It is time for my annual financial self-examination. I do this each year and make my findings public to create personal accountability. 2009 was much better than the 18 months before. My aggressive total portfolio lost 50% in 2008. In 2009, I reversed that horrible trend and gained most of what I lost, back. And for all of 2009, through Thursday, December 24, I ended the year at +40% (all numbers are Year Over Year), beating the SP500 (SPY) and Fidelity Freedom 2020 (FFFDX) indexes by a considerable margin (+20%, and +14%). And from the March 7 bottom, I gained 126% (showing just how deep my portfolio had sunk in 2008 and early 2009). My performance was aided by a continuing commitment to commodities, tech and emerging markets. I also tripled my commitment to high yield (junk) bonds and financials near the generational lows in March, which helped my overall return. A couple of speculations, such as buying General Growth (GGWPQ.PK) in April as it entered bankruptcy protection also paid off.
As bad as 2008 was for me and everyone, it is really the past ten years that have been very poor for investments of almost all kinds. Those who say we are at the beginning of a multi-year bear market really haven't done their homework. The Bear began in early 2000 with the collapse of the Tech bubble. The Nasdaq 100, which was as high as 5100 in March that year dropped below 1100 in October 2002, a collapse that rivals the Dow Industrials collapse from 1930 to 1932. Yes, the markets recovered (as they did in 1933-36), and the Dow Industrials, really an old-world and narrow index today, did reach new all-time highs of 14,200 in October 2007. But the Nasdaq stocks barely recovered to 50% of their all-time highs (a classic Fibonacci retracement). The bubble transferred from equities to real estate in the mid 2000s. Of course, it was here that historic damage was done over the past two years.
Given all this, I take some very small satisfaction in being down only an average of (-1%) annually for the past ten years in my overall portfolio. This is especially true because much of my capital contribution was near the peak at the end of the period (2006-07) making the subsequent drop that much more damaging to my portfolio. During the same ten year period, the SPY (-0.63%) and the FFFDX, a balanced "lifetime benchmark" portfolio for people retiring in 2020 (+2.23%) have better performance. Had I seen the 10 year bear to rival the 1930s coming, I might have just left my investments in a bank account. But hindsight is 20/20 so I am not second-guessing myself, but am happy to have nearly kept up with passive index funds.
It is a perilous but fun exercise to predict events over the course of a year. It is impossible to really know the future, but mentally stimulating to give it a try. And the result helps shape decisions throughout the year. Here are the Wealth-Ed.com predictions for 2010:
- The American stock markets will rise by 10-15%, defying many observers who consider the market to be either fully- or over-valued as of December 31, 2009 (too far, too fast). The SP500 will reach 1,270 during 2010 and will end the year close to that level; range will be 9500 - 11,300 DOW; 1020 - 1270 SP500; 1980 - 2490 NDQ 100; but the advance will not be smooth;
- SP500 aggregate earnings will exceed consensus expectations of $65-75. They will finish the year at $85 which will justify a 1,275 SP500 price based on a P/E of 15
- The stock markets will follow the classic pattern of strong in winter and fall and weak in the late spring and summer which is the source of the saying: "sell in May and go away"; it will be a good year to follow that advice
- The US dollar will strengthen into the second week of the new year and will then fall through the winter months as Treasuries are sold to finance riskier equity investments; there are a record $8.4 trillion dollars on the side lines in cash, money market and other near money funds (as measured by M2, according to Fed Reserve report H.6); the dollar will drop to $70 DXY by the end of March and then rebound in the late spring so DXY (dollar index ETF) will exceed $80 by September. A slowly improving economy and higher Treasury rates will be the impetus for dollar strengthening
- The Fed will hold short term interest rates low until mid-summer; it will allow long term rates to drift higher and the 30 year Treasury will hit 5% by June; by July, the Fed will begin to signal its intentions to let short term (Fed Funds) rates increase as the economy continues to strengthen and the unemployment rate finally starts to decrease (first in June); evidence of higher interest rates will push the stock market down and the dollar will strengthen; the 10 year Treasury (the basis of many mortgages) will finish the year over 4% from a current 3.5%;
- As the dollar weakens to 70 DXY in the first half of the year, the "carry trade" will re-appear from its Holiday hiatus and weak dollar investments will excel, including Energy, Materials and Emerging Markets; but sell those investments in April as the dollar shows signs of reversing; TBT will be a very good way to play the reversal in the dollar (ultra short the 20 year-to-maturity Treasury complex); by October, the shock of higher interest rates wears off and the stock market picks back up with domestic and cyclical stocks taking the lead from the weak dollar stocks of the year's first half; advice: rotate investments away from commodities and towards cyclicals and industrials as dollar strengthens at end of year;
- Healthcare stocks continue their comeback as the Senate finally gets a greatly weakened bill passed in January. It goes back to the House for conference and is finalized by the end of March. The public option is gone but the expanded Medicaid program remains bringing another 30M people onto the public funded program. Healthcare stocks continue their recovery with more people to receive care in 2010 and beyond; buy UNH, WLP, BDX, MDT, MRK, JNJ and PFE early in the year
- Gold reaches its peak early in the year at 1400. Gold bugs are crushed when the dollar strengthens later in the year. The Fed proves to be much more adept at taking liquidity back out of the market than was anticipated by doomsayers and gold falls back below $1000. Severe inflation (over 5%) never materializes due to the global production and labor overcapacity
- Oil prices range between $60 for a low and $100 for a high in 2010; the low will occur in the late spring or early summer as winter demand dissipates and the dollar begins to strengthen with the beginning of tighter money supply, but though "weak dollar" speculation dissipates, the price peaks at $100 as the economy picks up pace at year end;
- Natural gas outperforms oil as record supplies are reduced and demand begins to exceed supply by year end; gas ends 2010 at nearly $8 per mmcf propelling the natural gas oriented production companies back to 2005 levels; PWE reaches $30 in late 2010 (was as low as $6.50 in March; I have stayed with this for the round trip);
- The Republicans gain seats in both the House and the Senate as Independents that voted for change in 2008 are sorely disappointed in what is delivered and vote for economic stability and a balanced budget which the Republican party promises. Enough seats are gained so that the Democrats lose their supermajority in both houses. Awareness of this political shift is what fuels the market to new highs from the summer doldrums, starting in October.
Regarding 2009: I was in such shell-shock from the beating I took in Q4 2008 that it was January 3 before I got to my annual crystal-ball adventure. But predict I did and those predictions can be found below or by clicking here: 2009 Wealth-ed Predictions. This will be the ninth year I have made my annual predictions; the first time in December 2001. In December 2002 I made a call for the 2003 market to begin a great run starting in March. I hit that one out of the park and expect to do the same this year. Looking back at my early 2009 post on the direction of the market, I did prognosticate quite a bit of the year's direction and events correctly with only a few minor errors in timing or magnitude, not direction.
- Government backed interest rates (mortgages and Treasuries) will stay low throughout 2009 (less than 1% for 2 year bonds); but sometime thereafter, maybe early 2010, they will start rising and continue going up as inflation heats up along with an economic recovery. Right - the commitment to easy money by the Fed pushes the normalization of interest rates out to mid to late 2010 now; I never imagined Bernanke would stay this aggressive this long, but am glad he has;
- By July 2009, the high yield and corporate bond interest rates will begin to decline, narrowing the historic spread against risk free Treasuries; Right - this was my best call in early 2009; the Junk-to-Treasury spread peaked at over 2000 basis points (20%), historic highs; I loaded up on high yield debt (via FAHDX) in March and it returned 70% from there before I began getting out of the fund in October.
- Crude oil will continue weak throughout 2009 in a range of $25-$60 per barrel; as a result production and exploration will be reduced and lower production with higher demand will set the stage for a rebound to over $100 sometime in 2010 or 2011; enjoy low gasoline prices while you can; Right - on the downside but not on the upside; and right on the general weakness in demand and its impact on supply, which has really dropped (as indicated by active drilling rig count); the peak price ($83) exceeded my expectations because of excess monetary liquidity created by the Fed that sought out risky assets; still I benefited from this rebound as oil/gas producers via the Canroys, remain one of my largest positions;
- Gold prices will stay under $1000 in 2009, but will not decline under $600; but gold could increase to over $1500 by 2012 because of a weaker dollar caused by inflation from excess money supply created in 2009; Wrong - but for reason of timing as the Fed has been much more successful in creating monetary stimulus than I thought they would; but it is a good thing that there is excess stimulus, some of which ends up in risk assets like gold,; the spike in gold prices also mistakenly anticipates hyperinflation; If the Fed can withdraw stimulus in a timely way in late 2010, they can avoid high inflation, which will stop the gold spike below $1500. (and if they are unsuccessful, the spike can proceed to $3000 the next few years)
- In early 2009, GM will be forced to declare bankruptcy (or an equivalent government reorganization); same for Chrysler; this will set the stage for a revamping of the American auto industry and will usher in a new era of manufacturing competitiveness; Ford will escape bankruptcy, but will benefit from the changed labor and franchise rules; Right - but I didn't think Obama would be as brash as he was in protecting the unions at the expense of bondholders, including individuals and retirees; but given his constituency, I was not too surprised at who he chose to favor;
- At least five major mall retail brands will declare bankruptcy and will be closed; candidates: Abercrombie (ANF), Zumiez (ZUMZ), GAP (GPS), Hot Topic (HOTT), Lane Bryant, Foot Locker (FL), Eddie Bauer, Ann Taylor (ANN); but look for the retail sector to outperform as soon as 2010; Wrong and Right - wrong for good reason that the Fed was more successful stimulating the economy than I thought possible; but the names above are all in deep trouble and would have gone down if not for the Fed actions; support to consumer spending has unexpectedly helped GGP (see next); Right: Eddie Bauer went bankrupt in June, Ann Taylor closed half its stores, Lane Bryant and Foot Locker closed many of their stores, just avoiding bankruptcy; but the retail sector did better than expected at year end as stimulus got consumers spending again (RTH +17.8% for 2009)
- General Growth may become a victim both due to the above store closings / bankruptcies, but also due to the debt it took on to acquire Rouse Companies; its survival depends on selling several of the Rouse flagship properties: Fanueil Hall (Boston), Harborplace (Baltimore) South Street Seaport (NYC) and its Las Vegas malls (Forum Shoppes, Fashion Mall, Highland Mall); Wrong - but I figured out I was wrong in April and bought GGP at that time instead at $0.65 / share; the key to investing is to stay nimble; now it looks as though GGP won't have to sell any properties as it exits bankruptcy; I closed my GGP out at $6.60 in early December;
- Official unemployment will top 8%, but will not top 10%; Wrong - even the "official" number could not be kept under 10%, though it probably will not go any higher than 10.5%
- Mortgage rates for 30 year fixed rate Fannie's (FNM) will be less than 4.5% with no points; but these rates will rise in 2010; Right - though credit is so tight that few people can qualify for the record low interest rates; look for mortgage rates to rise once unemployment declines for 3 straight months and as the govt pushes banks to start lending again;
- The stock markets will see a range and return by year end of DJI: 7000 - 10,500 (13%); S&P500;: 725 - 1100 (15%); NASDAQ100: 1400 - 2200 (10%); with the lower end of the range reached in the first half of the year (there will be a retest of the November low, but that retest will be the bottom of a new 20 year secular Bull market, albeit the new Bull will be sleepy for several years while the economy and debt are repaired); Right - in fact, one of my best calls as I was two months earlier than Doug Kass on my market recovery prediction; I did not forecast the "panic bottom" in early March, but that lasted for only three weeks; I nailed the DOW as it ended up 13.5% for the year; SP500 was up 19% and NDQ100 was up 42.6% (my prediction was 2200 and it is 2210 today);
- The best asset class return in 2009 will be in high yield bonds (junk) with a 30% total return; Right by a landslide; and the returns were quite a bit better if catching the bottom in March as I did (+70% from January, but +90% from March);
- The 2nd best asset class return in 2009 will be in energy stocks, both producers and equipment providers, though producers will have the best total return at 25%; Right - sort of; a close call between Technology (+60%) and Materials (+48%) / Energy (+30%); I lump energy and materials together because they trade in a similar way; they all did well for the same reason, the weak dollar and easy money chasing risk assets (and foreign markets); my idea of energy for investment are Canroys which did much better than the big integrateds like Exxon (XOM) that make up the indexes; PWE which I own in a big way, is up 76.8% for the year, dividends reinvested; PVX is up 71.2% and PGH is up 41.1%;
- The worst asset class in 2009 will be Treasuries with 30 year bonds returning a negative 20%; Right - the TLT, which is a basket of Treasuries with an average maturity of 20 years, is down (-24.79%) as of December 25th and the 30 year is worse, but there is no easy way (ETF) to play it; this trend should continue in 2010 and longer term Treasuries should again be a poor investment with net losses over the year; long TBT in 2010 is a good way to take advantage of this future trend.
Disclosure: Long PWE, PVX, PGH, MSFT, XLK, FCX, BHP, UNH, TBT