As we reach the halfway point in 2009 let’s take a look at our 2009 investment predictions and see how we’re doing:

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%.

We were cautious heading into 2009, but relatively certain that the market would rebound in 2009 after such a disastrous 2008 as fears of economic doom became overblown.   Overall, this prediction is looking fairly good as investors begin to anticipate a second half economic recovery.  I do, however, expect the market to retrench here in Q3 before we see another ramp to the upside in Q4.  That is likely to be followed by a double dip recession heading into 2010.   The global deleveraging process is far from over.

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

This was one of the more controversial calls at the beginning of the year.  A lot of people told me I was crazy to say unemployment would reach 10% this year.  Now it’s looking like it could be at the low end of many analyst’s estimates.  The jobs market remains one of the primary reasons why this recovery is likely to be incredibly sluggish.

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 is following my playbook to a tee.  We’re currently seeing seasonal strength which is leading to overblown optimism of the ultimate bottom.  The rebound will be short lived, however, and I expect housing prices to remain depressed for years.

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 hasn’t exactly played out the way I expected.  The Euro is flat for the year as the dollar has declined 5%.

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.

Commodity prices not only stabilized in 2009, but rallied enormously thus far.  Oil has maintained an average price of nearly $60.  I never would have predicted such strength in commodity prices with so much weakness in the U.S. economy.  The global stimulus package is having a far more positive impact than I originally assumed it might.  I do believe we are near the annual high in terms of most commodity prices, however.

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

This has been another solid prediction.  Asian stocks have surged while U.S. and European stocks lag.  While most were saying that the U.S. would lead us out of recession I maintained that Asia and specifically China were the key.  With Shanghai stocks up 65% year to date, we may be getting a bit frothy, however.

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.

We’ll see how this pans out later in the year, but as of now it’s looking more and more likely that the Fed will raise rates at some point in the next 6-9 months.  The inflation chatter is picking up steam and if the so called “green shoots” continue to sprout we are likely to see further pressure on the Fed to raise rates.

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

This was a superb bond call.  Regular readers know that we recommended a long TIPS, short long-term bonds trade at the beginning of the year before getting out of the trade in late May.  We then went long treasuries for a quick 6% bounce on the day the long bond bottomed.

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.

The entire auto bailout situation has been a disaster.  We have sunk billions into the auto companies and have little to show for it.

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 was my long shot call of the year.  The Russian economy has made a spectacular rebound and oil prices have surged much higher than I anticipated.  The Russian economy remains very fragile, however.

All in all these macro predictions have been pretty solid.  More importantly, however, our micro market predictions (from our cautious approach to the beginning  of the year to our March 8th buy call to the June first short call at S&P 945) have been remarkably accurate.

Cullen Roche

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