REVIEWING OUR 2009 INVESTMENT PREDICTIONS

The only way to become a great investor is to have a strong strategy, a good plan and superb execution.  But like any business or profession, things don’t always go as planned.  Mistakes occur and the unforeseen impacts life in curious ways.  The greats in industry study their mistakes and learn from them.  Ali didn’t become the greatest until he lost, learned from his losses and then used these lessons to succeed.  The investment business is no different. You’re going to make mistakes.  Own them and learn from them.

With that said, I’d like to take a few moments to do what few investment professionals take the time to do – hold our feet to the fire.  A year ago we made 10 investment predictions (you can see our 2008 predictions here as well).  Some were good, some were bad, but all can be learned from.  Let’s take a look:

1.  The U.S. economy remains in very poor condition throughout the first half of 2009.  Stock market volatility remains high and the market remains in a trading range between the 7,500 November low and the 9,500 October 31st high throughout the first two quarters of the year.  Ultimately, signs of recovery appear evident by the 4th quarter of 2009 and the market ends the year near Dow 10,000 for a total return of 18%.

Besides a brief dip below 7,500 in late February and early March the market remained in its volatile range of 7,500 and 9,500 for the first half of the year.  At the beginning of 2009 we were quite bullish about the second half of 2009 based on the severely depressed expectations.  At turn of the year investors were very complacent and we remained cautious in the near-term.  As markets deteriorated rapidly we were forced to evolve with it.  The potential for drastic government intervention became clear to us in early March and we were incredibly lucky in timing our first bullish positions in 2009.  Ultimately, we sold into the rally far too early and never fully trusted the rally throughout the year as the fundamentals never caught up with the liquidity driven rally.  Aside from our very timely earnings buy calls (prior to each of the last three earnings seasons) we remained overly cautious (though we maintained a “no shorts” position throughout the move higher) and never fully trusted the true bullishness that was on full display in our expectation ratio (which turned bearish in mid 2007 and bullish in January of 2009).  As the risks appeared elevated throughout the year we remained diligent in our goal of managing those risks.  Nonetheless, our overall predictions regarding the equity markets were solid (though our execution could have been more aggressive).   With the Dow up 18.7% as of today our 18% prediction is closer than I could have ever imagined.

2.  The jobs picture remains very weak throughout all of 2009.  The unemployment rate reaches 10% by the end of the year.

The unemployment rate is at 10% as of the end of November and the jobs picture remains the one missing piece of the recovery puzzle.

3.  Housing remains in a steep decline, though the rate of decline slows substantially by the middle of 2009.  The market does not rebound, but false hope of a sharp turnaround appears possible by the end of 2009.

Housing prices continued to fall in 2009, but the recovery calls are becoming routine.  False hope of a sharp turnaround certainly appears to be on the table.  After all, even Bob Toll is looking for “a serious good time”.

4.  The Euro weakens throughout 2009 as the Eurozone economy remains in a deep recession.  The dollar makes a surprise rally in 2009 as the U.S. becomes a safe haven currency because the U.S. appears to be crawling out of recession sooner than other nations.

This was just flat out wrong.  We theorized that inflation would make a greater appearance in 2009 and that rates would likely rise.  We thought this would boost the dollar and the Euro would sell-off as Europe lagged other markets.  We were just plain wrong.   Curiously, the reflation trade proved enormously successful despite few signs of inflation.

5.  Commodity prices stabilize in 2009, but no huge rallies occur as we saw in oil last year.  Oil maintains an average price of $50.

Oil rallied 60%+ on the year and averaged $60 for the year, far exceeding our expectations.  Like stocks, we got the direction correct, but the strength of the move wrong.

6.  Foreign stocks are mixed.  Europe underperforms the U.S. as its recession deepens, while Asian stocks rally for 20%+ gains in 2009.

Once again, the idea was dead right as Europe underperformed the U.S. and the U.S. underperformed Asia.  The move, however, was far more powerful than we assumed.

7.  The Fed is forced to raise interest rates by the end of 2009 as inflation appears to be gaining some traction and the threat of deflation appears to be overblown.

This was the missing piece of our investment outlook.  We severely underestimated how far the government would go to save the economy.  The amount of money that has been thrown at these problems is truly staggering.  The recklessness of government spending and the Fed’s bubble policy is beyond our wildest expectations.

8.  Treasuries underperform TIPS (treasury inflation protected securities), as inflation fears cause a sell-off in bonds and a rush into TIPS.

Anyone running fixed income portfolios with this low risk trade on at the year’s beginning was on the beach by June 30th.  This was a home-run trade all year long as TIPS rallied over 6% and Treasuries tanked 20%.

9.  The big 3 bailout turns out to be a black hole bailout.  The billions in bailout money do little to revive the companies and they are forced to consider massive restructurings before getting the hundreds of billions the Obama administration is bound to fork over.

With Chrysler and GM coming out of bankruptcies and an estimated $30B in taxpayer losses I think it’s safe to say this was pretty spot-on.

10.  Russia experiences a massive fiscal crisis as the value of the ruble tumbles, oil prices remain under $70 and corruption takes its toll on the country.

This couldn’t have been more wrong.  The Russian stock market doubled on the year and oil is likely to finish the year above $70.   With Russia’s high beta correlation to EM’s we should have known better than to predict a decoupling from the rest of the emerging markets.

Stay tuned in the coming weeks for our 2010 outlook and predictions.

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Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Liam

    Thx for your hardwork TPC.

  • reddweb

    great job…this is quite impressive. I hope you put your money where your predictions were…u probably made 100% return or more :)

    Your reasoning for 7th prediction is counter-intuitive. Shouldn’t .gov’s money-throwing help your inflation reasoning?

    Deflation is severe, indeed. With deleveraging(private debt), 10% unemployment and wage stagnation inflation never had a chance..

  • Octopus

    All in all a very impressive track record, I think very few professional were able to achieve that.

  • Roomi

    You deserve my high praise for going after your own predictions. This not only shows that no one can predict markets with great accuracy, but also gives you credit for the self-evaluation. If only everyone could do the same! (Immediately Dr. Doom comes to my mind.)

  • JR

    TPC – super job! Possible typos:

    “The reckless of government spending…”

    recklessness..?

    “With Chevy and GM coming out of bankruptcies…”

    Chrysler..?

  • James

    Nice I think your prediction about ending at 10,000 was awesome. Maybe next time you will put all your money to work :)

  • Ken

    Great job……look forward to your 2010 comments if not already out yet…

  • Anon

    The reflation trade is puzzling to me too – there have been almost no signs of inflation. This shouldn’t be surprising as even the huge amounts of money thrown at the problem pale in comparison to the amount of credit being withdrawn. What has really happened is that inflation is likely being exported to China and other emerging markets as hot money flows. If the Japanese experience holds any water as an analogy, inflation may not be a problem for years. That’s not to say that it won’t eventually rear its ugly head, but in my view deflation will remain the chief concern for many YEARS (not just months).

    Ironically, I think the success of the reflation trade may be its own undoing – pressures brought on by markets raising the spectre of unanchored inflation expectations may force the Fed to withdraw liquidity faster than they want and also foreclose the possibility of additional fiscal stimulus. If this happens in the back half of 2010, that would be right when the economy is most vulnerable, as the natural inventory bounce tapers off and the mortgage reset problem hits hard again.

    While I view that scenario as a long-term positive in that necessary deleveraging will occur with faster pace (with caveats – we clearly need some sort of safety net in place to prevent a panicked downward spiral), in the short term the consequences may be more like the 1937-38 deep recession.

  • http://www.pragcap.com TPC

    I thought the government’s efforts would begin showing some signs of inflation by now and that the Fed would be pressured to raise rates. That is clearly not the case though.

  • http://www.pragcap.com TPC

    Thanks for that. Time to hire an editor!

  • http://www.pragcap.com TPC

    Therein lies the problem. I am rarely unhedged. Going all-in always looks like the better option in retrospect, but as I often say, it only takes one black swan to ruin years of work. I am perfectly fine getting some of the upside so long as I can avoid most of the downside.

  • http://www.pragcap.com TPC

    The power of the reflation trade truly took me by surprise. We have never seen this amount of money poured into a problem. We will not see the underlying weakness of the economy until the stimulus ends and that might not occur until mid to late 2010.

  • Octopus

    Power of reflation trade was almost impossible to gauge. I’t’s good enough if you had a decent performance in 2008 and were able to catch a part of 2009 move.

  • Naa

    Great work, TPC!!!

    I am still waiting to see if you plan on having a model portfolio on your site – which will be helpful in executing these macro themes.

    Thank you once again for all the hard work you put in.

  • Gordon

    Your comment in point 10 about corruption in Russia may be valid or not, I don’t know. But from all that I read, the levels of corruption in corporate and legislative USA now surpass anything seen before and must eventually have some dire effect. Will this influence your next predictions for the domestic scene?

  • Frederick

    TPC: Thanks for all your work. I appreciate your attention to risk and constant empahsis on risk adjusted return. This was an exceptionally difficult year to ever be ‘all in’, and there is no shame whatsoever in not capturing 100% of the available return in the stock market this year after the phenomal 2008 you had by missing all of the downside. (I believe your returns were actually quite positive in 2008, right?)

    Your site really helps me. Thanks again.