Market Predictions for 2009

I admit this is kind of a silly thing to do after the year we’ve just finished. If I’m right, it’s dumb luck and if I’m wrong, well, I’m wrong and don’t look too clever. For those of you looking for specific numerical targets on liquid tradeable instruments, you don’t need to read further as I’m not sure these are useful at the best of times and I’m quite sure that I’m not going to put my name on what essentially are lottery ticket numbers. Besides, any trader worth their salt knows that path-dependency and trading strategy is very often more important than actually predicting where something is going.

And if I had forgotten this, 2008 served as a violent reminder as almost all my main macros calls turned out to be big winners and yet on my trading account I ended the year (in November, when I essentially gave up pretending that I had the time to properly manage any market risk or positions) more or less flat, and my best estimation of my overall net worth was approximately flat to down. 10% in GBP - not too shabby but much less flattering when considered in EUR or USD…

So what were these calls in 2008? In no particular order:

• Short (UK/US) Banks: Winner, but…(too timid, took profits too soon - head faked by mid-year rally)
• Short Oil / Long Gold (mid-year): Winner, but…(put position on too big, too quickly @ ratio of just over 7, stopped out just before giant move to current ratio of c. 21..)
• Long Brazil (Bovespa): Loser… (looked brilliant for a few months then didn’t react to change in oil market sentiment and hedge fund deleveraging post-Lehman)
• Short GBP: Winner, but… (too timid, too early, tried to be too clever…couldn’t figure out what to short it against - USD, EUR, CHF all looked like crappy alternatives, kept getting stopped out by ridiculous volatility, and was too busy with work to get much of the big December move)

So what do I think 2009 will bring? Here are a few ideas with a (short) summary of my thinking behind each.

• A recovery in institutional credit markets: Smart money will start the long and difficult process of separating the wheat from the chaff, i.e. the bonds that deserve to be priced at 10 cents will decay into default and those that are intrinsically worth par will start moving back in that direction. In fact, this has already started to happen (you can see this by looking for instance at the performance of the iBoxx investment grade corporate bond indices (you need to register to drill down into data) which are mostly up 5-10% since hitting lows in mid-October) although to make really interesting returns means sifting through individual securities and names. So for the first time in the last 10 years, a corporate fixed income investment manager will actually be able to create “alpha” (as opposed to just leveraged beta masquerading as alpha…)
• Equity markets go up from here (for example S&P500 at 890), and volatility drops: I think the late November low might hold, although we could possibly see one more down trade in 2009 to lower lows, I think this is unlikely and think the market will grind mostly higher through the year. I could bore you for an hour about why I’m thinking this way but boiling it down to three points will probably frame the foundation of this view. (1) Price action: market should have gotten killed on Madoff news. It didn’t. First time we’ve seen positive price action in more than a year… (2) Wall of money: in this world of instant gratification and the constant shrill drone of a CNBC inspired financial media, when the various central bank and government interventions didn’t miraculously fix everything instantly, the downward spiral continued and often accelerated; despite everyone knowing these things take weeks and months (sometimes years) to have an effect. This time will not be different. (3) More buyers than sellers. Cash was king in 2008 because it was a very scarce commodity. It isn’t so much anymore and real returns from holding cash in 2009 will be negative. Besides, even though they will be far fewer in number, many many people will still be paid to invest and holding 50% or more in cash is not what they are paid to do.
• Selective emerging markets will outperform: Basically the ‘de-coupling’ thesis has some merits and the baby was thrown out with the bath water in the viciousness of the last 6 months bear market. I like Brazil (so I should probably buy more…), (sub-Saharan) Africa and (selectively) India. Of these three, the only one you can play via public markets is Brazil; for the other two the opportunities I like are venture capital / private equity plays so not easy to access.
• Better to be long oil rather than short: I haven’t had time to check pricing, but the best way to play this might be to buy long-dated deep OTM calls. Volatility is at record highs so this might look stupid to start, but I think the world is exactly at the marginal supply/demand fulcrum and will be for several years. Economics 101 tells me that the price will therefore be subject to massive, violent swings as demand moves up and down with the cycle. Basically, while 2008 might (we hope!) be an outlier in terms of volatility for many markets, I’m not so sure this will be true of oil.
• GBP will stop going down: Not because the government or the economy has improved, but simply because relative to the other major economies it isn’t actually that much worse off and the shorts will get too smug and the bargain hunters will come out. The only problem is that I’m not sure what level it will bounce off of; are we there already or do we go to 1.25 vs USD and 1.10 vs EUR as has been suggested to me by a friend? I’ll admit to this view perhaps being wishful thinking (see above) but have tried to guard against that and after being an extremely vocal GBP bear a year ago, I can’t believe that I’m now finding myself in the bull camp. This discomfort actually makes me feel better about my view.
• The next Microsoft/Google/JPMorgan*/General Electric*/Ford* (*the originals) will be founded in the next 1-3 years: The emperor has no clothes. The existing paradigm is not just bankrupt, but has been proven so. The massive barriers of inertia and incumbency have been breached and it is only a matter of time before smart, creative, energetic entrepreneurs and innovators take advantage. Of course I’m talking my book here as we’ve set up our new business to help find, finance and advise these entrepreneurs and Amy and I hope and expect to find one or two future Gates/Edisons/Morgans… Indeed, I’m pretty confident this will come true even if (especially if?) all of the above views turn out to be wrong.

In any event, I hope I’m right. Obviously it will be a nice boost to my ego and probably help pay the school fees, but mainly I think it will make the world a bit nicer place, especially for the vast majority of people who had no part in the (inevitable) excesses that led to this economic cleansing and yet are suffering its consequences. And if I’m right about the last point - we won’t know for a decade or so - the world will also be a better place. But that’s for another post, another day.

Happy New Year. All the best for a healthy, successful and fulfilling 2009.

Comments

[Greg Pinelli:]

Sean..I think your call on the credit market recovery in institutions in 2009 will be the call that sets up spark for a major resource recovery....There's NO doubt the makings are in place and the reserves are stacked to the sky...once the match is struck watch out....From that seminal event my take is...
1. Buy USO (DBE is also worthy and gives some variety in product) and just hold it....this provides a solid base for oils about face...
2. Get some Gold NOW!! Today!! The boomlet that's on the doorstep is fueled by money expansion and prospective credit explosions...ALL currencies will depreciate, though just not against each other.
3. Look to pharmaceutical and large infrastructure companies (SGR...ABB...a CEF for pharma..maybe SWZ)...
4. Nuclear energy will gain by default...coal is going to be reamed big time and there isn't enough nat gas supply for the longer run..electricity generation is THE hallmark of civilized society and renewables are more correct than plausible...URPTF..DNN...
Happy New Yeart o all!!!

Jan 01 11:16 AM

[secmaven:]

If oil is your thing in 2009 then go for DXO.

Every investor in gold in the world except the Japanese made money in 2008. This follows on the hells of six prior years.
Stock investors in 2008 invariably lost, whatever bourse they were trading.
There is a lesson here. A tide of money will flow into gold and swamp JPMorgan's short selling scam on the COMEX.

Jan 01 11:48 AM

[Sean Park:]

It seem that Blackstone's CIO Robert Doll has a number of similar views...


On Jan 01 11:16 AM Greg Pinelli wrote:

> Sean..I think your call on the credit market recovery in institutions
> in 2009 will be the call that sets up spark for a major resource
> recovery....There's NO doubt the makings are in place and the reserves
> are stacked to the sky...once the match is struck watch out....From
> that seminal event my take is...
> 1. Buy USO (DBE is also worthy and gives some variety in product)
> and just hold it....this provides a solid base for oils about face...
>
> 2. Get some Gold NOW!! Today!! The boomlet that's on the doorstep
> is fueled by money expansion and prospective credit explosions...ALL
> currencies will depreciate, though just not against each other.
>
> 3. Look to pharmaceutical and large infrastructure companies (SGR...ABB...a
> CEF for pharma..maybe SWZ)...
> 4. Nuclear energy will gain by default...coal is going to be reamed
> big time and there isn't enough nat gas supply for the longer run..electricity
> generation is THE hallmark of civilized society and renewables are
> more correct than plausible...URPTF..DNN...
> Happy New Yeart o all!!!

Jan 07 06:54 AM