Nine Ways to Profit in 2009

by: Matt Callow

The Big Picture:

Resist the urge to jump into this sick market. Anyone looking at 2008's near 40% decline will feel tempted to jump in at these bargain-basement levels. If you reference the year 1930 (one year after the start of the Great Depression), you may think twice. Despite all the fiscal and monetary stimulus being thrown at our economic mess, the US, and the world economies will look a lot like they did in 2008.

Political and Economic Predictions:

  • Oil falls into a range of $20-$30 where it settles for a short period. Be on the lookout for a complete collapse of Russian and Venezuelan economies as they cannot exist on such a low oil price. Expect military conflicts to ensue around the world, which will raise the price of oil somewhere between $45 and $85 by year end (depending on severity of conflicts).
  • Eastern Europe's massive debt loads and Western Europe's over consumption, and economic infighting cause massive upheaval within the EU. Expect European banks to rapidly erode, followed by the fall of the Euro, and maybe some major EU partners pulling out of the EU, or at least pulling out of the Euro.
  • Global recession continues. Talk of resisting isolationism is overcome by reality. Isolationism and protectionism accelerate global recession, causing commodities to continue the path of deflation. Talk of hyperinflation will be prevalent in 2009, but will not be seen until 2010 or later.
  • Hedge fund industry (with massive amounts of cash on hand, ready to move back into the market) cannot save the economy. Calls for new regulation, and inability to make profits under the current "2-and-20" high watermark standard leads to massive hedge fund closings. We have only seen the tip of the iceberg on this one.
  • Gold ultimately trades higher. I expect gold to waffle around its current price in the near-term, with a possible trend to the downside (due to commodity deflation), followed by a year-end rally (flight to safety) that closes out above $1000/oz.
  • 2007 was the subprime crisis, 2008 was the credit crisis, 2009 will be the consumer crisis. Unemployment will hit double digits (maybe not until 2010), housing markets will continue to fall, consumer defaults on mortgages, credit cards, and student loans will explode. Expect retail, and automakers to continue to struggle. China's economy will continue to falter (at a more rapid pace) due to the falling US consumer demand. Tech stocks finally take a long-overdue beating.
  • Despite attempts to lower mortgage rates to 4%, the move will fail to kick start the housing market. Refinancing will balloon, leading to a further split between the "haves and the have-nots."

Nine Ways to Profit from 2009

One lesson learned from my 2008 predictions was not to lock myself into any theme for a full twelve months. All of these predictions will be employed with the ability to trade in and out of themes as prices and conditions warrant. All moves will be posted before they are made on my blog.

The following themes investments will make up the 2009 Aggressive Trader Portfolio:

Theme 1: Short Banks. We have not seen the end of this story.
Action: Buy FAZ.

Theme 2: Short Oil to $25, then reverse and go long.
Action: Buy SCO.

Theme 3: Short Technology.
Action: Buy REW.

Theme 4: Long Gold.
Action: Buy DGP.

Theme 5: Short REITs.
Action: Buy SRS.

Theme 6: Short China.
Action: Buy FXP.

Theme 7: Short Europe. Although I'd like to short the Euro, that currency play would be too risky. With the Fed publicly acknowledging its plan to use Quantitative Easing, (and the ECB's lack of willingness to do the same), I cannot feel confident that the Euro will fall, relative to the US Dollar. Instead, we will short European markets by shorting the MSCI-EAFE Index, which contains about a 70% share of European weighting.
Action: Buy EFU.

Theme 8: Short Retail
Action: Buy SCC.

Theme 9: Short Toyota Motors (NYSE:TM). Although it is in a healthier financial position than any of the Big Three Automakers, Toyota is facing the same falling demand, and the same discerning consumer. On top of that, expect the new administration to throw billions more at the American companies with nothing going to TM. Finally, a strengthening Yen makes US auto sales less meaningful and less rewarding to the company's bottom line.
Action: Buy TM.SK (July '09 Put Options 55.00 Strike Price)

As always, standard disclaimers apply. No guarantees are implied. Do your own research and invest at your own risk. Good luck in 2009.

Disclosure: Long SRS.