10 Drivers That Will Affect the Market in 2009

[Excerpted from Bill Cara's Week in Review]

Let’s sum up 2008 and look into 2009 and 2010 for ten drivers that affect stock prices.

1.Investor Confidence:

• Due to the length and magnitude of the Bear market and accompanying malaise over the Humungous Bank & Broker and Insurance company failures like Wachovia (WB), AIG, Countrywide (CFC), IndyMac, Fannie Mae (FNM), Freddie Mac (FRE), Bear Stearns, Merrill Lynch (MER), Lehman Brothers, and the subsequent TARP-related banker bail-out program, the automaker bail-out, and then the Madoff fraud, there is very little confidence in the market. Volumes have plummeted along with prices.
• So far, neither the Fed nor the Treasury Department have given any semblance of an adequate explanation of where, why or how much of the taxpayers’ monies have gone to banks. The banks appear not to be lending these funds to customers, but instead are buying Treasury bonds and notes for sale to the Federal Reserve. As I see it, this should be called the Paulson Carry Trade – stripping the taxpayer to refinance the banks. The Obama Administration will be put on the spot to get answers.
• The Obama A-Team of Geithner, Summers and Schapiro will have to make many changes to bestow investor confidence in 2009. Will Bernanke stay on as Fed chairman or moved out to clear the air?

2.Economy: The US economy is still the economic engine of the world.

• Inflation or deflation is the issue. In the face of the Credit Default Swap-based collapse of the credit ring, subsequent counter-party risk avoidance and massive deleveraging by banks has taken the wind from speculators, leading to serious deflation. Analysts are thinking back to the long-running deflationary impact that kind of policy had on Japan.
• Serious economic stimuli and financial bail-out programs, such as TARP, however, are causing some analysts to make reference to Weimar Republic type inflation risk.
• The jury is still out regarding inflation or deflation, however, which is part of the reason for low volume and extreme volatility in all the capital markets (equities, fixed income, commodities, precious metals and forex).

3.Jobs: After the March US Unemployment Report showed an increase to +5.1% unemployment, I wrote the following perspective:

http://www.billcara.com/archives/2008/04/caras_commentary_community_cha_...
• Unemployment in the US (and across Europe and elsewhere) will become the next economic crisis. Traders, you need to plan for the effects on your portfolio.
• Something in a Goldman Sachs (GS) briefing I received Sunday (see below) pushed me into looking at historical unemployment records and the conclusion I derived can best be defined by the word ‘sea change,’ which I don’t think people are presently contemplating.
• To the point: I believe unemployment in the US will double in three years from the low of April 2007. By April 2010, I anticipate there will be 13.5 million unemployed, or 8.75% of the civilian population. That’s an increase of 6.73 million Americans without work.
• If true, that means more foreclosures on homes and cars, more homes on the market, with much lower prices to come, and older cars on the road, no wage inflation to speak of, and so on. The bottom line is that macro-economics will play an increasing role in how we manage wealth.

There is no change from what I wrote by way of that warning almost nine months ago.

• For 2008, the average unemployment rate for each quarter is about 4.9%, 5.3%, 6.0% and (likely) 6.7%. Going forward, I expect to see rates of 7.5%, 8.2%, 8.4% and 8.6% for 2009, and 8.75% at its peak in 1Q2010.
• However, the situation is actually worse since these numbers exclude the capable people who either were forced to take menial jobs or who gave up looking for work.

4.Consumer Confidence/Spending:

•The net worth of Americans plunged -11% in Q3 and will likely be worse than that in Q4. That fact puts the brake on spending.
• US Retailers first came under fire in June 2007, with an immediate impact on their share prices, and this problem continued through the Bear market, with occasional Bear market rallies. Because the business just isn’t there, companies have closed many stores, deferred plans to open many, and will close more in 2009. One analyst has predicted that 14,000 retail stores will close in 2009.
• US automakers have shut down lines and closed plants. Foreign manufacturers have been forced to stop shipping to the US as domestic dealers are refusing delivery and cargo ships have no place to put the ones in transit. Prices will have to be further reduced, which impacts the used car market as well, which hurts the people who are selling.
• Companies with the strongest balance sheets, most prudent management, best business models, and solid operating profit margins and returns on invested capital will carry on regardless of the levels of discretionary spending. Others will close their doors.

5.Housing:

• Since peaking early in 1Q06, the annual rate (in millions) of US housing starts fell each quarter in 2008 from 1.05m, 1.03m, 0.88m to likely around 0.75m in Q4. After reaching about 0.66 in 1Q09, the cycle should bottom and the trend sidetrack for maybe three quarters as banks complete the sell-off of foreclosed homes, and people who have a need to sell drop their price to market rate.
• House builders will likely start to build again after they see the cycle reach a bottom, but they will be building smaller, cheaper houses than through the period from say 1998-2006.
• Multiple unit residential developments in city centers and urban renewal projects will now take the lead from the suburban developments.

6.Business Confidence/Spending:

• In a major survey of chief financial officers done in September, there was a consensus that business spending would increase slightly in 2009. The same survey two months later shows a consensus cut of more than 10%. Both operational spending and capex is involved.
•Credit issues will continue to constrain capex, probably through the end of 2Q09, but not much longer.

7.International Trade:

•‘Trade war’ will be the next crisis facing capital markets.
• Traders believe that today’s global financial and economic crisis will cause most governments of the exporter nations to legislate a significant set of manufacturer support programs, such as the recent Detroit Big 3 bail-out. As other countries follow, there will be major challenges at the WTO.
• As 2009 and 2010 becomes a period of increasing tariff legislation, I expect to see a consequent impact on the global trade of goods and services. After 27 years of continuous growth, international trade volumes and amounts will now drop, albeit slightly.
•Manufacturers that are domestically oriented will be the beneficiaries.

8.Forex:

• A report from Goldman Sachs states, “The biggest trades of the year may have been best expressed in correlation trades – EUR to Oil, AUD to Gold, JPY to US Rates. The path of 2009 will have a number of trades that revolve around similar assumed trading rules. The present connection of the USD to credit or EUR/JPY to equities may be at risk.”
• The Goldman report added, “The rush for growth in 2009 has left many nations searching for any mechanism to jump start their economy (including forex). The USD weakness that followed the explicit push for Quantitative Easing was (immediately) followed with similar extraordinarily dovish comments and actions from Japan, Norway and Switzerland. Risk of a G10 rush to FX for relief may be the short-term block to a broader G7 consensus on how to fix the global recession.”
•The USD strength this year has been a safe-haven move. Going forward, a stronger USD will require a hike in interest rates.

9.Gold:

• During 2008, the GLD ETF peaked in March at 100.44, and then dropped to 83.57, lifted to 97.50, dropped to 72.51, lifted to 92.00, dropped to 68.81, and lifted recently to 86.91 before closing this week at 85.60. This pattern of lower highs and lower lows is the classic definition of a Bear market.
• Early in the year, I believed that precious metal prices were headed lower, so I caught the Bear. In mid-September, perhaps a month early, and through the end of October, I reversed my position, calling for a new Bull in gold and silver.
• I issued a SELL alert on Goldcorp (GG) on February 28 at US$44.71. The stock later moved to a July high of $52.49, but I stayed bearish until after the price dropped when I followed up with a buy at $26.42 on Sept 12. The price dropped to a forced selling spike low of $13.82 in October. On November 12, I issued a subsequent detailed report on Goldcorp, indicating I was a buyer at noon that day at $17 (long the stock under 18 with some put writes that reduced the cost base). The closing price this week is $30.41.
• On October 28, I recommended buying Silver Wheaton at US$2.59. The price subsequently went to $6.98, and the closing price this week is $6.13.
• Concerns among traders that range from extreme deflation to extreme inflation will continue to elevate volatility in all capital markets, including precious metal markets.
• Traders are conscious of the extreme amounts of debt being created by governments, since September-October, to stave the global economic crisis, which bodes well for much higher precious metal prices.
• As more capital flows into higher risk stock and commodity-related investment. Gold prices will benefit. I expect to see GLD at 150 in 2009.

10.Bonds:

• Treasury yields are lower now than at any time in history. A yield of 2.5% on the 30-year long bond, 2.1% on the 10-year, 1.3% on the 5-year, and 0.7% on the 2-year Treasury notes and bonds will likely not be seen again in the lifetime of most traders. Much higher rates and lower bond prices are likely during 2009 and thereafter.
• As soon as the economic crisis appears to be bottoming, traders will look closely at the enormous spreads between US Treasuries and AAA-rated corporate bonds, and those who require fixed income will start to move in that direction. Government, then, will be forced to follow unless they plan on not paying their bills.

Comments

[Emerald:]

Investment grade corporate bonds will be the clear winners as credit risk spreads tighten. Investors holding intermediate and long Treasuries will get crushed because it is an extremely crowded trade at this point. I am slowing buying corporates and am short the 30 year T Bond.

2008 Dec 29 11:28 AM

[Greg Pinelli:]

I like that Corp Bond trade..and Closed End Fund Pfd portfolios also...very large, unsustainable spreads. Treasuries are simply the latest panic purchase..Gold (and silver) is going to look very cheap at Decembers $900 (and $11) by April of 2009...it is IMPOSSIBLE to slam that much liquidity power (credit) into financial institutions and not have it gush at some point..and it will gush worldwide...it's hard to imagine a currency that won't be depreciating by the week.

2008 Dec 29 12:52 PM

[NOWHEREMAN:]

So let me get this straight: Pinelli wants you to buy Bonds in a currency which will be depreciating by the week instead of more Gold and Silver with that money.

I really don't understand the reasoning here. I guess, I'm not not very smart, duh.

2008 Dec 29 01:34 PM

[MarvinMBA:]

Buying bonds now paying zero interest rate could be hazardous to your finanances. I suppose thats for the suckers and the the author wants to make us aware of the potential hazards. I agree with most of the authors comments and this is one of the best commentaries I have read on Seeking Alpha....MarvinMBA

2008 Dec 29 03:47 PM

[NOWHEREMAN:]

User, total agreement on the ZIRBs., a Bubble if there every was one. But what will happen to make it burst?

And when it does will the spreads narrow rapidly via depreciation of Corporates and T Bonds simultaneously because of an excess supply of each?

2008 Dec 29 04:50 PM

[Greg Pinelli:]

You certainly answered the intelligence question..and anyone reading your gutless posts could hardly argue..Yes..I'd buy corporates because the spreads between Treasuries and Corps is too wide..I would also buy gold..because gold is forward looking and will handle any issues that come alone when credit creation expands beyond what anyone is expecting..got that a.whatever..duh???
Read my post and please..if you're fairminded..notice I ACTUALLY GAVE SOME RECOMMENDATIONS!!..any... can take cheap potshots..and believe me..this dude a.....whatever..is on to that game shamefully.


On Dec 29 01:34 PM aitvaras wrote:

> So let me get this straight: Pinelli wants you to buy Bonds in a
> currency which will be depreciating by the week instead of more Gold
> and Silver with that money.
>
> I really don't understand the reasoning here. I guess, I'm not not
> very smart, duh.

2008 Dec 30 08:59 PM

[NOWHEREMAN:]

Mr. Cara wrote an article previous to this one, the Title started with Low Volume ...

You were pushing DHS, JSN and JPS at the time. I did a quick analysis of your picks and selected my best pick of the 3 for the reasons listed.

I then recommended MHI which being a Muni CEF would be able to access TARP for a safety net, besides having a 10% Tax free yield paid on a monthly basis.

2008 Dec 30 11:34 PM

[NOWHEREMAN:]

What does Seeking Alpha imply?

To me it means looking for the Best investments. That is it, Just the Best. There aren't 100 Best investments or even 50. If I could find just 10, I would me very happy indeed.


There is an ongoing, probably, deep recession. The Government is involved in almost every aspect of the Stock Market and no one knows how many more cockroaches will be uncovered.

In this environment, I consider tossing out investment ideas willy nilly reprehensible at best. Especially if you can't defend your selection.

My selections are simple, varied and far, far inbetween.
They are Income oriented, well researched and will be held for 5 or more years unless something changes fundamentally, regardless of price.

I hold speculative stocks in my porfolio but do not recommend them simply because they do not fit in this venue. I do not lie about myself or invent history, science, mathematical formulas, whatever to push my agenda. I do not have an Agenda.

I ask questions and voice my opinions, and if people don't like my opinions, it is their right to question them.

If someone has to be vulgar to make a point, I will use my right to have that post removed.

I will not share my best ideas until I have a full established position. Since Most of my stocks are thinly traded usually less than 100 million shares outstanding with one less than 15 million, I will not publicize them. I want the lowest prices I can get during this Bear.

Suffice it to say they span the Globe, Australia, Canada, China, Marshall Islands, Sweden, UK, Vietnam.

So Pinelli, please continue to make a recommendation or 3 with every post, I'm sure they will all be Seeking Alpha Material.

2008 Dec 31 04:02 AM