Investing in 2009

There is a special challenge for investors planning for 2009.
It is easy to get caught up in emotion, especially when so much is
going wrong. This causes people to look backward. Investors can meet
the challenge by using a sound analytical framework and by looking
ahead. For those nearing retirement, this is particularly crucial.

My advice to our investors emphasizes two major points:

The news flow is incessantly negative — fraud, corruption,
mismanagement, greed, and every proposed solution called a bailout.
When this message is repeated in every news source, it is also
reflected in current market prices.

2. The market has a gift for us. Our initial rebound target is Dow 11,000. Let us see why.

Basic Rationale

will not have another Great Depression, and the prices of many stocks
are at depression levels. The collapse came in mid-September when the
Lehman Brothers failure led to a credit market freeze. Take a look at
the chart.

Lehman failure, permitted by government inaction, made every lender
suspicious of every borrower. Normal lending came to a halt, throttling
regular business activity. Equity and credit markets had been priced
for a moderate recession. Now many expected something much worse, a

Meanwhile, the effect of the government
policy has been underestimated. None of us expects the Federal
Government to solve all of our problems. We have joined the criticism
of the many mistakes.

Enough is enough.

counter-reaction has been too extreme. People have expected immediate
policy impacts. This is naïve. There are lags in implementation and in
effect. The modern news cycle has become extremely short. Any new
policy has scores of critics – all wanting to get on TV – within hours
of the announcement. The reaction gets a pitch in blogs and in the
press. The hot-button traders join in.

When the
market reacts negatively, as it has for months, it seems to validate
the pundit reaction. People are not looking at the actual policy
effects, but rather at stock prices. Everything becomes a story of
fraud, corruption, and bailouts. This is a trap.

Stories of corruption are easy to understand. Economic impacts are complicated. Successful investing means finding things that others do not see. The wise investor will see that current government policy is exactly the opposite of depression-era actions.

Data will triumph over speculation.

There are already many signs of improvement. Each is important and the cumulative effect is very important.

· No more dominoes falling. A
few months ago we faced the risk of failure in many banks and major
financial institutions. Whatever one thinks of TARP, it stopped that.

· Credit markets have improved. LIBOR rates are down and bank lending is improving.

· The stimulus package. Whatever the exact size, it will serve to add demand for services and employment.

· Lower gasoline prices. Consumers focus on what is in front of them. This is a boost to everyone’s weekly budget.

· The Fed on mortgage rates.
Massive intervention by the Fed has driven mortgage rates much lower
and they are still declining. Some homeowners are refinancing and it
also helps affordability for new buyers.

· A housing bill. A major housing package will be Job #1 of a new Congress. There will be assistance for new home buyers.

economic model – even the best – has any ability to forecast these
effects. Why not? Models require relevant historic data. This is a
collection of policies beyond any precedent. The economic predictions
you read in the paper are more speculative than usual.

How to React

Our basic advice is to buy something. If you have been out of the market, Congratulations! It is now time to act.

you have been invested, it is time to consider your asset allocation.
Nearly everyone we talk with is over-invested in real estate, cash
(CDs) and bonds. Stocks now offer a better opportunity.

not view the market, or the newspaper, or pundits as your investment
advisor. Instead, look to the fundamental value of the companies and
the stock prices that are offered.

Most investors
are fighting the psychological tug that causes them to sell at market
bottoms and buy at market tops. Great indicators, including our Gong Model and our Sector Rotation System, are in line with the fundamental analysis.

you a skeptic? Take a partial position. If you are out of stocks, buy a
1/3 position. If you are in stocks and thinking of selling everything,
move to corporate bonds with a yield of 8-10% with half of your

You can make a big return even without an
economic boom. Stocks will start to react when it becomes clear that a
depression is “off the table.” That gets us to the initial target of
Dow 11,000. That is over 20% for the market, and even more in our
basket of stocks. It may take a few months, but we can then reassess
the economic prognosis.

Some Examples

There are several great themes. We love energy plays in the drilling space. The majors need to replenish depleted holdings. The market has treated these stocks like oil futures. Our favorite is Transocean Energy (RIG),
which has locked-in contracts with cancellation penalties. The
valuation is so low that a double is easily possible with a more
positive economic prognosis.

We also like construction and infrastructure stocks such as Caterpillar (CAT). Investors can wait a lifetime to see companies like this offered at single-digit P/E multiples on normalized earnings.

There are great growth stocks such as Apple (AAPL).
The company has a broad range of products, and a low P/E relative to
growth if one allows for the cash holdings. Too many people trade on
rumors about Steve Jobs, ignoring the company fundamentals.

You can also find some unfairly punished stocks, those that declined with the general selling. We like ResMed (RMD)
which works in the sleep disorder field. This is a growth industry
where insurance pays the tab. They have an approved home testing kit,
avoiding the mega-buck price tag from the past. It is not sensitive to
the economy, but has sold off by 1/3.

There are many “Obama opportunities” where one can pounce when the time is right.


has there been such a great opportunity for investors. With it comes
the challenge of putting aside emotions and looking forward. There are
many stock ideas that will put some octane in your portfolio. Some
investors can find these on their own. For others, this is the perfect
time to get some professional help, leaving the worry to someone else.

[We own all of the stocks mentioned in both personal and client accounts.  This article is one of our regular reports to investors.  We have not edited it to reflect changed prices and events.  It originally appeared as part of Seeking Alpha's series where ten managers were invited to provide their thoughts about 2009.  Readers will find many good ideas in the series, which is refreshingly different from the MSM approaches.]

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  • VennData January 17, 2009  

    Well done. The background negativity about Obama is breathtaking. If you go head to head, intelligence-wise vs. Bush. Who wins?
    At the end of Bush/Cheney, Cheney is running around saying how “right” he was. Can you see Biden doing something like that? Never. Cheney is making a fool of himself, while his country club, Federalist Society, Stop-Stem-Cell buddies are all down 40%.
    The quiet, right wing investor frustration at Bush is comical. They supported him every step of the way, but the Dow is down over 20% during Bush’s two-term catastrophe. Now, their emotional worldview is repeating itself: the same denial in ’92 they got from listening to Rush Limbaugh, Hannity, FOX News, the GOP media machine… who said Clinton was going to ruin the economy, will be wrong… again.
    The right wingers will miss this opportunity… again.
    They’re susceptible to the same daily, anti-Clinton (…anti-Obama?) nuttiness we had to live through in the 90’s. They’re sitting on their cash. They will under perform while we make money as they listen intently to more garbage about birth certificates, Obama’s “muslimism” the UN, Hillary at State… Eric Holder… etc… etc…
    Shout out to wingnuts: Buy now. Remember how Clinton left you in the dust last time? …while everyone else made money? Obama’s going to do the same, because American always bounces back. The good news for rational investors is they will not listen. They will cling to their Rove media pieces and WSJ editorial page spin. They want “revenge” on “the Clintons…” Get them in the confirmation hearings! The Clinton’s ruined American! Marc Rich! Clinton pardoned… a criminal! Ahhh! …hahaha.
    That’s an opportunity.

  • nullpointer January 18, 2009  

    No more dominoes falling.
    Oh really? Then why exactly did we prop up BAC and C last week? Healthy, solvent business do not require cash injections from the American taxpayer.
    I value and respect your opinion, I honestly do. You are the counterpoint to all of the bearish blogs in my RSS reader, which is exactly why I read you – to provide some balance.
    But just as some bears are over doing it by calling for the next depression, you sometimes suffer from “Kudlow-itis”.
    We have 30 years of loose credit and over capacity to work off….that isnt going to happen in 12 months.

  • stock investment January 18, 2009  

    Managing your money so that you can prevent it from risks is critical to achieving the most profit. Management is an important aspect of stock market trading. Before you begin to trade stocks, you need to have a plan of what to do with the profits and how to grow your nest egg.

  • Contrarian Profits January 19, 2009  

    After falling 35% in 2008, US stocks are now trading at only 10.6 times forecast earnings, well below the historical average. But are they good value yet? Martin Hutchinson says it will depend on the sector and country. He offers his financial advice by picking the biggest bull and bear markets for 2009.

  • Joe Market January 19, 2009  

    A new wave of alt-A mortgage resets will begin hitting in the 3rd quarter lasting two years. Unemployment is still rising leading to more foreclosures. Credit will tighten and the pool of potential buyers is shrinking because of current foreclosuers and unemployment. Demographics are also working against the housing industry. Population growth had peaked in the fifties. This whole mess is what is called a negative feedback loop. It will get uglier before it gets better and will last a long time

  • anonymous January 19, 2009  

    The weakness of your analysis is that it is almost entirely US-centric, as if only domestic factors and policy decisions will affect American prosperity. A full picture has to take Europe and China into account. It’s useful to read the blogs of Brad Setser and Michael Pettis, and Naked Capitalism, among others.
    A global depression is by no means off the table. In fact, unless things turn around very soon, it will be inevitable. Despite everything, I agree with you about RIG and AAPL and gingerly stepping back into the market, in part because cash is not king in the coming inflationary depression (not an oxymoron!).

  • Bill Luby January 20, 2009  

    Nice summary, Jeff. I may be biased because I agree with almost everything you said, but even if everything does not turn out as you anticipate, I think you have tagged the most likely scenario.
    Cheers and best wishes for a healthy and profitable ’09,

  • RB January 20, 2009  
  • RB January 20, 2009  

    Bernanke is wrong, Fisher was right and deflation is inevitable?

  • stock market September 3, 2009  

    I agree that great gains happen during a recession. The Stock market is offering great investment opportunities. As Jeff said, it is only a matter of finding the right investments to succeed in stock trading. The stock market is always in fast pace, gains and losses happens every day, recession or not.
    Also, there should be a right balance of saving and spending. Consumers are tightening their belts to save more however, they forgot that consumption is the most essential fuel that makes our economic system running.

  • NFL Jerseys August 16, 2010  

    I think you have tagged the most likely scenario.