Well, can you believe that we are about to finish the worst year in the DOW since 1931?  That's right, we just had the worst year in the stock market since the great depression 77 years ago.  The S&P will also have its worst year on record and is down over 40% for the year.  In sending out my New Year's outlook, I wanted to spend a couple of minutes on 2008 before moving to 2009, as I think it is very relevant.  All markets were basically down in 2008 with the stock market, bond market, commodity market, and metals (including gold) down for the year.  There really wasn't a place to hide this past year except in cash, over the entire year anyway.  We have seen the credit market crises which started in earnest with the Lehman bankruptcy and a very leveraged banking system morph into our economy and virtually all segments have been affected or will be in the near future. 

 

While we were able to protect a lot of our capital through hedging (both with covered calls and the inverse ETFs) timing of investing, keeping a cash horde, and moving some money into oversold high grade corporates at the end of the year, most investors or fund managers lost some capital in the equity markets, even if it wasn't 40% or more.  There should be a couple of things you think about as you go into 2009.  First, don't be passive with your money.  Even if you are in control over your 401K or IRA, don't just put your money in a fund and forget about it.  Certain sectors will far out perform others in 2009, and if you just leave your money in one sector you can get absolutely destroyed as so many investors did in commodities, energy, or financials this year which lost 65-80% in value.  Staying away from sectors that have meltdowns can have a tremendous affect on protecting your capital.  Second, stay or become diversified.  It will make sense to stay diversified across the stock market, with some highly discounted highly rated bonds, with some CDs/cash, and with a small amount in oversold commodity plays.  Don't put "all your eggs in one basket", I don't care if it is just your 401K..  Third, have a plan.  Don't put your head in the sand, especially like a year the markets had this year.  Understand what you are trying to do from a retirement, an education, investment, and tax perspective and make sure the way you invest and spend makes sense against your plan.  You don't need to be an expert in everything, just understand where you money is and what you are trying to do.  A mini-financial plan at a minimum is critical to your financial future..

 

Before I move to 2009, I also want to bring up this Madoff situation where there may of been $50 billion worth of lost assets in a ponzi scheme.  Don't ever totally give up control of everything you know and do with your investments.  It is amazing to me that investors and funds alike would give their money to a man, not be allowed to see where there money is being invested, never be allowed to look at what's going on electronically, never meet the advisor, understand that the firm never had an outside custodian, and still blindly trust this person.  Especially when he still had very profitable returns even in years where there were recessions, even though he wasn't running a hedge fund.  It's OK to be trusting (as I know you are with with me or you wouldn't have me managing your money), but don't be blindly trusting when you really have no idea what is going on and no way to verify anything.  Nobody has the right to take that away from you.  Financial Planning is an integral part of investing and you should always have a "big picture" plan.

 

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OK, enough about 2008.  We're all ready to get that behind us as it was an absolutely horrid year for virtually all markets and is something we may never see again.  So what should 2009 bring?  I am not going to mince words, as I know many people feel like we should have a big bounce back year.  I just don't see it.  There are too many challenges to have a big year, but I do think there will be many ways to make money, but I will get into that in a moment.  First, we have to get through a housing bottom before we can move forward.  The Fed agreeing to buy mortgages and CDOs the past week which was the first significant step to getting this done.  Houses lost over 9% value in the month of November (typically 25-30% from the highs so far), the worst month ever on record!  With that said, I think housing probably has another 10% to go, as more inventory has to get cleaned up and as long as foreclosures continue to accelerate we have not reached a bottom.  But I do think the government is focused on this and we will hear more to stabilize the housing market in coming weeks.  People always ask me when I think we will have reached a bottom in our market and I always respond "I can't predict that, as nobody has been able to do that with much credibility".  With that said, housing is the key.  When housing bottoms, I believe spending will start to come back as people can't spend when they are "scared to death about their jobs, or out of work".  And until housing stabilizes consumers won't spend and companies will continue to layoff employees.  The consumer makes up 70% of our GDP, so the country can't grow without the consumer.  Simple as that.  It is all intertwined and the economy will move forward when housing does.

 

When things do start moving forward though, they will do so in very meaningful spurts.  With gas prices at such low levels this is like a stimulus and is putting extra money in consumers pockets.  Refinancing is picking up at an unbelievable pace and lower mortgage payments is putting money in consumers pockets.  An infrastructure plan will help municipalities and help the overall economy and should help bring things back when coupled with the above two stimulus's.  Things will come back, they always do.  The market moves about six to nine months before the economy does, it is just a matter of how long this recession goes on.  I think it could be for awhile, but I definitely think the worst is behind us and certain areas will far outpace others in 2009.

 

So I will be very sectorized in 2009 and continue to use hedges to protect my clients and myself.  In equities I currently plan on focusing on consumer staples or other recession resistant stocks, especially ones that pay nice dividends.  Dividend paying stocks always do better in tough times.  I will couple this with some "oversold commodity" types of stocks that are trading at depression levels with multiples that are a third or half of typical levels.  I will be careful here, but there are certain companies that have strong balance sheets that will not go out of business and are trading at real values right now.  I will continue to add cash flow to many of the equity plays by doing covered calls which really protect clients with additional cash flow and add protective hedges during sideways or down markets. 

 

I will look for continued value in the bond world.  Take for instance the Goldman Sachs Corporate that was just added to many portfolios.  It is already up 4% in a month or so and pays an additional 6.875% bond payment every quarter.  A return of over 10% with virtually no risk is not bad in these markets.  These A or AA companies are not going out of business and bond payers are always the first to get their money.  The government just wont' let certain companies go out of business and has said so, but with the fear in the market I am often able to find high grade corporate that make a lot of sense. 

 

I think we really have a treasury bubble right now as treasuries are paying next to nothing and the spread between corporates/munis and treasuries are at historic highs.  The 10 year treasures have rates around 2.4% and were at over 4% less than a year ago.  Though the economy is terrible, with the amount of money that the government has flooded the market with, I just do not believe treasuries can continue to go up in value through 2009.  There are multiple ways I can play this through TIPS or by actually shorting treasuries. I will definitely invest in one of these areas this year as these investments can do well even if other markets aren't.

 

In all accounts (especially ones with $100K or more) I will keep a decent amount of money in cash/CDs waiting for the right investment strategies to develop.  There is nothing more frustrating to not having cash available for investment opportunities when they arise.  Additionally, if things are challenging having some cash again protects a client from capital destruction.

 

There will be plenty of good areas to invest in 2009, but patience will be critical.  Even in a sideways market an investor can make double-digit returns just by being patient and using cash flow strategies.  

 

So to sum things up, I don't expect things to get a lot better in the economy in 2009 but do expect real "winner and loser" differentiation.  I do think the credit markets will continue to get better.  I do think some sectors have gotten oversold.  I do think we will be in a trading range of 7,000-10,000 on the DOW.  I do think we will get a short-term run sometime right before or after Obama comes into office for several weeks, up to a couple of months.  We are in for some challenging times, but I think the S&P will ultimately come back to fundamentals when the credit markets settle down and that should be around $60-70/share which should equal a trading range somewhere like above.  Don't be too passive in your investing in your 401Ks or elsewhere.  Now is at least a time to understand what is going on and to have a plan with strategies that make sense.

 

It has been a challenging year to say the least, but now is not the time to disengage.  If you wanted to be in cash that would have been 45% ago, but not very many people were that smart.  In fact, none that I know of.  The new year brings new opportunities and good communications are essential going forward.  I hope all of you had a great holiday.  Do not hesitate to call me if you want to discuss anything about your accounts.  Also, if you want to forward any of my letters to others that may have questions, please feel free to do so.  I look forward to working closely with you in 2009.

 

Sincerely,

 

 

Hunter Hardy

InvestmentHunter Wealth Services

Financial Planning Made E-Z

www.investmenthunter.net

(972) 900-5142 (Mobile)

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