It's clear that 2009 will be the year in which our government completely transforms itself from economic referee to economic player. Not an easy transition by any means. This administration is searching high and low for solutions to the crisis and I fear that Congress might be veering off track. Thus far the market response to detailed stimulus leaks has been lackluster at best.
If I was President Obama, I would be very concerned about this negative action because the market is the best and only indicator to determine if this thing is going to work or not; if the market isn't on board this thing is doomed to follow in the path of its failed predecessors. Coming up with a game plan is actually not as difficult as our elected officials are making it out to be as long as you let the following four principles be your guide:
1) Tax cuts aren't enough, they must be coupled with tax incentives. In this environment of fear and uncertainty, merely giving money away will not produce the desired results. Just like the Bush tax cuts and the prior stimulus, the extra money will quietly dissolve and we'll all be asking what happened to that $350 billion? Instead, the tax cuts must be implemented along with incentives that will lead consumers to the right place. If not, the American people will act the same way as the banks did with their TARP 1 money.
You want people to buy houses, then give them thousands of dollars in a new home tax credit. You want companies to hire instead of fire, then give corporations a new employee credit. You want investors to put money back in the stock market, then suspend capital gains. Want to sell new cars, you know the trick. The proposed tax cuts are a step in the right direction but the incentive part of the stimulus package is missing. Provide the right incentives and you'll be amazed at what people will do.
2) Get to the bottom of housing. Until the ground beneath our feet stops sinking, this crisis will continue. President Obama must be careful not to take his eye off of this ball. A bottom in housing is a key trigger to an economic recovery. I expect he will do whatever it takes to keep people in their homes and limit the flood of excess inventory. Although housing has not yet bottomed, housing stocks have anticipated the bottom for quite some time now and they will rally on any government action.
3) Don’t just create jobs to create jobs; we need innovative employment. We can't allow the short term drop in oil prices to affect our long term energy goals. Energy independence can be ours. It's not very often that we experience a crisis of this magnitude, but when we do it opens up a window of opportunity in which the American people are accepting of change. President Obama has enough goodwill that he could transform our transportation system to natural gas, electric, hydro, etc. The automotive industry is restructuring anyway, why not turn GM, Ford (F), and Chrysler into the flex fuel leaders of the world. Medical advances should also be strongly supported by stimulus. Same goes for tech, and obviously infrastructure as well. Again, we are moving in the right direction by creating new jobs, but investors want to hear about innovation.
4) Our banking system must be restructured in a way that is cyclically immune. Mark to market transparency does not hold up well during cycles of contraction. Get rid of it. Market corrections are necessary for a healthy economy but they should not decimate our financial system. Bank balance sheets must be built to endure tough times. Think of the banks as the offensive line, we don’t want anything flashy or attention grabbing but we recognize that this sector is the key to the economy.
If the government applies these four principles, we will be in good shape. However, if they fail to restore confidence with tax cuts, housing, employment, or financials we should be prepared for a long year. Most 2009 stock action will be closely tied to government action, I’m keeping a close eye on Ford, Toll (TOL), U.S. Steel (X), Astec (ASTE), Cisco (CSCO), Google (GOOG), Geron (GERN), Cytori (CYTX), and the financial Proshare UYG that is down in the $3 range. All are terrific candidates to go up on government action. Hopefully Obama will be more Celtics than Clippers over the next few weeks. The ball is in his court.