What To Do in 2009

There is a special challenge for investors planning for 2009. It is easy to get caught up in emotion, especially when so much is going wrong. This causes people to look backward. Investors can meet the challenge by using a sound analytical framework and by looking ahead. For those nearing retirement, this is particularly crucial.

My advice to our investors emphasizes two major points:

1. The news flow is incessantly negative — fraud, corruption, mismanagement, greed, and every proposed solution called a bailout. When this message is repeated in every news source, it is also reflected in current market prices.

2. The market has a gift for us. Our initial rebound target is Dow 11,000. Let us see why.

Basic Rationale

We will not have another Great Depression, and the prices of many stocks are at depression levels. The collapse came in mid-September when the Lehman Brothers failure led to a credit market freeze. Take a look at the chart.

The Lehman failure, permitted by government inaction, made every lender suspicious of every borrower. Normal lending came to a halt, throttling regular business activity. Equity and credit markets had been priced for a moderate recession. Now many expected something much worse, a depression.

Meanwhile, the effect of the government policy has been underestimated. None of us expects the Federal Government to solve all of our problems. We have joined the criticism of the many mistakes.

Enough is enough.

The counter-reaction has been too extreme. People have expected immediate policy impacts. This is naïve. There are lags in implementation and in effect. The modern news cycle has become extremely short. Any new policy has scores of critics – all wanting to get on TV – within hours of the announcement. The reaction gets a pitch in blogs and in the press. The hot-button traders join in.

When the market reacts negatively, as it has for months, it seems to validate the pundit reaction. People are not looking at the actual policy effects, but rather at stock prices. Everything becomes a story of fraud, corruption, and bailouts. This is a trap.

Stories of corruption are easy to understand. Economic impacts are complicated. Successful investing means finding things that others do not see. The wise investor will see that current government policy is exactly the opposite of depression-era actions.

Data will triumph over speculation.

There are already many signs of improvement. Each is important and the cumulative effect is very important.

· No more dominoes falling. A few months ago we faced the risk of failure in many banks and major financial institutions. Whatever one thinks of TARP, it stopped that.

· Credit markets have improved. LIBOR rates are down and bank lending is improving.

· The stimulus package. Whatever the exact size, it will serve to add demand for services and employment.

· Lower gasoline prices. Consumers focus on what is in front of them. This is a boost to everyone’s weekly budget.

· The Fed on mortgage rates. Massive intervention by the Fed has driven mortgage rates much lower and they are still declining. Some homeowners are refinancing and it also helps affordability for new buyers.

· A housing bill. A major housing package will be Job #1 of a new Congress. There will be assistance for new home buyers.

No economic model – even the best – has any ability to forecast these effects. Why not? Models require relevant historic data. This is a collection of policies beyond any precedent. The economic predictions you read in the paper are more speculative than usual.

How to React

Our basic advice is to buy something. If you have been out of the market, Congratulations! It is now time to act.

If you have been invested, it is time to consider your asset allocation. Nearly everyone we talk with is over-invested in real estate, cash (CDs) and bonds. Stocks now offer a better opportunity.

Do not view the market, or the newspaper, or pundits as your investment advisor. Instead, look to the fundamental value of the companies and the stock prices that are offered.

Most investors are fighting the psychological tug that causes them to sell at market bottoms and buy at market tops. Great indicators, including our Gong Model and our Sector Rotation System, are in line with the fundamental analysis.

Are you a skeptic? Take a partial position. If you are out of stocks, buy a 1/3 position. If you are in stocks and thinking of selling everything, move to corporate bonds with a yield of 8-10% with half of your position.

You can make a big return even without an economic boom. Stocks will start to react when it becomes clear that a depression is “off the table.” That gets us to the initial target of Dow 11,000. That is over 20% for the market, and even more in our basket of stocks. It may take a few months, but we can then reassess the economic prognosis.

Some Examples

There are several great themes. We love energy plays in the drilling space. The majors need to replenish depleted holdings. The market has treated these stocks like oil futures. Our favorite is Transocean Energy (RIG), which has locked-in contracts with cancellation penalties. The valuation is so low that a double is easily possible with a more positive economic prognosis.

We also like construction and infrastructure stocks such as Caterpillar (CAT). Investors can wait a lifetime to see companies like this offered at single-digit P/E multiples on normalized earnings.

There are great growth stocks such as Apple (AAPL). The company has a broad range of products, and a low P/E relative to growth if one allows for the cash holdings. Too many people trade on rumors about Steve Jobs, ignoring the company fundamentals.

You can also find some unfairly punished stocks, those that declined with the general selling. We like ResMed (RMD) which works in the sleep disorder field. This is a growth industry where insurance pays the tab. They have an approved home testing kit, avoiding the mega-buck price tag from the past. It is not sensitive to the economy, but has sold off by 1/3.

There are many “Obama opportunities” where one can pounce when the time is right.

Conclusion

Rarely has there been such a great opportunity for investors. With it comes the challenge of putting aside emotions and looking forward. There are many stock ideas that will put some octane in your portfolio. Some investors can find these on their own. For others, this is the perfect time to get some professional help, leaving the worry to someone else.

Disclosure: Long RIG, CAT, AAPL and RMD personally and for clients.

Comments

[stox2buy:]

Personally, I think the prime time of investment opportunities for the so called: TECHNOLOGY sector, namely computer/network/inter... personal devices and enterprise software(ERP) are long gone.

The next big thing coming is stem cell based regenerative medicine, this is a huge field as big as TECHNOLOGY if not bigger. From the hardware(tools) to treatments to drugs, this is the golden opportunity for those who do some study, dig in further, a lot have been going on yet a lot more will be happening as the new year unfold especially in "adult stem cell area".

Investment in tools, treatments or drugs now is like investment in TECHNOLOGY a decade ago in hardware, software and internet/mobile.

Investment in tools is the safest and the 1st to be rewarded, then treatments and then in drugs. Treatments and drugs will have the biggest winfall but they are further down the pipeline in terms of timing.

Disclosure: long tool stock (KOOL), lurking on stocks in treatment and drug with stem cell/regentive medicine flavor.

Jan 06 01:25 PM

[investor88:]

Respect the charts, go long some at least.

Jan 06 06:31 PM

[Roger Knights:]

"If you have been invested, it is time to consider your asset allocation. Nearly everyone we talk with is over-invested in real estate, cash (CDs) and bonds. Stocks now offer a better opportunity."

Junk bond ETFs are a reasonable compromise. (Especially two weeks ago, when I bought one of them, before their recent runup.)

Jan 06 07:08 PM

[Roger Knights:]

PS: Your recommendation of AAPL will look good in retrospect.

Jan 06 07:11 PM

[Roger Knights:]

PS: Your positive take on AAPL is spot-on, as events in the coming two months will reveal.

Jan 06 07:14 PM

[Lars39:]

Time will tell. Significant recovery is more likely in 2010 than 2009.

Jan 06 07:22 PM

[sr9web:]

Yes, the panic crashing is mostly over.

Now comes the long slow starvation.

Jan 06 11:06 PM

[Chris H.:]

Watch the dollar fall just as fast as the dow goes up. We lose again.

Jan 07 09:31 AM

[Urbane Gori...:]

That's all the good news. The bad news however is that we still have a glut of homes on the market, repos are still occurring, more businesses are shutting their doors, unemployment is higher and looks to be going higher still. About 1/3 of the States in the US are reporting major funding issues (I live in Kalee-four-neeah! - We're number one! We're number one!) Food is rising again ($4.59 for a bag of bagels that cost me $2.59 2 weeks ago... Right!), Looks like a commercial real-estate collapse is right around the corner. Meredith Whitney says that the banks will be lining up in a month or two for a complete new round of TARP handouts. The big three should easily run through their first go-around in the next two months and car sales are dropping like rocks. China has apparently decided not to do the right thing and jump start the world's economy.... I could go on....

So who exactly is jumping up and down with joy over the price of gas..(Forgot to mention... Gas was $1.69 last week and now it's $2.01... Go figure... ) ..

The future doesn't look bright... With or without shades.. Or rose colored glasses.

Boy! Do I pity Obama....

jegan ;-)

Jan 07 04:57 PM

[Eric Rasbold:]

Well said, Jeff. I agree 100 percent that stocks offer better hope of return than any other investment vehicle. And now is the time. I am looking for industrial raw materials suppliers, concrete, and steel. I especially like Alcoa. General 'A' class engineering contractors may get a bump upon enactment of the stimulus, whatever form it may take.

Jan 09 12:00 AM

[long_on_oil:]

Anytime you can buy RIG for less than it cost you to fill your tank, you better do it. GE selling for less than it did in 1932...and paying a 7.7% dividend. Heck you can cut the dividend by 30% and still have a bargain. Do you really think GE won't benefit from Government contracts. GE will not fail they make to many products used by the government, airlines, cities, hospitals, national defense, nuclear power plants and on and on.
GE products are like Wal Mart, they touch every area of your life and I don't even own the stock yet. I do own a bunch of RIG.
Buy stocks that pay good dividends and make products we use everyday of our life. AG stocks come to mind. Stocks like MON, POT, DE, MOS.
Forget retail and consumer discretionary like Las Vegas and any high end restaurant stocks.

Jan 09 10:46 PM

[Allen Phatimer:]

More dominos will certainly fall, only difference is that they will be smaller ones. So the Fed and Treasury have decided that there are many banks too big to fail because they recognize that the system is now extremely unstable – that doesn’t change the fact that these banks are not lending. The reasons are many, but the fact is credit is NOT easier to get. So it doesn’t really matter if you prop up the walking wounded, if they can’t do their jobs – i.e. facilitate business through lending and translate savings into investment and spending then okay, they are still alive but not doing what they should be doing to help our economic situation. Libor is down but there is no difference between getting denied a 7% mortgage and getting denied 5% mortgage. Sure, gas prices have fallen and that has helped – a substantial tax cut of sorts but where’s the stimulation? And a housing bill will help if done correctly but that I’m afraid will be too little too late.

So good luck buying more stocks. That might be good advice for the 2 or 3 guys left that haven’t taken a major beating; but for most everyone else, I think it’s too early given depression-like earnings collapse. And as for your stock picks, good luck to you on those as well – although all excellent companies, the earnings risk in RIG, CAT and even AAPL is (IMHO) much greater most suppose and the valuation multiples in the somewhat defensive RMD is hardly on the cheap side. I also think that RIG and CAT are value traps of sorts – both great companies and ones worth owning again some day but the earnings for RIG are going to be going down for a long time and the CAT earnings also at risk (and so too its balance sheet). The game has changed in way unimaginable, yet complacency abounds. The American economy is melting down and the banking system changed in ways that will stifle growth, (relatively speaking), for years to come. You might want to play a little more defense with your client’s hard earned money. A key lesson to be learned here is to worry more about what you might lose than what you might miss out on. Good night and good luck!

Jan 12 12:58 AM

[ArtfulDodger:]

With bonds at all-time highs, you have to go where you can get the best value for your dollar. Obviously, that is in stocks.

In my opinion, the opportunities are as good or better than they were in the 1979-81 time frame when you couldn't give a stock away.

There are negatives out there, and you can catch every one of them twenty-five times a day by turning on any financial station.

The points you made Mr. Miller are worthwhile at this time, and needed to be made. Thank you for the article.

Jan 13 08:03 AM