2009: Fear and Loathing $$

2009 is shaping up to make 2008 look like the good ‘ole days…

Why?

Let’s look at some issues…

STIMULUS: Won’t it make a difference?
No. government stimulus is great in that is provides a nice immediate effect. It has a tremendous long term cost though. For the gov’t to hire it must either take from others (more taxes) or just print money itself. Neither is a good option long term. It gives us all a warm fuzzy in thinking that Barack is taking care of all of us but gov’t jobs are never the answer. It is a credit card mentality from the gov’t. It only works until the bill comes due….stimulating the private sector to create jobs is a far better option. It take a bit longer to work, but the results, far from costing money provide it for all…

Let’s reverse the whole scenario. What out there points to a recovery? A million jobs paving roads? Really? If the employment rate is expected to be 10% next year, then any jobs created by the gov’t will be more than offset by losses in the private sector.

To use the credit card mentality again, the govt’t will use its credit card to create demand (jobs) while at the same time losing income (from other job losses). Can you imagine how this scenario ends well? Me either..

HOUSING: A rebound?
Hell no!! Housing still has tremendous downside. Why? Housing inventory is still at 12 months and will only grow. The option arm nightmare is just beginning. These people cannot be helped by lower interest rates as they are not paying the minimum interest payment now on the loans. This is going to lead to another tidal wave of homes coming onto the market in the next year or two. Unlike the subprime defaults, these defaults will hit the $500k and over homes that people bought with 5% or less down. The already squeezed middle class is going to get whacked again…

A scenario in which we see 14 or 15 months of inventory out there is not all that out of the realm of probability

Much has been said about the banks not lending the TARP money. They aren’t because they know they have hundred of billions of dollars of losses coming up in mortgage products from these loans coming up. They’ll need the cash.

20% down..
The last two years of the housing boom were fueled by new mortgage products that allowed buyers to put in most cases less than 10% down for a home. These loans are gone. We are back to the 20% down rule. Were is it coming from? Investments? With the Dow (.DJI) and S&P (.INX) off 40% this year the stock market will not be a source of funds. Jobs? Unemployment will most likely hit 10% next year so it will not be from jobs or singing bonuses and people worried about losing a job are not going to tap savings for a new home. In short there is not a source of funds for a down-payment.

Even if we have willing buyers, were are they going to get the money?

After the last housing bust in the early 1990’s it took 9 years for home prices to return to pre-bust levels. The boom then was nothing like the current one so to expect prices to return and make millions of underwater home owners profitable when they sell anytime before 2017 is delusional.

INFLATION: Up ,Up and Away
What happens when the supply of something grows unrestrained? It value falls. Thus is the dollar. As it s value falls, more of them are required to purchase items. Inflations ensues. How do we stop inflation? Raise interest rates to increase demand for dollars, oops, there goes the housing fix currently being tried…

THE CONSUMER:
Retrenching……If you have watched the news in the past month shopper after shopper is saying they are cutting back on spending and not using credit. That is the right decision for them, but bad for growth today. The consumer is shell shocked and will not dip their toes in the water again until they are 100% sure it is safe. That, will be a while. A poor economic climate in 2009 will only worsen the mood and the fear they feel, causing further retrenchment.

Part of this problem is the inevitable mood swing surrounding a new administration. This does have a severe downside though. “Hope” was Obama’s message and the “it is a new day” mantra has been restated over and over by followers. Here is the problem, even if Obama does everything right, 2009 will still be a lousy year. That optimism will turn to a vicious pessimism as consumers will then resort to a “if he can’t help us no one can” mentality.

The consumer will stash money away, reduce debt and live less frivolously. Again, all good things long term but very bad short term for business.

What to buy?
Personally if you are going into stocks, buy things people have to have with a nice dividend. Discretionary names ought to suffer as a whole with some individual spectacular successes.

Personally I am looking at oil (DBO), (DXO), shorting the dollar (UDN) and gold (GLD).

Not thinking about selling current holding as ones like Dow Chemical (DOW), GE (GE), Phillip Morris International (PM) all will pay me 9%, 7% and 6% in dividends this year (long term holdings so lower tax rate than regular income). Those that don’t are smaller portions of holdings and success there ought to be met with very nice upside (hopefully).

AutoNation (AN)is capturing market share by the boat load as competitors close. It will emerge as the clear dominant player in all its market. That, and I am still convinced something is going to happen with it, Sears Holdings (SHLD) and AutoZone (AZO).

Borders (BGP) is feast or famine. I think it will be fine but it will take time…CEO George Jones is doing everything right and Ackman will buy it before he let’s it fold.

On the fence for a sell is Wells Fargo (WFC). It is a tough one because there are only really four big banks left (JP Morgan (JPM, Bank of America (BAC), Wells and Citigroup (C) so business will be there. But, the level of business going forward just will not be there as housing suffers for years. I have been selling covered calls on it for three months now and have lowered my cost basis on it 10%. After January expiration, assuming a market rally going into inauguration, I may just take that chance to get out before the 2009 slide begins. If I am called out, my total return in it for the three months will be 12% (dividend included). I’ll take it.

Disclosure (“none” means no position):
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