Predictions for 2009
Wednesday, December 31, 2008 at 10:25AM by Kip Herriage -VRAInsider.com
“May you live in interesting times” … Ancient Chinese Curse
That’s right. This famous Chinese proverb was actually written as a curse, and I’d say that it totally and completely sums up this past year. 2008 just became the worst investment year since the Great Depression, with losses of 35-40% for most major indices. At least we can say that it wasn’t boring....and that it only lasted one year.
Like 2001, none of us will ever forget this past year. It started innocently enough, with the Dow Jones coming off of an all time high, and the economy in seemingly good shape. In retrospect, we now know that the recession began in November of ‘07, but at the time everything still felt pretty normal. After all, we had Bush, Bernanke and Paulson telling us that everything was in great shape…that the underlying economy was strong, that housing was going to hold up just fine, and that the derivatives problem was being exaggerated. Famous last words from our infamous leaders…
Let’s all agree to remember the following: the next time our instincts tell us one thing and the so-called leaders of the free world tell us just the opposite, lets go with our gut. Maybe Obama will be a different story, but I think I’ll wait for the proof first.
2009: A Bounce Back Year?
As we head into the New Year, most are saying that it has to be better than this one…and I agree. After all, another 40% drop will take us to Dow 5000 and none of us want to have to endure that. As I’ve been writing, earnings on the S&P 500 are expected to see a significant drop, and while I can make a case for Dow 5000, I can also make the case for a recovery in the markets, although it might be the second half of the year before it begins in earnest. Obama’s economic stimulus package(s) and infrastructure jobs program will inject over $2 trillion into the US economy, and similar stimulus packages are being planned around the globe. Frankly, I think they’d be better off just giving everyone a check for $50,000. Don’t laugh folks; this is an idea that is actually being kicked around. It would reinflate the economy immediately and because ALL of the money would wind up in the hands of the end-user…the consumer…it would likely be far more effective. At least for their stated purpose of preventing our bubble of an economy from bursting.
If you’ve been reading my comments for long, you know where I think this is all headed, regardless of what the government experiments with (and trust me, we are all just guinea pigs here). Because we have a consumer based economy (rather than a manufacturing based economy) with over 70% of our gross domestic product (GDP) coming from what we each decide to purchase, not much they do will help. Unemployment is ultimately headed to 12% plus, home prices still have 15-25% left on the downside, and our “system” has to complete the deleveraging process. We’ve seen savings rates in the US drop from 10% in the 80’s to negative 5% in 2008 and we are buried in debt. We have homes that are too big for our incomes, and we’ve spent lots of money that we don’t have, on things that we don’t need. The baby boom generation will be remembered as the greed generation, and unfortunately, a one year recession is just not a big enough penance to pay. Karma doesn’t work that way, and neither do the laws of free enterprise.
Recessions are normal, healthy, and happen for a very good reason. And, when they do happen, they act as a powerful cleansing agent. Recessions help to bring bloated asset prices down (on real estate, houses, businesses, and stocks, etc.) to such levels as to allow those who’ve acted responsibly over the years to benefit greatly via the bargains on the market. Because the government has decided to try to short-circuit the normality of this particular recession, they will only make the pain we’ll experience that much greater. It’s been said that you can’t fool Mother Nature…and the same principle applies to the universal laws of economics. Just ask Japan.
Japan has been trying the same economic policies since their recession began in the 80’s. They have continually bailed out their weak banks, they’ve supported industries that would have otherwise failed (via massive cash infusions), and they’ve kept interest rates at near zero the entire time (sound familiar?). And here’s what they have to show for it; real estate prices dropped for a record 17 years, the Nikkei Dow dropped 78% (just so far), and deflation has proven to be a monster worse than any of the ones Godzilla ever had to face. But for some reason, our monetary braintrusts believe that this time will be different. Either that or this has all been by design…the powers that be (see shadow government) planned all of this in order to transfer massive amounts of wealth to a select and informed few; to purge the system once and for all and hit the reset button, with the strongest surviving and the rest learning a lesson they will never forget. Before you scoff at this, lots of smart people say that this is just what happened with the crash of 1929 and the depression that followed. Regardless, the similarities are spooky and we should plan for the worst, in the event that it actually happens.
Lucky for us, the opportunity to create massive wealth and to build true legacies is far greater in times just like these. Much more so than in even a “normal” economy. The key is watching the smart money and moving our money with theirs…this will be our primary objective in 2009 and beyond.
So, Where’s the Smart Money Right Now?
Over the last 23 years I have seen the best and the worst of the so-called stock market guru’s. The vast majority of the experts that you see on TV may be smart, in fact they may be very smart, but when it comes to investing they underperform the stock market averages by a great deal. What CNBC conveniently forgets to tell us when they have these folks on air, is that 90% of all money managers (and the mutual funds or hedge funds that they manage) fail to beat the market on a yearly basis. That’s right; the vast majority charge those big management fees to investors and then proceed to lose to the overall market year end and year out.
It took me about five years as a financial advisor to figure this out, but once I did I started learning to perform my own due diligence, both on individual companies and on individual market strategists. I knew that I couldn’t learn it all, so I was determined to find out who the real gurus were. I wanted to learn as much as possible from them so that my clients could reap the rewards. Now, over two decades later I have a mastermind group that includes the worlds brightest. This helps me to determine what the short and long term market trends are, along with where the smart money is investing, and it’s a big reason why I’m able to outperform the market and anticipate what’s coming next .
One of the most important investing lessons I’ve learned is that you can’t tell the stock market what to do (as much as I want to). The market is smarter than everyone put together…it has a mind of its own…and if you decide to bet against the markets trends (minor or primary) you will lose…every time. For example, as much as I believe that we are in a long term bear market, and that we will see 6500 on the Dow before we see 11,000 (the current 200 day moving average), I will quickly change my mind if the market starts flashing a buy signal, either short term or long term. We could be at just that point in the Dow right now.
The chart below is on the Dow Jones Industrial Average. As you can see, the blue line represents the Dow itself, and the red and black lines represent the 50 day and the 200 day moving averages, or the DMA. Moving averages are very important to follow, as they dictate where significant support and resistance begin to influence either the market, or a particular stock. As this chart clearly shows, the Dow is very close to breaking through the 50 day moving average and thus the overhead resistance at about 8600. In fact, it did just that today with a close of 8668 (this chart is actually one day behind). (charts are for vraletter.com subscribers only)
Does this mean that its smooth sailing ahead and that the stock market is headed higher? It quite possibly does, but we’ll need to see a continuation of the move before we can say for sure. If the move higher continues into the New Year on heavy volume (currently the volume is light due to the holiday season), then we will have confirmation that the markets “minor trend” has turned bullish, even though the primary trend (200 day moving average) is still bearish.
The chart below really makes the case for the importance of the 200 day moving average, or again, the primary trend. As you can see, for four years the Dow bounced off of the 50 and 200 DMA like clockwork, but at the end of 2007 it first broke the 50 and then finally, the 200 DMA. Once this happened, the bull market was over and the worst year since the Great Depression became reality.
Understanding and using these two moving averages is one of the first and most important elements of technical analysis, and is a very strong tool when combined with fundamental analysis (reading financial statements, analyzing price to earnings multiples, studying industry and seasonal trends, etc.)
There are Both Technical and Fundamental Reasons to be Bullish
If the break above the 50 DMA can hold, this would be a bullish indicator for the short term…but only from a technical point of view (the S&P 500 chart is identical as well). Now we need to look at the markets fundamentals. As I’ve been saying, you can't turn to a business television channel these days without hearing about the record amounts of cash that are on the sidelines. Institutional investors and individual investors went to cash and Treasuries out of fear… and you can bet that they will begin to move back into other investments out of greed, and out of fear that they will miss the move higher. Aha, here are the two emotions of investing again…fear and greed…and in this case the fear would even come from a different motivation; the fear of underperforming the competition. However, the move back into the equity markets, commodities, debt and real estate will not be immediate…not with the potential for more Bernie Madoffs out there, or with the (strong) potential for lots of additional bad news on the economy.
But since greed is such a powerful motivator, I think this cash hoard of over $5 trillion from money markets and treasuries will begin moving back into the markets more aggressively once they perceive the called smart money is returning. Combined with the Obama euphoria, and the historically seasonal bullishness of the stock market from November to April each year (when 90% of all gains take place) it’s still very possible that the minor trend for the stock market could turn bullish for some time, maybe even as I’ve been writing to Dow 10,500. So, even in the face of all of the bad economic news on the way, we could see a significant bear market rally. One that we don’t want to miss.
Finally, I look for continued volatility in 2009, so don’t be surprised to see intraday swings of 500 points…as a matter of fact you should expect it. So far everything that Obama has done the market has liked, so you have to ask yourself how long this honeymoon will last?
I see geopolitical risks as the wildcard that could catch everyone by surprise, and growing tension in the Middle East should have everyone alert to the risks. I also believe that there are more Bernie Madoffs out there in the hedge fund world, and that this kind of news could cause a stock market drop of 1000 points… out of nowhere.
I wish each of you great success, health and happiness in the coming year. The calamity from 2008 is providing all of us with massive opportunity…once in a lifetime kind of stuff…you just have to remember to look for it on a daily basis.
We’ll do that together in 2009.
All my best,
Kip Herriage
Editor, VRA
Reader Comments (1)
If I have to be the guinea pig in the gov's game, then let me be the one they put in the test group of "Saves well, spends smart and makes Superb Investment Choices!" Happy New year Kip...looking forward to seeing, and participating in all of the great opportunities that will present themselves this year. All the best to you my friend...thanks for being AMAZING!