A Very Wary Christmas

The Holiday season is normally a time of reflection and direction, as most of us relish in our accomplishments, review the areas for improvement, and plan the new coming year's direction for our personal and business lives.  Unfortunately this year there is still more cause for concern than optimism that our country's fiscal problems are solved.  They say money makes the world go ‘round.  That can have an adverse affect on everyone's personal life as this has been an equal opportunity recession.

That concern or wary approach to next year has shown up in several areas of our lives.  This unease is justified through the huge drop in consumer spending not only for the holidays but over the entire second half of the year.  Another obvious warning sign that not is all ok in Whoville is the months' supply of new and second hand homes on the market.  Houses are standing on the market over 10 months on average as sellers lower their price enough to dump or they're forced into foreclosure.  A full 10% of all outstanding mortgages are either seriously delinquent or in foreclosure.  It was credit and housing that got us into this mess and without a fix it will likely delay any permanent economic resolution.

The rising unemployment rate, unprecedented government bailout money, and billion dollar investor ponzi schemes shake the resolve of the even most confident of investors.  Let's face it the news looks pretty bleak - but before you stop reading and feel even more depressed - there is some good news!  The stock market has already discounted the biggest drop since the great depression.  As the market is a leading indicator - the real economy can get significantly worse, as the stock market goes up.  The record $ 7 trillion of government stimulus is bound to have some positive effect on some sectors of the economy.  Even if unintended.  The paradox about the markets in 2008 was that only shorting and Treasuries worked.  In more rational times some sectors of the economy win and other sectors suffer.  This year every sector suffered - some worse than others - but all bad.  So not just the US contribution, but the global coordinated effort to flood the private sector with cash will create some disparity again.  This will create opportunities in some sectors, for those paying attention in 2009.

We are very close to a level where a 20% rally could ensue.  920 on the S&P and 9050 on the Dow would be considered breakouts from the downtrend there we are currently in.  All we have done as we have progressed through the fourth quarter is slow the bleeding as all three of the major indices are still down for this month.  But let's look forward.

The stock market had a drawdown of 52% from the peak of 2007 to its low last month.  This has created significant value of some of the best global businesses in the world.  Many of these companies are paying large dividends and have rarely seen upside potential.  Many blue chip companies are trading at 25 - 30% of what they were at only months ago.  The risk is buying too early or making the wrong selections.  Profession application of risk management tools would be beneficial.  

The likely hood is that the market does not run away from us to the upside.  But it is important to be ready with a plan to take advantage of these opportunities in 2009.  Which ones today?  I'm still mostly in cash as I have been for months, I recently added small gold and silver positions and the only stock sector I own is global telecom.  It is best to be pragmatic and watch for the opportunities as they present themselves, than to apply wishful thinking as to what you think might happen.

The outlook for next week - New Years week, is positive.  Historically this is the best week of the year.  Change is in the air.  We have a changing of the guard politically and I do not believe for one second that the trillions of dollars of stimulus money will not have a serious affect on markets and the economy- even if it's wrong.  There will be opportunities for investors to capitalize.  While I am upbeat on the direction next week, the caution is to watch the volume.  Conviction of institutional traders who really control market direction can be seen in the associated volume.  No volume equals no conviction.  Best wishes for great health and prosperity throughout 2009.

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