bubble is at and it makes it to where bonds aren’t all that safe right now…well let me be more specific. Government bonds aren’t as safe here as far as appreciation goes. I think they will pop at some point in 2009 and bond prices will plummet. So I wouldn’t suggest owning bonds until that bubble bursts.

However, there could be some bargains in corporate bonds as stocks stabilize and recover.

The only recommendation that I’d make here is to be “long” (buy) TBT (an ETF that shorts bonds) once the bubble is nearing its top. Right now IS NOT the time for that but it may be in the coming months. Remember, that the Fed may exaggerate this bubble even further as they buy up treasuries in the coming months.

So if you see a real, concerted push up for stocks, then it will likely be time to buy TBT. Until then, don’t get into this one until you see those signs. Don’t be quick to rush into this one.

Prediction #3: Commodities Stabilize in 2009 Courtesy of the Federal Reserve and OPEC

So what about commodities? I think you will find that oil stabilizes around the $30-$40 a barrel level due to OPEC supply cuts and a slight recovery in demand due to the recession coming to an end by mid 2009. Therefore I’d suggest buying the oil tracking ETF (USO). I think that one is ripe now for a longer term investment.

I also think that the huge sums of dollars that the Fed is printing up and pumping into the economy will re-inflate the economy. As it does, the gold ETF (GLD) should prosper. So I’d buy it on any major pull back. Keep in mind, that this ETF is extremely volatile. In the ones that I mention that are really volatile, you might want to consider buying smaller positions in.

In general, I think commodities as a whole will stabilize and recover a bit at least by latter 2009. After all, the Fed is creating a ton of money that is being pumped into the economy. So you have a huge sum of money chasing a finite amount of goods. This will eventually kick in and push up commodities once again. Also, this “printing of money” will also dilute the value of the U.S. dollar which will also aid the commodity recovery.

Prediction #4: Goodbye U.S. Dollar and Yen; Hello, Euro and Aussie Dollar

Lastly, what about currencies? Many were shocked in 2008 when I stated that the U.S. dollar and yen would rise.

Now I’m saying that the heyday for the dollar and yen are coming to an end. These were great defensive plays when stocks were sinking but now they will lose their luster as stocks stabilize in 2009. Also, these currencies carry the lowest yields of any major currencies of the world. So there is almost no incentive to hold these anymore.

Foreign currencies will once again rise up against the dollar and the yen, especially the euro and the Australian dollar. The euro is the “first stop’ for currency investors when they flee the U.S. dollar because it’s the world’s next most liquid currency and is also referred to as the “anti-dollar”. So when U.S. dollars start to sink, the EUR/USD ought to be your first pair to buy. Secondly the AUD/USD (Aussie vs. the U.S) pair is the next one to buy.

The Aussies are known for a “commodity rich” land. Therefore as the demand for commodities picks back up and also China’s economy improves, Australia will benefit (since China is a big “customer” of Australia’s goods).

Also, the EUR/JPY (euro vs. the yen) pair will prosper as stocks improve. You will find that this pair “tracks” stocks the most closely over longer periods of time. Therefore, as money runs away from the dollar and the yen and to the euro, EUR/JPY buyers will benefit.

I mention all of these asset classes because it’s good to have a diversified portfolio that encompasses them all.

I hope you have a Merry Christmas and a prosperous New Year!

Disclosure: no positions

Comments

[punk_ash:]

don't take credit for your call on US $, there are 1 million pundits predicting everything, you happen to be correct on this one, just chance...

2008 Dec 23 04:18 AM

[myWealth.com:]

Great analysis is never by chance.

2008 Dec 23 08:56 AM

[myWealth.com:]

It wasn't by chance. It was by macro analysis. Looking at the whole pie and not just one piece.

2008 Dec 23 08:58 AM

[Asbytec:]

So, let's see. The Fed has reduced interest rates to zero and is flooding the banks with money. That hasn't even begun to slow our descent into recession. Jobless claims are way up.

And, there is deflation (at least targeted deflation.) Banks are hoarding cash despite Fed's attempts to force them to lend. But, they are not lending and folks aren't borrowing, especially in the all important housing market.

We're firmly in recession and losing jobs with falling home prices. Banks are strapped and don't trust each other. The Big 2 are forced into restructuring and may have a plan to do so in 90 days, but will not be near implementing such a plan. Does this sound like something we can just "snap out" of by mid 2009?

Even if the credit markets begin flowing by June, what about the looming period of (hyper) inflation? Man, we have a long way to do and a lot of work to do before things stabilize.

2008 Dec 23 10:37 AM

[myWealth.com:]

Things are always still bad economically while stocks start to recover. This is due to markets anticipating recoveries about 3-6 months in advance of the trough in the economic cycle.

They want to grab up value before it becomes obvious to everyone. Some think that stocks rise as the economy rises, but that's not how it happens. The rise in stocks precedes the rise of the economy (in anticipation of a recovery).

Here's a good example of this: images.google.com/imgr...

See the stock market move in red and the economic move (cycle) in green.

So what I'm talking about is the stock cycle that leads the economic cycle.

Hope that helps in clarifying. This is why there will still be bad news surfacing yet stocks eventually rallying. That always leaves people scratching their heads. However. once they see how the market cycles coincide with economic cycles, it solves the mystery.

2008 Dec 23 02:03 PM

[Ron2008:]

To have inflation you have to have demand. With unemployment soaring, demand will take a long time to show up.

The housing market will never have the demand of a few of years ago because subprime mortgages won't be handed out like candy again.

2008 Dec 23 03:44 PM

[myWealth.com:]

Historically, stocks start to recover when unemployment is at its highest. Why? The lead time that stocks have over the actual economic cycle.

2008 Dec 23 04:30 PM

[Asbytec:]

Sean, thank you for the clarification. Yes, many indicators, like unemployment, are lagging indicators.

Ron, I believe you're right on both counts. And furthermore, it will be a good long time before anyone buys MBSs...at least in their current form. There will probably be some regulation and rules on transparency forthcoming. Also, on CDS and other instruments. Especially, in the light of the Madoff scandal.

Personally, I hope this means the Fed will actually govern (tighten) the money supply produced on such instruments. If so, I suppose this will mean lower credit limits for many consumers and tighter credit all around. I guess that will be a good thing.

2008 Dec 23 10:13 PM

[pitaking:]

We might see a 5-6 month rally in stocks to S&P 1000 but I don't see any chance of a new bull market by the end of year. Housing is still in the early stages of crashing around the world, unemployment and recession are just beginning to ramp and earnings will be in free fall. We are still firmly in a bear market and we don't base until S&P 400-600 range.

2008 Dec 24 07:35 PM

[SeekingTruth:]

Good work, and it required a lot of diligent analysis to do this useful product.
I am sobered however by the 1966 to 1982 cycle in which we could similarly default judging from all the present conditions. Comments about weakening S&P 500 earnings forecasts are also a great concern, as previously mentioned.
Therefore I would also prefer well selected and closely watched individual stocks, and similarly selected ETF's when your own indicators suggest an appropriate move for increased risk taking.
Mutual funds should now be avoided by most due mainly to their harsh tax implications and traps. Better choices abound.
And be ready to take a good profit when it presents itself, and do not hang on in the case of individual stock or same sector weakness. There are ways with options to mitigate an early sell miscue if one educates themselves well.
If you do not have a set of reasonably trusted indicators, then I would be late to the party this time around. If you don't have them -- get them!!
And yes , cash is better than bonds right now, if you think we will ever recover at all. The bond short position at a later date is also well noted and received.
All in all , a fine piece of work.

2008 Dec 25 04:28 PM

[myWealth.com:]

Glad you enjoyed the commentary, guys. Was glad I was able to clarify my points as well.

I thank all of you for reading my posts. I appreciate that. Visit my website if you get a chance sometime too.

Looking forward to many more articles on Seeking Alpha. I love this site.

2008 Dec 26 10:51 AM