The Rush Report
The Q4 2008 Market Rush Review
By
Mark Rush
redgroup2@
January 1th 2009
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Preface
Once again, it is once again time for my quarterly market review, where I examine world events and attempt to understand their implications on the market. This is my time to reflect on current events, portfolio performance, and event scenarios, and their subsequent implication on world equity markets and my investment strategies.
As you read through this review, even if you don’t agree with my thoughts or analysis, please take the time to think about your financial choices and ways to improve your returns. It is my goal in life to have my money working for me instead of me working for my money.
Please email me with your thoughts, questions, and insights on the opinions that I present. The purpose of my effort is to stimulate a dialogue around current events and their impact on the markets.
This document may be distributed to anyone free of charge as long as it is provided in an unaltered form. I reserve all Intellectual Property Rights of this document.
Regards,
Mark Rush
redgroup2@
Please read this important notice
Disclaimers
As you read this document keep in mind that I do not have any special insights into the markets nor do I have any type of training or experience in any kind of investments. I am not a financial advisor nor do I have a degree in economics or finance. Remember these facts as you read and ponder my unprofessional opinions.
This document should not be construed as investment advice; you and your financial advisor are responsible for making your investment decisions. The purpose if this document is for me to “think out loud” and stimulate thoughts regarding my investment ideas for my portfolio. I am asking you for your feedback about my thoughts, strategies and conclusions.
Nothing in this document should be construed as tax advice or estate planning. Tax laws are complicated and change often. I do not have the time to follow changes in tax codes; therefore, any thoughts I may have on the subject are very likely to be obsolete or, at the very least, dated. Before you attempt to implement any tax strategies you should consult a tax professional or financial advisor.
All thoughts and strategies are based on the fact that I invest money from the United States using US dollars and pay US taxes. All comments and views are from my American investment perspective. Many of my strategies consider US tax implications and currency exchange rates that may not be valid when viewed from outside the US.
The views and opinions in this report are strictly my own based on publicly available information. I do not have any special perspective into the markets. Opinions stated are my own and do not reflect the opinions from any current, past or future employer.
I will/may change my strategy and investment ideas radically and suddenly between reports without notice to any receivers of this report. My own investment strategies can be extremely aggressive and my portfolio should not be replicated by anyone, including me.
I am an amateur investor and this document is a hobby for me. Any thoughts and concepts should be treated as such. Please consult a professional financial advisor before you make any investment decisions regarding your investment ideas, goals, and strategies. Continue reading this document at your own risk…
This report is subject to considerable error and the opinions can change without notice. Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities or investments. Do NOT ever purchase any security or investment without doing your own and sufficient research.
Introduction
WOW….
All the signs were there… I have been watching this crisis develop for the past two years and I have been a pessimist for the past several years. The depth of the current financial crisis even caught me off guard and I didn’t expect the situation to get as bad as it has become; unfortunately I now expect the current economic situation to get much worse.
I have stated in the past that we had a trillion dollar real estate problem but now it seems that it has ballooned into a three trillion dollar problem due to the rapid fall of housing prices and high default rates. The government is literally printing money to make the problem go away and is risking the complete utter collapse of the dollar in order to save those who have made unwise choices.
Ben Bernanke (Federal Reserve Chairman) is certainly getting the full use of his nickname of “Helicopter Ben” for his comments regarding his ability to cure deflation by dropping money from helicopters. In the past few months our government has managed to promise more that $9 Trillion dollars of spending, loans and guaranties. This equates to about $30,000 per person (children and retired included) or about $120,000 per family of four. If the Chinese were to ask for their money back, would your family be ready to repay your share? Will your neighbors be able to repay their share? Will America be able to repay the borrowed all the bowered money?
The magnitude of bailout after bailout and the vast economic damage done is astonishing. American households have lost more than $10 trillion of net worth due to the drop in the stock market and housing prices in the past year. An immense battle is taking place between the forces of deflation caused by wealth destruction and economic contraction verses the Federal Reserve attempt to prevent deflation with blatantly inflationary policy. No one knows how this clash of the Titans will turn out…
-Mark
Chapter 1
The Basics
(Simplistic answers to complex questions)
Are we near a market bottom/should I invest now?
The stock market typically turns around about six months before the economy does. If I were to believe we are currently at or near a bottom in the stock market then I would need to believe the economy will turn around in July. Typically stock market bottoms are not made off "V"s (huge selloff followed by a quick recovery in the shape of a V). Historically, it simply doesn't work that way. Look at DJIA from 2000-03 (chart below). Notice that after the dot com bubble that burst it took almost three years for the market to bottom. Recoveries are slow and easy… People will have time to get in later. Falls are quick and rapid; most people won’t act quickly enough to get out of the way of those.
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The 2000-03 bear market was accompanied by a business recession brought about by the popping of the Internet bubble. At no time did consumer spending drop during that recession, this time we're just starting to see real consumer spending declines, and this time it is a consumer-led recession; the ugly sort that happened back in the 1970s and early 1980s.
The market lost nearly half its value in the 2000-03 recession without any consumer spending declines. The move from 1995-2000 was a credit-bubble led move. So is this one, but this one nailed both consumers and businesses. If we remove that factor this in it suggests that we could go all the way to 5500 on the DJIA!
The 2000-03 decline required two full years to reach close to the bottom. This "bear market" is less than a year old at this point, having initiated in November or December of last year, and thus is less than halfway over on a historical time perspective compared to 2000-03. If you look at consumer-recession associated Bear Markets of the past (think 1970s) you will find that those are far more vicious than the 00-03 time frame, and the losses heavier.
I believe earnings estimates for US stocks are still too high. In the first quarter of 07 the S&P 500 estimate was for about $100 of earnings per share. Current estimates are still around $60. That 2009 number is far-fetched. I believe $40 of earning for the S&P 500 is more likely. Previous Bear Markets have ended up with the P/E multiple in the single digits. With the leverage out of the system forward earnings on the S&P 500 is likely around $40-50. This puts the Market bottom target around 500 on the S&P, simply using historical price/earnings multiples and previous bear market bottoms.
Below is a chart that shows the current stock market (green) with the stock market of the Great Depression (white). If history were to repeat itself then we would expect to see a DJIA of 3500. I believe the economy is more developed and significant action has been taken so even as a pessimist I don’t believe that number would be reached but it does look to me that the 5000-6000 range is a real possibility… In any case this shows that if we do follow this pattern then we still have another 18 months of downward action to go.
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Finally, I would analyze any investment thesis based on what I thought the economy is going to do. If I somehow come up with a belief that the economy - the consumer portion of the economy - will in fact turn around by July of 2009, then I would have an argument for trying to scale into investment positions for the long haul at this time.
I believe that the credit excesses have not yet been wrung out of the system. The government has distorted the market with all the bailouts. No one has done anything about the real problems; instead they are choosing to shift failure from private enterprise onto the public's balance sheet. This could lead to a bond-market collapse and/or drastic currency devaluation. Real estate by every measure is still overvalued and all the action in the world can’t avoid the inevitable downward repricing of homes.
An example of what happens when you delay the inevitable is what happened to Japan's Nikkei Index. It was almost 40,000 in 1990. Nearly 20 years later, it has never been able to stay over 20,000 since, and now is under 9,000. This was a direct consequence of Japan's government policies when dealing with the excesses of Japan's credit and real estate bubbles of the 1980s. When it burst in 1990, rather than forcing losses into the open and dealing with them they looked the other way. Despite 20 years of trying, Japan has been unable to create material amounts of inflation, being stuck in a deflationary to flat monetary environment for nearly twenty years. We could be headed for this scenario if we do not change our political and monetary courses of action. At worst we have a very small but real chance of a full-blown global economic Depression. These risks need to be considered before anyone invests in the market.
Japan NIKKEI 225 Index 1988 - 2008
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I know that just about every money manager out there will tell you to invest now and for the long haul, being in the market is the way to go… Just remember they have a very real and vested interest in you (not them) being in the market. The financial market and those who are employed in that industry, in general, get a percentage of the money that you have invested… If no money is being invested, there are no paychecks. Think about what they have to gain and how much you can loose before you heed a professional money managers advice when you get the speech about the “the long haul”. They in essence are willing to risk ninety-eight of your dollars so they can guarantee themselves two and all the while trying to tell you that they are only thinking about your future.
I think a lot of money managers actually believe that stuff they are preaching but denial and self interest are some of the two most powerful personal motivators and distorters of reality. Human nature tends to believe in a future where things work out in their best interest. You can call it optimism or you can call it narcissism. Everyone has a vested interest in things returning to “normal”, but this fact doesn’t mean that it will happen.
We are in very uncharted territory and these types of events tend to create unforeseen consequences. Any choices you make are a pure gamble on an outcome that neither I nor anyone else can predict. Trillions of dollars have been created and destroyed in the past few months. No one knows what is coming next and no one know what the future value of anything will be.
Where do we go from here?
I wish I knew but I don’t. What I have done in this section is try to think about the various possible paths that are before us. Based on what I have read and can think of, I have laid out some possible economic outcomes… and how I would invest for these outcomes.
All is well
Quick and mild recession
Deep and long recession
Depression with deflation
High inflation
Hyperinflation
Monetary system collapse
X
All is well
Premise: Sufficient money has been pumped into the system by various governments including the US that more than make up for the loss of value of the housing market. Congress, Treasury, and the Federal Reserve prevent further fall of housing prices and after a few months’ prices stabilize then start to rebound. The stock market selloff was only a panic overreaction and the long-term fundamentals of the global economy were sound and still are sound. America’s balance sheet gets stronger as asset prices rise.
Scenario: Once government programs cause housing prices to stop falling and stabilize, new buyers would return to the housing market and cause a slight increase in housing prices. As housing prices stabilize banks begin to loan money again and people start getting their dream homes at prices and interest rates they could only dream about a few years ago. The new housing boom with lower energy and commodities prices gets people to shop and buy new furniture and household items. Then globalization picks up again and production around the world would come back. Growth is slower at first but steady. The stock market sell off was just an overreaction to the nightly news and once everyone realized that their investments are safe, all the money on the sideline flows back into the economy and the stock market and new highs are made in all stock markets around the world. Investors were presented with a once in a lifetime opportunity to invest for those who did make a lot money.
Commodity/oil prices would start to be under upward pressure again as world GDP starts to head back toward 5% but employment would recover. The government gets its money back and makes a tidy profit from money it has loaned out which helps to keep interest rates low for a reasonable period of time. The history books record this as the how the US dodged a huge bullet due to swift and bold monetary and fiscal action. Global liquidity returns and new stock market highs are reached around the world. The only downside is higher commodity prices, a lower dollar, and some inflation due to monetary easing.
Case for: Certainly bold fiscal and monetary policies have been taken and liquidity has been showered upon the financial system. Knowing the best that Washington has to offer is keeping an eye on where the economy is going and the fact that no one can go bankrupt increases confidence to the system. With so much money sitting on the sidelines it’s only a matter of time before the money flows back into the stock and housing market. Easy credit, cheap energy, and lack of risk acts to stimulate the economy. The credit collapse was a confidence crisis and not a fundamental issue.
Case against: The current bubble has been building for 20 years. The basic problem is that we borrowed our way into this problem and it’ll take at least 20 months of reduced spending to pay down our consumer debts. Our current economy was based on the consumption and borrowing that could not be maintained. Believe it or not most people only want to loan money to people who can pay it back. The individual balance sheets of America are going to take years to work down. A vast number of people who could buy homes before are now ineligible to buy homes because they were never really qualified in the first place. What percentage of Americans do you suppose have $40k to put down on a $200k home? Oh yeah, the phrase “the best that Washington has to offer” in the last paragraph sums up how delusional this fairy tale is…
Actions: Under this scenario I would borrow money and buy Stocks. If I truly believed that we were on the path of recovery I would jump at the stock market especially beat down foreign stocks like China and India. Commodity names and financial stocks would move up 100+% in the next few months. Energy would also be a great investment. I would even borrow money (margin) or at the very least buy options on these names. Shipping companies… the list is too long… you would need to buy anything and everything. Leverage on the way up is a good thing.
Case for: Quick and mild recession
Premise: The Feds bold action averts a disaster but there was a bubble and a lot of the excess takes a few quarters to mop up. Those on margin still get burnt but the vast majority of the people remain unaffected. After the excesses are worked down by way of a recession, the economy becomes efficient, and starts to recover. GDP growth begins in Q3 of this year.
Scenario: Low interest rates start a new round of buying of houses and cheap energy helps the economy. This causes housing prices and the stock market to quickly stabilize. Once the full effect of cheap mortgages kicks in housing prices tick up for a few months and it scares a lot of people that were waiting on the sideline and a rash of home buying begins all across the country. The recovery in the housing market causes a steady recovery in world stock markets.
It is somewhat muted this time because people do need to prove that they have the means to buy new but due to low interest rates affordability sores. Between lower prices on houses and lower interest rates, payments drop almost in half for new home owners. What was a $300,000 house with a 6% mortgage rate had a payment of $1800/mo becomes a $200,000 house with a 4% mortgage with a $955/mo payment. As the low interest rates roll over into the refinance area a new wave of refinancing occurs freeing up billions in the economy.
It takes time for all this economic news to work through the economy but when it does the recession ends and employment returns. It still takes a few years to get back to the explosive world growth we had but the economy slowly grows out of its funk.
Case for: Again the bold fiscal and monetary policies have been taken and liquidity has been returned to the financial system. The new administration adds confidence to the system and with so much money sitting on the sidelines it’s only a matter of time before the money flows back into the stock and housing market. It takes a while and the recovery isn’t quick but it does recover. Easy credit, cheap energy and government intervention stimulate the economy.
Case against: A vast majority of people bought crap they couldn’t afford then and they still can’t afford because they lack the means to repay the loans.
Actions: I think under this scenario you would have more time to make more thoughtful choices and invest more slowly and cautiously. I would tend to slowly invest my money over the next year but certainly raw material, energy, retail, and financial stocks would gain. I would like to own stocks at first that had high dividends and buy other stocks during the year with those high dividends.
Case for: Deep and long recession
We only have to look at Japan to see the effects of a 1980’s banking crisis there. It took more than 15 years (and by some accounts it is still going on) to get out of the recession caused by their asset value collapse. The idea here is that the economy stays in a funk until the country can pay down some of its individual and public debt that will take a decade or so to pay down.
Premise: The idea here is indeed the government does take swift and bold action but it misses the human element. You can lead a horse to water but you can’t make him take on more unsustainable consumer debt.
This simply states it took a very long time to get where we are, saving rates have been horrible for decades and it could take a decade or more to pay down this debt. It will take years of profitability for banks to strengthen their balance sheets and many more years for the typical consumer to pay off their debt. Today most college graduates, already heavily burdened by debt, are unlikely to step in for the retiring baby boomers’ consumption. A cultural change needs to occur which will take many years for the US and its citizens to get their collective act together to learn how to buy/borrow/consume responsibly.
Scenario: The Fed saves many organizations but all it really does is mask those who have failed and those who have not. The whole idea behind any monetary system is “what are my goods and services worth” and “what goods and services can I obtain with the currency I hold”. The problem is the market is constantly trying to evaluate what everything is worth but the government keeps changing values artificially and this destroys the market along with its inherent the economic efficiencies.
This interference does build short term confidence in the sellers but raises suspicion by any possible buyers. Each time the government intervenes, fear and greed is replaced by apathy and jubilation (“great what are they doing now” and “thank god someone has bailed me out”). A non-dysfunctional monetary policy is necessary for an efficient economy. An efficient economy grows faster and better than an artificial economy. At the end of the day all the action in the world can’t get a person to take on risk and changing the rules constantly only adds to the risk. It also greatly adds to misallocation of resources, there is a huge difference between what people think they want and what they actually want.
Case for: The current bubble in loans took 20 years of bowing and debt financed spending to get here and it can not be undone that quickly. The government action has confused people on what anything is worth and it could take a decade or more for prices and confidence to recover. People leaving college these days are so saddled with debt that they are not able to borrow to replace the purchases made by the retiring baby boomers that are now getting the message that they are not going to be able to sell their house and retire any time soon.
Case against: Japan effectively ignored the situation only, taking action when it was forced to. The US has a growing population and a much more flexible work force; the intervention into the banking system was bold and decisive. Although you can point to some similarities the US is experiencing with Japan, you can also point to a myriad of differences. Japan was also a one country event while the current liquidity crisis is a global credit issue. Mistakes are not often repeated; generally due to the greatness of the human spirit, humans are always able to invent new and grander mistakes.
Actions: Under this scenario stocks would be a very bad investment and high quality (or government backed) Corporate bonds would be a good place to put money. The failure by Japan created the Yen carry trade that is part of the problem today.
Case for: Depression with deflation
If no action was taken to save our banking system I am sure this is where we would have been going, but thankfully something was done. The question that is before us is did we stop the depression or did we just delay it? A key component for a great depression is cascading failure of banks or other critical businesses and the primary fear that any money invested/loaned may disappear one day. This would cause a run on the banks and markets as everyone tries to liquidate causing a shortage of money and deflation.
Premise: The current $10 trillion of net worth lost in the stock and housing market is causing a significant amount of value to be removed from the economy. This causes a severe shortage of money as people begin to pull their cash out of the system; money becomes scarcer and scarcer while goods and services become less and less valuable. This spirals out of control until credit is practically destroyed and we become a much smaller cash only economy. Very few people have the means to live well without credit.
Scenario: The government has indeed backstopped many businesses but what were created is essentially zombie corporations. Unemployment sores and even though the government creates jobs it basically is only creating make-work type jobs that add little to the real economy. As the economy continues the falter millions of small business fail and a great wave of bankruptcies ensues. Huge distortions form and the government programs become fraught with waste, fraud, and abuse. The real economy continues to tank as everyone looses confidence in the economy and our government’s ability to deal with the economy.
Case for: No matter what you try to do the current crisis is a collapse of a bubble and a lack of confidence. It is highly unlikely that people will easily return to prior habits. Many baby boomers are very near retirement and will be afraid of further erosion of the economy so they will not want to spend money but become massive savers…
Case against: All the intervention, quantitative easing (printing of money), and the Fed’s propensity to avoid a great depression should actually work. It may prevent the housing market collapse only by creating another yet to be determined problem. Theoretically, anyone can stop a depression if you can only get enough bags of cash and a large enough fleet of helicopters. The US government has both in abundance and it’s not afraid to use them.
Actions: We are seeing the early signs of deflation, for proof all you have to do is look at just about any prices out in the world. Gasoline, oil, real estate, stocks, used cars, and even gold are cheaper than they were last year… Therefore in deflation you primarily want to own cash, and believe it or not your mattress is a great place to hold it. FDIC insured institutions are also a great place to put money and a few government bonds. The trick in deflation is just not to loose any money. Your investment is cash, each day your money will buy more and more things.
Since we haven’t experienced deflation in most of our lifetimes it’s a hard concept for many people to get their arms around. We are so predisposed to worry about inflation that a good strategy for deflation is counter intuitive. Just as some of you may have had troubles convincing older people in your family to “invest” you will have problems with the concept of “not investing” and the logic is exactly the same… they grew up during a period when that was repeatedly a very bad thing with the gravest of consequences, you grew up with the exact opposite experience. People tend to get stuck in their ways and so are you. Investing during deflation is really dumb… CASH, CASH, and a bond or two…
Case for: High Inflation
Premise: This case assumes that we get more or less stable economic growth but it comes at the price of inflation in the range of 8-20%/year.
Scenario: The action by the Federal Reserve adds sufficient liquidity, by printing money, into the system. This forces banks and investors to start lending money for fear of loosing money to inflation. The Fed crates this situation on purpose to some degree to prevent deflation and simultaneously to prevent people, like your grandmother, from hording cash where it can not add to the economy (velocity of money).
People move their saving out of cash and begin to risk their money to get some sort of return greater than the inflation rate. This injects even more liquidity back into the system and gets people to spend because money gets less valuable each day and objects become more valuable in terms of the fiat currency. This stimulates the economy and in essence it forces the rest of the people out of cash, adding to the cycle.
Inflation pushes housing prices higher although home prices fall in real terms. The government holds down real interest rates long enough to allow everyone to refinance. In real terms interest rates are effectively negative, they may hold rates say at 5% while inflation is near 10% effectively paying you 5% to borrow money. Who in their right mind wouldn’t borrow under those conditions and when you factor in the tax code it’s a double no brainer.
Case for: To some degree I believe this scenario is the current objective of the Fed. I don’t think the Fed is going to state this outright but I believe that this scenario has some merit and we all know how to deal with inflation but few people alive today know how to deal with many of the alternatives.
Case against: It may be a realistic goal to inflate our way out of the problem but it may just go wrong and create one of the other scenarios.
Actions: Get rid of your cash and buy Gold and get yourself a huge house. Borrow 100% of the equity and put that money in the stock market. Buy oil and commodities and sell ALL bonds. Buy REIT and energy Trusts
Case for: Hyperinflation
Premise: The Fed prints too much money to fight the current crisis. Inflation goes above 20%/year
Scenario: The Fed is impatient in its battle with deflation and keeps printing money to simulate the economy. Once they see their mistake it’s too late and massive inflation takes root.
Case for: The Fed over prints money, at the same time a panic ensues about the value of the dollar. Many foreign investors’ dump dollars making the dollar value fall rapidly.
Case against: I believe that the US economy is too big for too much money to devalue too quickly. Given the slow speed of any type of hyperinflationary cycle the Fed would have ample time to correct the problem.
Actions: Get rid of your cash and buy Gold on margin or any other assets you can especially land, very big houses, and as many rental properties as you can get. Sell all bonds and then short the bond market. Invest in foreign currencies and commodities. Borrow fixed rate money as you can and then lever yourself up as much as possible. I find it ironic that this leads you back to buying the thing that first started the crisis.
Case for: Collapse
Premise: All the bad loans and unsustainable promises that the US makes eventually causes the dollar to become virtually worthless.
Scenario: The government institutes wave after wave of stimulus packages and borrows vast amount of money without regard to its ability to pay anything back. The Fed is so obsessed with deflation that it just floods the system with new money. Foreign owners of bonds get tired of the constant loss of value of their holding causing the eventual mass selling of bonds. A complete loss of confidence occurs and no one accepts dollars as payment any longer.
Case for: Given the right combination of events or circumstances I could see this kind of outcome. Foreign entities do hold Trillions of dollars of our debt, if that was removed from our economy in addition to the trillions of dollars already lost it could seize the economy and we could revert back to a barter system.
Case against: Several other unlikely events would need to take place (global war?) before this is a realistic case.
Actions: Convert any and all worthless pieces of paper into useful things that you can physically touch. Get rid of any money that you have and buy farmland, gold coins, ammo, and rice.
X
Premise: The case is simple here; something completely unexpectedly disrupts an already weak economy. A major war, major epidemic, terrorist attacks, civil unrest, governmental collapse, mutant zombies, or Obama is unable to produce utopia. This case is all those things but more than likely will be something that no one thought about.
“The real troubles in your life are apt to be things that never crossed your worried mind. The kind that blindsides you at 4 PM on some idle Tuesday.”
Scenario: The most likely outcome of X is X. Unknowns beget unknowns.
Case for: We are not as nearly wise as we would like to think we are… Going into the Great depression a lot of very smart people thought they knew what they were doing and they didn’t and things didn’t turn out so well (Depression WWII). Why is this any different?
Case against: The economic mistakes we are making are so huge that we are likely to force ourselves into a known horrible outcome instead of an unknown outcome…
Actions: X
Hey, all this crap contradicts itself, how the heck do you make a plan from all that?
Ahhh, now the tricky part… now that I have laid out some possible outcomes, I am going to guess the probabilities of each scenario. Then based on each investment thesis for each outcome I will multiply my net worth by the probably of each and invest that sum of money into that investment thesis for that scenario. Then periodically or as more information becomes available, but at least once a quarter, I should reevaluate and reallocate my investments… The example below should make this clearer.
Based on my limited understanding of the world I personally believe without any justification whatsoever that the probability of each scenario is as such.
All is well – 10%
Recession – 20%
Long Recession – 30%
Depression – 10%
High inflation – 15%
Hyperinflation – 5%
Collapse – 2.5%
X – 7.5%
So more or less I suspect a 10% chance of a rapid return to economic growth, 50% chance of recession, 10% chance of a Depression, 20% chance of inflation and 10% of currency collapse or something else just as bad but yet to be determined.
How to invest under these circumstances
I should have some aggressive stocks, value stocks, various bonds, Cash, gold, and a sprinkling of dehydrated food along with gold coins and other useful things. Talk about a diversified portfolio…
10% chance for a return to normal; investments should be made in aggressive stocks
50% chance for recession; High yield highly rated corporate bonds
10% chance for depression; Cash
20% chance for inflation; Gold and other commodities
10% chance of some sort of collapse; gold coins, food, ammo and other useful material objects
Theoretically if I had $10,000 to invest, based on this section I should own…
$1,000 in aggressive stocks
$5,000 in high yield safe corporate bonds
$1,000 in cash
$2,000 in gold
$1,000 in useful material objects in my home
It is entirely possible that we could move through more than one, if not all of these scenarios… I would suspect that over the next few years we’ll experience almost all these scenarios in varying degrees. Each scenario will be a chance to loose or make a large percentage of your net worth. I believe the upcoming next few years will have a material impact on your entire future and all passive investors will likely incur material losses if they don’t say informed and adjust their portfolio accordingly.
How much is a “credit rating” worth?
A lot of mortgages are "non-recourse" loans, meaning that if you default all the lender can do is ruin your credit and foreclose on your house. In many states the lender cannot come after your personal assets, only foreclose on the house.
Suppose you bought a $400,000 dollar house that is now worth $200,000 and you did this with no money down but you happen to have $200,000 in savings. You “could” theoretically walk away from your mortgage wait for it to go into foreclosure and then buy the house from the bank. But then you would have a bad credit rating (along with half the people in the US) but luckily you are in a position to pay cash for the house and the bank will always take that… Under this scenario your net worth has gone from $0 to +$200,000 by being foreclosed upon!
The question to you is how much is a credit rating really worth to you? $200,000? I am not suggesting that anyone should do this but just pointing out the game theory that exists and why I believe that more foreclosures will occur in the near future… More and more people are coming to grips with the reality of “what is my credit reality really worth to me?”
There are many websites/blogs out there like this one trying to convince people to do the wrong thing and stick it to the man. I have included this one in the document.
Chapter 2
Market Dynamics
Economic Projections
It is time to review world events applying my “opinion” to the probability of the event occurring (0-100%) with my “opinion” of the market impact on a scale from 1 to 10. A “1” represents little to no impact on the markets; whereas, a “10” indicates that if the event occurs, I expect a widespread fundamental market directional change to occur. This is totally unscientific, based on my irrelevant opinions with absolutely no other basis other than my limited understanding of how the world works.
The purpose of this section is to highlight current risks in the market. I will attempt to quickly try to explain my thought process behind each rating.
US Economic Indicators (my view)
US Gross National Product (GDP) Shrinks > 3% for 2009
Probability of Occurrence 50%
Impact 7
The housing market and consumer debt have taken its toll on the economy and I believe that the trend has more to go. The rest of the economy is much weaker than this time last year and appears to be weakening. On the positive side, energy and commodity prices have retreated somewhat from their peak, but as the world economy recovers I expect commodities prices to rise again. I expect a deep recession in 2009 as we work though the restructuring of the economy.
The housing wealth effect has been eliminated and will dampen future consumption for many Americans for the foreseeable future. The process of wealth transfer from current home owners and mortgage lenders to the new owners and lenders is in full swing and once completed the economy will be able to begin to recover.
To add to the problem, we also have an economic slowdown in the third world, the world economy will continue to slow and this will dampen economic recovery in the US.
I believe the economy will contract but a depression will most likely be adverted.
The economy is weakening
Unemployment of peak >10% by the end of 2009
Probability of Occurrence 50%
Impact 7
We are currently at 6.7% and most economists are calling for 8-9% unemployment next year. I am going with 10% based on my findings. I find this number very troubling but I think (hope) unemployment will more or less peak next year… My current prediction is certainly much higher than what I was expecting six months ago. If employment stays here or improves (back under 6% unemployment), I believe this will be the sign that the economic is improving.
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I believe unemployment will peak next year at recent historical levels and we will start to reduce unemployment in the future but for now this indicator is a big negative…
Unemployment is high and trending higher
Federal Reserve raises interest rates 2009
Probability of Occurrence 90% for ‘09
Impact 6
Let’s see… Since the Fed funds rate is effectively zero… Therefore prediction of rate going up from zero is quite bold. Current low short term rates are very inflationary but I feel that it a necessary evil at this point. Longer term I expect these low rates will cause inflation, which is bad for the value of the US dollar. Hopefully the Fed will start being concerned about inflation at the end of next year therefore the Fed will raise rates in 2009. If this doesn’t happen it’s because we have slipped into a depression. Higher rates will be a sign of impending economic recovery (or currency collapse). Rates could be held at zero until the economy recovers.
I find it odd that we created a crisis by having rates too low (near 1%) for too long and we are going to cure our problem by having rates at 0%.
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Low rates are good for the market…
Inflation < -2% in 2009
Probability of Occurrence 50%
Impact 7
There has been a dramatic fall in prices around the world in most types of raw materials, from oil to food. We have gone from obvious inflation to deflation in just 6 months. Deflation would be very bad for the stock market but any deflation in the 0-4% range in my opinion is acceptable. Below is a chart of the total money supply. This is how the Fed is fighting deflation, in the past 6 months FTTM has jumped from $4 Trillion to $8 Trillion. Long term this could cause hyperinflation or currency collapse, but for now deflation is the issue.
[pic]
Deflation is very bad for the stock market
Return of spending by US consumer in 2009
Probability of Occurrence 10%
Impact 7
More than 6.4% of all residential mortgages are now in delinquency. Clearly the housing ATM machine is broken and many people lost their house so they could fill it with more junk. Foreclosures will be higher than historical for the next 2-5 years; consumer spending will take years to recover since much of the spending was financed via fictitious housing values.
My next fear is a credit bubble in credit cards and in student loans. The bubble in credit card loans is already evident. Lending standards are going to rise and money is going to get more expensive. The US is going to go cold turkey on its credit addiction.
I believe this indicator is weak and will get weaker
S&P profits exceed of $40/share in 2009
Probability of Occurrence 50%
Impact 6
I expect that corporate profits will fall until sometime in 2010. Corporations are financially stronger going into this down turn (except financial institutions) compared to other downturns but this one will be much deeper. Most are still predicting $60 earnings per share for the S&P 500, believe it or not I think that is far too optimistic and so I am estimating $40. The earnings for the S&P 500 were $82.54 in 2007 and around $65 for 2008.
I expect S&P 500 earnings growth to be down by more 33% form last year
Real Estate prices drop greater than 10% in 2009
Probability of Occurrence 50%
Impact 3
Home values nationally have tumbled an average of 25% from their peak. As bad as that is, prices would need to fall as least 10% more to reach their traditional relationship to household income. Markets tend to overshoot, therefore add another 10% to that number and over the next 2-3 years we could still see a nearly 20% drop in housing prices in the next couple of years for a total decline in the 40-50% range from the peak.
Some think that 8 million more homes will go into foreclosure over the next four years. In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%. Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.
Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent. Housing dropped another 5.3% since last year. I think that we will get another 10% drop next year in real estate prices. The banks are getting possession of houses and they are not afraid to move product. I believe this is the year that the banks will dominate the housing market. I believe that 2010 will bring stable prices, but not rising prices by the end of 2011. I believe 2009 we will be “near” the bottom…
In the middle of this selling, be on the look out for a “dead cat bounce” or market fake out in the housing market. One month very soon housing prices will go higher but this will be a fools rally and all it will do is bring the frustrated sellers back into the market and push it even lower. Housing is unlikely to recover anytime soon. Look at Japan and see their 15+ year old real estate bear market.
Currently the 30 year mortgage rate is down to 5.1%, which in the scheme of things makes rates still attractive and down 0.9% from just last quarter. Currently, I don’t own a house and plan to rent for at least one more year because I expect housing prices to come down more. I expect houses to stabilize in 2010, not because of intrinsic value, but due to the new tax and spending scheme in place, higher inflation, and voter bias to have the tax base subsidize home ownership. I believe that real estate, at that time, will be a reasonable safe haven for capital, only if you can borrow the money at a low tax subsidized fixed rate. The attractiveness of me owning a house isn’t the because of the house but it is the acquisition of the loan. I want to own things in current dollars and pay them back in the future with worthless dollars over the next 30 years.
30 Year Mortgage Rates
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1 year ARM
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|Metro area |
|2009 median home price |
|2009 change |
| |
| |
| |
| |
| |
|Dallas |
|$155,645 |
|-1.0% |
| |
|Houston |
|147,549 |
|-1.8 |
| |
|Atlanta |
|50,092 |
|-2.5 |
| |
|Chicago |
|239,359 |
|-5.3 |
| |
|Philadelphia |
|201,151 |
|-9.8 |
| |
|Boston |
|295,918 |
|-12.5 |
| |
|New York |
|393,210 |
|-13.7 |
| |
|Washington |
|261,411 |
|-17.1 |
| |
|Los Angeles |
|269,614 |
|-17.2 |
| |
|Miami |
|214,551 |
|-18.8 |
| |
| |
| |
| |
| |
|Notes: Prices are projections for the end of |
|2009. Change is from the end of 2008. |
| |
Housing prices are falling; interest rates are falling
$1,000,000,000,000.00 (Trillion Dollars) Trade deficit by 2010
Probability of Occurrence 10%
Impact 3(short term)
For 2009 this indicator is valueless at this time and will no longer be included in future reports until it once again becomes pertinent.
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Irrelevant at this time
$1,000,000,000,000.00 (Trillion Dollars) budget deficit for FY 2009
Probability of Occurrence 60% (New)
Impact 4 (short term)
The rich are getting decimated and as they loose their jobs and/or income, their bonds and stocks have lost value and many won’t be paying taxes. For those of you who think that the “rich” in the country don’t pay most of the taxes the proof will be watching the tax revenues. The current budget wrongly predicts $2.7 trillion in revenues and that equates to $9,000 in taxes for each and every person in the US or $36,000/year for a family of four. Are you paying your share? Are you neighbors? I wish I only had to pay my fair share of $9,000 for I would have the means to stimulate our economy.
I thought “W” was a spending fool but I suspect we haven’t seen anything yet. Democrats have a propensity for uninhibited spending and with control of the White House and Congress they have very little to stand in their way. The party of big social programs (spending) has the biggest excuse to “invest” in the past 60 years. They are wetting themselves to let loose the flood gates to spend as much as possible before they get a spanking in the 2010 election. I do expect Obama to limit to some degree the free for all spending…
Congress is of the opinion that we need to bail anyone and everyone out. The problem is they only want to bail out failure and not success. Where is my reward for not buying a house? If I would have overspent I would be eligible for a reworking of my loan… since I didn’t what do I get? I get to pay Taxes…
We will invest billions in road construction to revive the economy? Hmmmm… let me think about this, if you were a home owner and you just lost a major revenue stream would you pave your driveway? Or would you wait until better times? “Infrastructure” is an uninformed response to the current financial crisis. Do you think the banking system is going to get healthy if new roads are built? This made sense in the 50’s and 60’s when our transportation system was inefficient but we have sufficiently adequate infrastructure. Isn’t this the party of fixing global warming and phasing out the internal combustion engine? How does union built roads fit into this plan?
Government should pay down its debts and fix infrastructure when times are good and borrow when times are bad. Someday we will hit a point of “we can’t afford to do this” only when it is too late. I would rather send money out to the population in the form of checks to allow them to buy the things that are needed, not in the form of political patronage.
The states and cities that have also been on spending rampages for the past few years will also need money. So let’s not forget to add another $100 Billion in state government red ink to the toll that won’t be reflected in these numbers, but not until the state and local bailouts begin.
Over the past 8 years the revenues of the US government has skyrocketed… but not as fast as our spending. Whatever happened to the battles to reduce government expenditures?
Estimated receipts for fiscal year 2009 are 2.7 trillion (+7.1%)
$1.25 trillion - Individual income tax
$949.4 billion - Social Security and other payroll taxes
$339.2 billion - Corporate income tax
$68.9 billion - Excise taxes
$29.1 billion - Customs duties
$26.3 billion - Estate and gift taxes
$47.9 billion - Other
The budget for 2009 totals $3.1 trillion
Mandatory spending: $1.89 trillion (+6.2%)
$644 billion - Social Security
$408 billion - Medicare
$224 billion - Medicaid and the State Children's Health Insurance Program (SCHIP)
$360 billion - Unemployment/Welfare/Other mandatory spending
$260 billion - Interest on National Debt
Discretionary spending: $1.21 trillion (+4.9%)
$515.4 billion - United States Department of Defense
$145.2 billion - Global War on Terror
$70.4 billion - United States Department of Health and Human Services
$59.2 billion - United States Department of Education
$44.8 billion - United States Department of Veterans Affairs
$38.5 billion - United States Department of Housing and Urban Development
$38.3 billion - State and Other International Programs
$37.6 billion - United States Department of Homeland Security
$25.0 billion - United States Department of Energy
$20.8 billion - United States Department of Agriculture
$20.3 billion - United States Department of Justice
$17.6 billion - National Aeronautics and Space Administration
$12.5 billion - United States Department of the Treasury
$11.5 billion - United States Department of Transportation
$10.6 billion - United States Department of the Interior
$10.5 billion - United States Department of Labor
$8.4 billion - Social Security Administration
$7.1 billion - United States Environmental Protection Agency
$6.9 billion - National Science Foundation
$6.3 billion - Judicial branch (United States federal courts)
$4.7 billion - Legislative branch (United States Congress)
$4.7 billion - United States Army Corps of Engineers
$0.4 billion - Executive Office of the President
$0.7 billion - Small Business Administration
$7.2 billion - Other agencies
$39.0 billion - Other Off-budget Discretionary Spending
I believe thoughtless government overspending is harmful in the long run
International value of the US dollar declining >20% in next 5 years
Probability of Occurrence 75%
Impact 7
I have actually lost count of how much money the government has backed but I think it is about 8-9 Trillion dollars since my last report. That’s roughly $30,000 per person (including children) in the United States. Do you think that will worry anyone who loans money to the US?
Long-term, I don’t believe the US can continue to support the current public and private debt burden. In the long term the dollar has no direction to go but down. The combination of poor education, poor fiscal discipline (public and private), and mass retirement only leads me to believe over the next 20 years it would be better to place a significant portion of your investments overseas to obtain better growth and to take advantage of the eventual currency devaluation and fall in local purchasing power.
As you can see from below, in 2001 it took about 85 cents to buy a Euro, today it takes over $1.397 and where it’s going from here is anyone’s guess. Money flooded into the US for safety reasons and it can just as likely flow out just as fast. By next report I suspect that it will be above $1.60 or below $1.20. It’s only conjecture to see how people will react to the current and developing monetary situation.
Chart: How many dollars does is cost to buy 1 Euro?
[pic]
Long Term bad for US investing; Good for Foreign investments.
Improved Liquidity in 2009
Probability of Occurrence 75%
Impact 7
I started to talk about liquidity over a year ago and I have been pointing out the importance of this indicator. Liquidity became almost nonexistent for a few days a couple of in the past few months and the lack of liquidity could have caused a worldwide credit collapse… I still believe that the private credit market is and it will remain materially weaker for some time, although it should begin to improve with time.
The below chart shows the TED (Treasury Euro-Dollar) spread. This shows the premium that banks must pay over Treasuries to get money. This is kind of like a fear index for the credit market.
[pic]
This indicator is weak but has improved significantly although isn’t anywhere near normal
Technical Indicators
Current values N/A
Impact N/A
Model Portfolio and other technical indicators (+100% strong buy -100% strong sell)
US Stock 9/30 12/31
SPY -96% 0%
QQQQ -96% -24%
IWM -80% 0%
Foreign Stocks
EFA -96% 32%
EEM -96% 0%
Bonds
TLT +40% +72%
SHY +88% +16%
Gold/Euro/Yen/US Dollar
GLD N/A +80%
FXE N/A +32%
FXY N/A +56%
UUP N/A -32%
Volatility
VIX +100% -64%
[pic]
We have talked about the Volatility index (VIX) before as the stock market fear index and once again you should notice that it spiked after 9/11 and during the start of the Iraq war. It was just under 40 in the last report and closed out the year at 40. Last quarter as the VIX approached 40 going up I considered that a very ominous sign but since then it has hit 90 and has again approached 40. This time 40 looks like a positive for the market at least in the short term since volatility is falling.
These indicators are improving but still weak to neutral for US stocks; the VIX is positive on the US Stock Market; the indicators are still strong for US Government Bonds; the foreign markets are improving and slightly positive. Positive for gold, Euro, Yen and weaker for the US dollar.
Global Health Issues:
Mutation of the Bird Flu to a Human form
Probability of Occurrence 10%
Impact 10
Bird Flu Virus (Avian form) reaching the U.S.
Probability of Occurrence 25% per year
Impact 4
Yes, avian flu still is on my most unwanted list it has the biggest and potentially largest impact to human kind at this point. It continues to kill people each month, even though it is not making the news any longer (it’s not very exciting to report on). It has the potential to be more devastating than a limited nuclear war in terms of loss of human life.
Probability of Occurrence: Until the flu mutates into a human transmittable form I am not overly concerned, if the flu does mutate to a human transmittable form I will be extremely concerned (It is my only 10 rating). There have been cases in Europe where domestic birds have been infected and so far the outbreaks have been contained with low ramification to the human population so far.
The Spanish flu of 1918-19 was by far the most lethal influenza pandemic of the 20th century. It infected about one-quarter of the global population and killed more than 40 million people worldwide, roughly 2 percent of the world population at that time. With the world having 6.5 billion people now the number of deaths could easily be around 130 million people, nearly twice the number of deaths from WWII.
Nearly 50% of the people who have contracted bird flu have died from it. See the following link for more information.
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International / Foreign policy issues:
Economic crisis in China in next 4 years
Probability of Occurrence 25% (raised from 15%)
Impact 9
As with all economic turmoil we always have to be on the watch for a crash in China. Any rapid economic upheaval will likely cause a political upheaval also, I cannot predict the outcome but most likely the government will clamp down on its people and we would see massive social unrest.
Another thing to remember, China plays by China’s rules, any investment that is placed in China runs the risk of being sacrificed for its own national interests. China is the economic engine that is keeping the world economy afloat and any mismanagement in the Chinese economy will affect all classes of investments worldwide. If you invest anywhere, you should be familiar with the geo-economic conditions in China.
I believe that China will be the first country to come out of the current economic crisis and long term I plan to invest a majority of my money in the stocks of that country. According to the CIA China is the second-largest economy in the world after the US, although in per capita terms the country is still poor. At current growth rates China could be the world’s largest economy by 2020 based upon purchasing power parity, assuming massive social upheavals don’t occur.
Al Qaeda attack in the US
Probability of Occurrence 10% in next 4 years
Impact 8
Unlikely but should be planned for… It is always wise to own some out of the money put options to protect against a sudden stock market collapse. Every portfolio should always have long dated out of the money puts in it. Without these instruments, if something catastrophic were to occur 50% of your saving could be eliminated overnight.
Destabilization of Pakistan in the next 3 years
Probability of Occurrence 40%
Impact 6 (8 for Indian investments)
My major concern is that the Islamic Republic of Pakistan has tested nuclear weapons and has between 25-50 nukes. Historically it has never gotten along with India who also happens to have ~50 nukes of its own. It is unlikely that a pro-western government would the come from a sudden change of the current situation.
It is believed that Osama Bin Laden is hiding in northern Pakistan and him and his crew would benefit greatly from a collapse of Pakistan.
War in Iran
Probability of Occurrence US 2% Israel 25% in next 3 years
Impact 9
This is a dangerous game of chicken that neither side should be playing… Clearly the US under Obama won’t even consider this option but this will put increasing pressure on Israel to do the dirty work. I suspect if Israel initiates action there will be a 50% chance that it will involved a limited number nuclear weapons.
North Korea nuclear war
Removed from the list last year and remain off the list this… (
But now we have to worry about the social collapse of North Korea. This would mean massive migration to china and South Korea that will cause social unrest in the region. Some limited war may result. This would be a buying opportunity if the Korean Markets fell during the turmoil.
Russia attempts to exercise regional military power (New)
Probability of Occurrence 70%
Impact 7
Putin is still living in the cold war and still striving for relevance in the post soviet world. Now that energy prices have fallen he has lost a major tool to keep the eyes of the world glued on Russia. So, now he will have to use new methods to keep the worlds attention on Russia. I suspect he will be eager to test Obama very early and check for signs of weakness.
The financial system in Russia is on the verge of collapse and any good hard line communist knows that an external conflict will cause the population to be more inclined to endure hardship. Let us not forget that Russia has over 7000 nuclear weapons (and another 9,000 “inactive” ones).
Global stability in 2009 (no hostilities between major nation states)
Probability of Occurrence 90%
Impact 8
Who and why a major war being started is unpredictable at this point, crazy things happen when world economies are in trouble. Global free trade and the advent of nuclear weapons have kept wars somewhat tame for the past 50+ years (in relative terms). I hope that it stays that way.
Domestic Macroeconomic factors:
Collapse of the US Dollar in next 4 years (new)
Probability of Occurrence 2.5%
Impact 9
This is a new category that I didn’t think was a realistic possibility for at least another 10 years. With the current conditions in the financial markets and international currencies markets, a collapse of the dollar seems unlikely but possible. If some yet unknown event or if housing continues to fall (the government has backed $5 Trillion of Freddie and Fannie loans) and if investors begin to loose faith in the dollar it could trigger a run on the dollar.
One has to remember that dollars are nothing more than pieces of paper (legal documents) backed by our banking system. It would behoove everyone to understand the term of “fiat currency”, “fractional-reserve banking” and its implications. On second thought don’t look it up, if too many people did it will only scare them and that would be the beginning of making this prediction come true.
Baby Boomers Retirements and Social Insecurity
Probability of Occurrence 99%
Impact 9 (long term)
This policy has the potential for massive socioeconomic upheavals over the next 30 years and I am sure we are not prudent enough as a culture to take the “medicine” that is required to solve the Social Security problem. Currently Social Security and Medicare consume 30% of all federal revenues which equates to 7% of GDP. This is projected to go to 14% of GDP by 2040.
The three easy (unpopular) fixes is to either; raise Social Security taxes now, cut everyone’s benefit by 15%, or raise everyones retirement age by 5 years. Implementation of these ideas can shave Trillions, yes with a “T”, off payments over the next 75 years.
Out of all the issues that I am covering this is certainly the one issue that is most likely to occur and have the largest impact to Americans outside of a major war or massive epidemic. The Social Security problem is large; the problem will come to fruition so slowly that I am not sure we will have the foresight or the guts to deal with it in time to prevent massive widespread pain.
The housing problem is shaping up to be a $3 Trillion loss of value in the economy, Social Security is currently a $54 Trillion dollar unfunded liability. It will eventually Bankrupt the US if nothing is done.
Democrats in charge of both White House and Congress in 2009
Probability of Occurrence 60%
Impact 8
The democrats have been waiting 28 years to control the legislative and executive agenda and will likely get their wish though at least 2010, after that time the populous will turn back to the center (as has always happened in recent history). Now given the blue states clamoring for power, it won’t be long before the legislative agenda begins, with a supportive President ready to sign all bills into law. As with any political association it will run amuck and I believe create great harm to the long term health of the US dollar, US investment and our economic wellbeing as a nation.
Chapter 3
The Plan
Every trader reserves the right to make a more intelligent decision today than he made yesterday.
- Sheldon Natenberg
The Housing Market, where are we and where are we going?
Recent news of foreclosure rates even stunned me, the perpetual housing doom and gloom guy. What troubles me the most is that 6.41% of All US residential mortgages are delinquent and 2.75% of all mortgages are in foreclosure… 10,000 houses per day are being foreclosed upon and this will have an impact on the economy.
I previously stated we are now in that elusive ACT III of this housing drama. Keep in mind, act three has only just barely begun; this play is far from being over!! I have extended this crisis out through 2011 in this report, I am now thinking about buying a house in late 2009 or 2010; I think home prices will continue to fall 20 - 30% more over the next 2-3 years…
The three “acts” of the housing bear market are:
Act I: Build and they will come! 2003-2007
Act II: I have to repay this loan? 2007-2008
Act III: Banks liquidate and crush housing prices… 2009-2011
So since we may be closer to the end, shouldn’t I be relieved and start investing like a mad man? The liquidity crisis which was caused by the housing crisis seems to have received some effective triage. Still there will be more bankruptcies, write downs, and even more bad news. We still will have firms going out of business and many more foreclosures ahead.
The capital markets need to work through the entire liquidity, mortgage, foreclosure, recession and inflation issues before the econmomy can fully recover. We still clearly have at least another year or two of pain if you are a home owner. For those of us with capital to put to work I believe that it “might” be a good time to invest in Q3 of ’09 since conditions should be bottoming then, or at least not getting any …
I now expect Act Three to take at least another 18 months or more before I declare this play over. Bottom line is that I expect the housing slump to go on for at least one more year possibly two. The danger is that this play is about over and a new one might open called, “collapse of the dollar”… It could be a very long tragic play that would make Macbeth seem like a light hearted comedy…
I still want to make it clear that I don’t think housing “real” prices will go up any time soon only gain modestly for the next 5-10 years after bottoming. I do want to buy a house but it’s not because I think houses are going up but because I can borrow subsidized money cheaply… I believe mortgage rates eventually are going to go up to 8%-10% over the next 2-5 years and I want to get a subsidized loan (tax write off) before those rates go up. Also I believe that longer term we are going to experience serious inflation and owning a house is a good hedge when combined with a large fixed price loan.
I believe to escape the real estate bubble we are creating a bond/interest rate bubble. Owning a house during the housing bubble is a bad thing, owing money during a bond bubble is a good thing. In essence I believe the house in “real dollars” will maintain its value while the loan that I get will gain value in “real dollars” for a total positive net gain.
Deflation
It seems to me that we are in a period of deflation and most people are ill-equipped to deal with deflation since most people have never experienced it before. During deflationary times you want to hold cash. It’s that simple, the best investment you can make during inflation is not investing since each day your money gains real value. Even though stocks look cheap during deflation isn’t the question but what is the value of money? Stocks, oil, property all maintain their relative value to each other, it’s just that the value of cash goes up during deflationary times.
Deflation is when everyone has a fire sale at the same time because everyone needs to raise cash. People undercut each other to get cash so prices fall as bidding wars propagate for the remaining cash that’s in the system. This is a very important concept most people aren’t getting in the current market and the reason the Fed has “printed” so much money is to prevent that shortage of money.
The Dollar and US Bonds (the next bubble to burst)
I can’t emphasize this enough… Long term; I hate US government bonds… and by long term I say over the next 2-10 years. Short term they may have value but have been bid up to ridiculous values to the extent that short term bonds are near zero yield. The thirty year treasury is now at an unbelievable yield of 2.69%!! Would you be willing to loan money to the US (or anyone) for the next 30 years at a locked in rate of 2.69%???? If you are let me know because I am willing to pay 2.7%.
The US government has effectively backed the US financial system to the tune of trillions of dollars via Freddie and Fannie. What is going on is the government is borrowing money to fund mortgages via Freddie and Fannie. If the housing market were to go into complete freefall the dollar could collapse as would bonds if investors lost confidence. All these loan guarantees are fine as long as housing prices ‘stabilize’. If housing values were to plummet, say 50%, my guess would be that the US will have to suddenly incur several trillion dollars of losses. Wait… Isn’t this how all the homeowners and then banks effectively went bankrupt?
What are the chances of confidence being lost in the US dollar? Already you can see that I am not optimistic and recently The China Daily stated that "China's increased purchases of US Treasury Securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis... The current strong foreign appetite should not be taken by the US government as solid proof of the long term value of its Treasury securities." This statement should not be taken lightly since China is the largest holder of US bonds.
None of this is good for the US dollar long term; the only reason that the dollar is where it is now is because of a flight to some sort of “perceived” safety. Longer term, more rational minds are going to see that the value of the US Dollar is at risk and the resources of the US Government are not unlimited. Currently the US is at the highest risk for default since WWII.
I will not buy nor shall I ever hold US Treasuries Bonds (except for TIPS). If anything I will short them when the time comes (via TBT). Yields are far too low for the risk being taken, the flight to “quality” has artificially driven rates low (bond prices high) and they will fall. The Federal Reserve will need to eventually raise rates and this will also cause bonds to fall. I fully expect that tax revenues will fall greatly this year. Add to this the looming Social Security issue and likely inflation; how could any serious investor expect to only want 2.7% on their money for the next 30 years?
In the short term, there is a phrase on Wall Street and it is “don’t fight the Fed”, meaning the Federal Reserves has a huge resource base and it wants rates to go lower to stimulate the economy. For now it may be foolish to try to step in front of this behemoth. I believe that someday betting against interest rates and the US dollar will become a no brainer way to make money. In the short run the flight to “quality” may continue for weeks, months or even years. It will be hard to judge when the right time is to jump in but I plan to put on a small short position right around tax day (April 15th) and more this summer. Seriously I can only loose 2.7% a year while I am wrong and waiting it out…
Now let’s talk about the case for owning government bonds, I still believe that they are likely to do poorly over the next several years as the anticipated Fed rate hikes are factored in. Bonds do very poorly during periods of inflation or rising rates. I believe that by the end of 2009 US dollar denominated bonds will have become a bad investment. Since rates are likely to start going up around the world as the economy recovers and as that recovery puts strains back into energy and commodities, I believe that bonds are a poor investment choice. I am going to take this opportunity to invest in high yield stocks and trusts that are most likely going to keep up with inflation over the long run.
In the near term it is anyone’s guess how bonds will do. One observation regarding the market is that things tend to go on longer than anyone thinks. In other words I think bonds are overvalued and yields are too low but I thought that about housing before it ran up another 30%. In the short run if deflation continues to be in the driver’s seat and people are not willing to divest of bonds, then bonds will perform. If you look at my Model portfolio you will see that bonds outperformed the market last year substantially.
I just think at these levels bonds could drop 30% in just a few weeks timeframe. Bonds have always been the bastion of low volatility and steady prices but I believe those days are ending.
Muni bonds
Fundamentally, the housing market has given many cities, counties, states artificially high revenue streams due to property taxes and yet they felt the need to borrow more money backed by those heightened revenue streams. Well, as the housing market collapses and property taxes recede, many of these municipalities are or going to have trouble paying the interest on those bonds let alone returning the principle to their rightful owners. Based on this situation I will avoid many municipal bonds.
But what do I think of bonds as an investment? What is abundantly clear is that the US Government isn’t going to let anyone fail, especially any state or local government. In fact I believe they may even encourage these entities to “simulate” the economy (this is merely a political code word for tax and spend without the tax part). I think that Muni bonds are safe as long as Treasuries are safe. If a true dollar crisis were to develop this issue would become disastrous. As a Capitalist, I hate these instruments; as a reluctant Keynesian, how could you not love them?
The question isn’t will or will they not pay the loans back; the question is who will pay the loans back? If you don’t believe the previous section on US Bonds then this is the place to go… If you do then these are a time bomb. If the Federal government steps as I expect these bonds would be safe and have higher yields and better tax advantages than treasuries.
Corporate Bonds/convertible bonds/preferred shares
For the next few to several months I believe that we are faced with deflation more so than inflation and corporate bonds are a great way to make money during deflation. As I have stated in previous sections I don’t like US Bonds because I believe they are too expensive and the yield is too low. What I do like is highly rated corporate bonds especially the ones being back by the government. The yields on these bonds beat US bonds and in terms of risk adjusted yields are high. I am parking some of my excess money here.
I have also bought some funds that deal with convertible and preferred share. These are great little instruments that have high yields and substantially less risk than common shares. If inflation ever comes into the fold, I would sell all these instruments.
Financial stocks
Right, most of these entities are virtually bankrupt. I trade them but owning them for the long haul isn’t a good idea since hope is not a legitimate investment strategy.
Gold
This is another tough one that is very hard to call. I believe that for the moment we are in a deflationary spiral so I expect gold to go down and my propensity is to sell (short) gold. If signs of inflation were to occur then the opposite would be true. No one knows if or how long we’ll be in a deflationary cycle and no one knows if or when an inflationary cycle will start. Once an inflationary cycle starts gold would be a good investment but for now I plan to stay away form in as an investment theme.
I will buy gold if gold goes over $400/ounce after it has sunk below $350 and stayed there for 3 months. I will buy gold if it goes above $1100/oz. One is based on deflation and the other, inflation.
I am tempted to buy a small volume of physical gold and put it in a safety deposit box just as a hedge against currency collapse. I am able buy physical gold and put it into a safety deposit box even when I think is going down by also selling short financial gold (GLD) via the stock market. This called a physical/financial spread and it allows you to own gold without worrying about the value of the stuff you own. This will open you up to all kinds of issues regarding taxes (if you sold one side of the position and not the other) and margining (if gold skyrocketed you may get margin calls on your short financial gold and may have to sell your real gold to raise that money)… But it’s a nice way to own gold without have any financial exposure to actual gold prices.
Oil/Energy
It will continue to go down until the dollar falls. I will buy energy stocks when oil hits $25 a barrel
Domestic Stocks
As long as we are in the deflationary part of this crisis stocks will continue to go down no matter how “cheap” they get. Deflation is bad for stocks, inflation is bad for stocks (but not as bad), and a crap economy is really bad for stocks. I will invest again at DJIA 5500… Things are cheap! They are most likely going to get cheaper!!! This is the nature of deflation.
Obama and your (our) money
On a philosophical basis, I am a Capitalist Libertarian… The Congress will be controlled by the Democrats and when Obama takes the oath of office I fear an explosion of populist/socialist legislation will occur with little to no ability to slow or stop this legislation. There will be few checks and balances and I fear that all the progress made under Reagan will evaporate within a year or two. I believe that the new Washington will be hostile toward wealth creation and squander resources that we can not afford.
Once the redistribution policies have failed (again) in achieving their goals the Democrats will scratch their heads as Government revenues drop and unemployment goes higher. They will then wonder how they will fund their wealth redistribution programs, higher tax? The solution… Do it right, stop cutting corners, and spend more…
I will be writing more about wealth preservation in future reports and ideas on how I will try to avoid tax laws legally. As a Libertarian the thought of Wall Street effectively under the control of the Socialist via the US Treasurer frightens me… As a libertarian I believe it is wrong to seize the resources of the successful to subsidize failure. As an American I can see that as a misuse of our economic capital and reducing our ability to maintain vibrate economy. Capitalism is under assault and it is loosing.
Summary of Mark(et) US Economic Indicators
GDP Growth – Negative
Unemployment – High
Federal Reserve Bias – Printing Money
Inflation – Deflation
Consumer Spending – Collapse
Corporate profits Growth Rate – Falling
Real Estate Market – Collapse
Budget Deficit – Excessive
Dollar – Strong but likely to fall hard
Volatility Index – High but improving
Technical Indicators – Less extreme, more or less neutral on stock and positive on bonds
Liquidity – Poor but improving
So… What is the Plan?
I made a bet that the market was overdone to the downside last quarter and I was wrong. I stated that this was my “most important investment decision of this decade”… I lost big time!
Is there any real reason to invest right now? Do I think there are buying opportunities? Yes but I think they will be even greater opportunities closer the middle or end of next year. In other words, I believe the market will continue to go down for the next several months or until the economy reverses itself.
So, if I am so pessimistic of the market why am I fully invested in the market? I was about 75% cash for a while but I believe the market has nothing to do with fundamentals at this point. The market is nothing more than mass human emotion swinging to and fro on each piece of irrelevant piece of news/bailout/bankruptcy. I believe that leading up to the Obama inauguration optimism will shine through and many foolish people will start to become optimistic and see this as an opportunity to invest… I plan to effectively sell everything by 1/20/09. I believe that this may be the last chance to sell before the next round of drops in the market.
Longer term globalization has not and will not go away for the next 30 years. But the US has demonstrated its dependency on credit and if we add in the fact that we have a growing social security time bomb, it still brings me back to the same theme that I have had since the first issue of this report. With my long term view on global macroeconomics and my view of the US macroeconomics of the US debt markets, I have no choice but to invest outside of the US, minimizing my exposure to the US dollar and especially avoiding dollar denominated government bonds in the long run…
I believe at the end of the day that I will (eventually) make a lot of money (or at least get my money back) from this current credit meltdown event. The world economic changes that are occurring are not going to be stopped by this temporary hiccup in capital flows. Longer term, more than a billion people on this planet are in the process of becoming “middle class” and they are going to want things and will have the means to buy them.
The next few months are going to be an extremely difficult investment environment. We are likely to go through several phases of boom, bust, deflation, inflation, bailouts and claw backs. One thing that’s for sure is that passive investing is a fool’s game now. Putting money in an investment and letting it sit unwatched for the next few years will only result in tears. Only strategies, action plans, and contingency plans will get me through this period.
Chapter 4
Domestic watch list for 2009
These instruments are cheap because any investment are risky at this time in our economic history, something to think about.
iShares Dow Jones Select Dividend Index
Symbol DVY
Sector Dividend paying stocks ETF
Risk moderate
Return moderate
Complexity simple
Time Horizon Unknown
Tax implications Consult tax advisor (mostly at 15%)
Account(s) Taxed and IRA
This is a diversified ETF with higher yielding large company stock with a current yield just under 6% (assuming no dividend cuts)
iShares S&P U.S. Preferred Stock Index
Symbol PFF
Sector Preferred shares ETF
Risk Moderate
Return High
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (not sure)
Account(s) Taxed and IRA
This is a diversified ETF with higher yielding large company preferred stock with a current yield over 11% (assuming no dividend cuts)
PowerShares Financial Preferred (PGF)
Symbol PGF
Sector Financial Company preferred shares ETF
Risk Higher
Return Very High
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (not sure)
Account(s) Taxed and IRA
This is a diversified ETF with higher yielding large financial company preferred stock with an current yield near 13% (assuming no dividend cuts)
iShares iBoxx $ High Yield Corporate Debt
Symbol HYG
Sector Corporate bond ETF
Risk lower
Return Very high
Complexity simple
Time Horizon Unknown
Tax implications Consult tax advisor (Normal tax rate)
Account(s) IRA and Taxed
This is a diversified ETF with higher yielding large company bonds with a current yield near 12% (assuming no dividend cuts)
SPDR Lehman High Yield Bond (JNK)
Symbol JNK
Sector Corporate junk bond ETF
Risk Very High
Return Very High
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal tax rates)
Account(s) IRA and Taxed
This is a diversified ETF with higher yielding large company junk bonds (non investment grade) with a current yield near 14% (assuming no dividend cuts)
iShares FTSE NAREIT Mortgage REITs (REM)
Symbol REM
Sector Mortgage REITs ETF
Risk Extraordinary
Return Extraordinary
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal tax rate)
Account(s) IRA and Taxed
This is a diversified ETF with exposure to mortgages with a current yield near 22% (assuming no dividend cuts). If you want exposure to the mortgage mess, here it is.
Gold
Symbol GLD
Sector Precious Metal
Risk Moderate +
Return Moderate
Complexity Simple
Time Horizon Medium term (3 months – 60 months)
Tax implications Long term capital gain rate of 15% does not apply to this ETF.
Long term capital gains rate for this security is 28%
Account(s) IRA and Taxed
What this ETF does is allows you to buy gold as if were a stock. Each share that you hold is equivalent to owning a 1/10th of an ounce of gold. The gold is stored in a bank vault in Great Britain. Gold has always been a currency of safety and I believe world demand for this metal is only going to go up as the world gets richer. Also as the US dollar falls gold will tend to go up and vise versa.
UltraShort Lehman 20+ Trsy ProShares
Symbol TBT
Sector 2x leveraged short US long Bond EFT
Risk Speculative
Return high
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal)
Account(s) IRA and Taxed
The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. This is what I will use when I decide that I want to short the long bond. This ETF moves opposite direction and twice as fast as the 20-30 year bonds.
iShares Lehman TIPS Bond
Symbol TIP
Sector Treasury Inflation Protected bond ETF
Risk Lower
Return Moderate
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal)
Account(s) IRA and Taxed
The investment seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. TIPS index
Chapter 5
International watch list 2009
2009 Consensuses GDP Growth Forecast by Country
|China |8.5% |Thailand |3.9% |Turkey |
|US Large Cap: |20% |30% |40% |30% |
|US Small Cap: |10% |10% |20% |30% |
|International: |10% |20% |30% |40% |
|Fixed Income: |50% |35% |10% |0% |
|Cash: |10% |5% |0% |0% |
US Large Cap:
SPDR S&P Depository Receipts (SPY) 33%
NASDAQ 100 Trust Shares (QQQQ) 33%
Vanguard Value VIPERs (VTV) 33%
US Small Cap:
iShares Russell 2000 Index (IWM) 100%
International:
iShares MSCI “EAFA” Europe, Australia and Far East Index Fund (EFA) 50%
iShares MSCI Emerging Markets Index (EEM) 50%
Fixed Income (Bonds):
iShares Lehman 20+ Year Treasury Bond (TLT) 25%
iShares Lehman 7-10 Year Treasury Bond (IEF) 25%
iShares Lehman Aggregate Bond (AGG) 25%
iShares GS $ InvesTop Corp Bond (LQD) 25%
Cash:
iShares Lehman 1-3 Year Treasury bond (SHY) 100%
Year to Date Returns
|Name | |12/31/07 Price |12/31/08 Price |YTD Gain % |YTD Gain % w/ |
| |Symbol | | |w/o Div |Div |
|SPDR S&P Depository Receipts |SPY |$146.21 |$90.24 |-38.28% |-36.42% |
|NASDAQ 100 Trust Shares |QQQQ |$51.22 |$29.74 |-41.94% |-41.67% |
|DIAMONDS Trust |DIA |$132.55 |$87.52 |-33.97% |-32.26% |
|Vanguard Value VIPERs |VTV |$66.39 |$41.16 |-38.00% |-35.38% |
|iShares Russell 2000 Index |IWM |$75.92 |$49.24 |-35.14% |-34.47% |
|iShares MSCI “EAFA” |EFA |$78.50 |$44.86 |-42.85% |-42.16% |
|iShares MSCI Emerging Markets |EEM |$150.30 |$24.97 |-50.16% |-49.48% |
|iShares Lehman 20+ Year Treasury |TLT |$93.04 |$119.35 |28.28% |30.57% |
|iShares Lehman 7-10 Year Treasury |IEF |$87.01 |$98.53 |13.24% |16.10% |
|iShares Lehman Aggregate Bond |AGG |$101.17 |$104.20 |2.99% |5.65% |
|iShares GS $ InvesTop Corp |LQD |$104.84 |$101.65 |-3.04% |0.28% |
|iShares Lehman 1-3 Year Treasury |SHY |$82.19 |$84.66 |3.00% |5.62% |
As you can see, just about all stock funds got creamed. Bonds did well and long term treasuries were excellent.. This is the first time since inception of this portfolio that a loss has occurred in all categories (risk adverse – aggressive) and as you can see from the box below the more aggressive you are in the good times the more you make, the more aggressive in bad times the more you loose.
Results for the various “no brainer” portfolios
| |Risk |Balanced |Growth |Aggressive |
| |Adverse | | | |
| | | | | |
| ’08 Return |-8.18% |-18.66% |-33.90% |-39.60% |
|’07 Return |7.82% |9.40% |10.04% |10.45% |
|’06 Return |9.72% |13.63% |19.09% |21.83% |
|’05 Return |5.49% |7.55% |9.73% |11.77% |
Risk adverse strategy only lost about a year of growth, balanced and growth each lost about two years of gains while aggressive lost nearly 4 years of gains in a single year.
This would be a good time to rebalance a portfolio. If I had the risk adverse portfolio (I wish) then it would be time to sell some bonds and buy stocks since the value of the bonds went up and the stocks dropped (the total value of the portfolio just got skewed toward bonds).
Chapter 7
My Holdings
Don’t be foolish enough to try to replicate my portfolio, very few money professionals would even remotely approve of this portfolio. I plan to make some money on these positions between now and the inauguration day, at that time I shall sell most of it.
Taxed Account Holdings for Q4 ‘08
|Name | |Price |Portfolio % |
| |Symbol | | |
|ISHARES EMERGING MKTS |EEM |$24.97 |17.36% |
|ISHARES CHINA |FXI |$29.09 |13.49% |
|BANKING ETF |KBE |$22.01 |10.20% |
|MS INDIA INVT FUND |IIF |$12.50 |8.69% |
|CHINA FUND |CHN |$16.54 |7.67% |
|LLOYDS |LYG |$7.70 |7.14% |
|PROSHARES ULTRA FINLS |UYG |$6.03 |6.99% |
|POWERSHARES NASDAQ 100 |QQQQ |$29.74 |6.89% |
|NATIONAL HEALTH INVS |NHI |$27.43 |6.36% |
|ARCELORMITTAL |MT |$24.59 |5.70% |
|BARCLAYS |BCS |$9.80 |5.68% |
|MORGAN STANLEY |MS |$16.04 |3.72% |
|NOKIA CORP |NOK |$15.60 |3.62% |
|AU 0PTRONICS CORP |AUO |$7.68 |0.03% |
|CITIGROUP JAN $30 CALL (short) |WRVAF |$0.03 |-0.01% |
|ULTRA FIN JUN $20 CALL (short) |UYGFD |$0.05 |-0.02% |
|INTEL CORP JAN $25 CALL (short) |WNLAE |$0.38 |-0.09% |
|NOKIA JAN $25 CALL (short) |WIKAE |$0.65 |-0.15% |
|XLF JUN $20 CALL (short) |XLFFT |$0.14 |-0.16% |
|NOKIA JAN $20 CALL (short) |WIKAD |$1.70 |-0.39% |
|EEM I MAR $30 CALL (short) |EEMCF |$1.00 |-1.16% |
|S&P 500 JUN $100 CALL (short) |SWGFV |$4.35 |-2.02% |
| | | | |
|Cash |CASH |$1.00 |0.47% |
| | | |100% |
I still own many emerging market and bank stocks from last year and will be looking for a chance to unload them (1/20/09). One smart thing I did manage to do is sell a bunch of call options when the market volatility was high and those have worked in my favor. I will attempt to buy back some of the near worthless call options beginning on January 26th when retail customs can enter bids in penny increments for options (currently five cent increments are required).
IRA Account Holdings for Q4 ‘08
|Name | |Price |Portfolio % |
| |Symbol | | |
|HOSPITALITY PROPERTIES |HPT |$14.87 |20.10% |
|MORGAN STANLEY INDIA INVT |IIF |$12.50 |16.89% |
|ADVENT CLAYMORE CONV SECS |AVK |$10.95 |9.87% |
|ABERDEEN ASIA PACIFIC INCOME FD |FAX |$4.30 |9.69% |
|NORDIC AMERICAN TANKER SHIPPING |NAT |$33.75 |7.60% |
|PRECISION DRILLING TR |PDS |$8.39 |7.56% |
|AU 0PTRONICS CORP |AUO |$7.68 |7.09% |
|KNIGHTSBRIDGE TANK |VLCCF |$14.65 |6.60% |
|BLACKROCK DIVID ACHIEVERS |BDV |$8.36 |3.77% |
|ISHARES AUSTRALIA INDEX FUND |EWA |$14.01 |3.16% |
|IRELAND BK |IRE |$4.77 |2.15% |
| | | | |
|CASH |CASH |$1.00 |5.53% |
| | | |100.00% |
This portfolio is mostly high yield stock and trusts. Many are foreign companies and I keep them in my IRA account to avoid complicating my taxes. I will sell 1/3 of these investments to raise money to buy SDS to hedge this account by 1/20/09
Chapter 8
Final Thoughts
The Good
Interest rates are low
Low energy prices are pumping billions back into the world economy each day
Commodity prices are cheaper
The risk of a massive depression has been greatly reduced
New leadership (feel good effect)
The Bad
Housing prices are in freefall
High unemployment going higher
Falling Tax receipts due to financial turmoil
Exploding Budget deficit due to increased spending
We are in a recession and its getting worse
Governments interfering/controlling prices and values
Potential of consumer credit crunch, credit cards, and student loans
Potential for inflation
New Leadership (economic philosophies that have been proven never to work)
The Ugly
Potential for a new Great Depression
Recent action by the US Government has put the wider economy at risk
Potential for national debt spiral both public and private
The government has taken charge of a large part of the economy
Potential for US bonds may be downgraded
Potential for Hyperinflation
Unforeseen events
Final thoughts:
Mayhem reigned supreme in the markets during the past year, but it appears the risk of a complete and utter collapse of the financial system has been reduced significantly, but it has not been eliminated. The aggressive action by the world governments may have contained the damage but it may have only delayed the inevitable. The risk is that the US Government has probably saved the credit market but it has gambled with the credit rating of the United States of America in the process. We may have averted a depression or devastating recession but have raised the real possibility of a total collapse of the US dollar/world economy.
In general I believe we are still in the deflationary part of this crisis. Helpfully we will move through this phase and it will most likely be followed by a period of inflation/high inflation/hyperinflation (no one knows for sure). For now any investment strategy is extremely risky including sitting on the sidelines or just sitting on cash. No one knows what will come next and no one knows what the true value of anything is…
I currently own a lot of stock but plan to effectively sell most everything around Obama’s inauguration believing that foolishly optimistic people will be silly enough to believe that one human being will convince 6.5 billion people to produce, borrow, and consume as if nothing went wrong; the credit bubble has burst and Humpty Dumpty cannot be put back together again, even with all the Presidential horses and all the Presidential men.
My current thoughts (subject to many changes and revisions) are that I expect that I will be soon short of the market, short index OOM call options (skew), own many high yielding AA+ corporate bonds, short energy and short gold in anticipation of the beginning of a very nasty recession with unemployment hitting 10% and GDP shrinking by 4% by the end of the year.
I suspect by November of this year (or around Dow 5500) I will reverse directions and be long the market via Ultra funds, Ultra long gold, Ultra short Treasuries (TBT), and be long one house while short one 30 year fixed rate mortgage at ~4% as a defense against the anticipated inflation caused by all the money we have printed. This part of the plan could take months or years to pay off… Only the tea leaves know for sure.
I still don’t own a house or much of anything “real”. In the strictest sense, I have lots of little pieces of paper that lay claim to parts of businesses around the world. Even those pieces of paper aren’t even real and are only bits of scattered data strewn across the internet. I have come to appreciate the fact that I need to own a few more practical objects that I can touch. My New Years resolution is to own more useful things in real world.
This is the conclusion of my report, I hope to get the next report out by April 5th 2009 and entertain you with my new thoughts and reflections. Please send any questions, comments or topic ideas for future issues to me via email. GOOD LUCK!!!
Regards,
Mark Rush
redgroup2@
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