GRADING OUR 2009 INVESTMENT PREDICTIONS

As the third quarter comes to a close it’s appropriate to take a look back at some of the predictions we made at the beginning of the year.   Our forecasts haven’t been perfect, but they’ve been “better than expected” which is only appropriate since that seems to be the trend of 2009:

Our predictions:

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%.

Pretty much on the money thus far.  The overall idea heading into 2009 was that we had overshot to the downside and priced in a far too pessimistic outcome.  Therefore, some relief was required on the upside.  Although I entered the year on a bearish note I never could have predicted what would actually play out – a 25% decline followed by one of the most incredible rallies the stock market has ever seen….With the market up 17% this year we’re likely looking at limited upside potential from here.

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

I got more grief from readers regarding this prediction than anything else.  “There is no way the unemployment rate reaches 10%”.  Well, with estimates calling for 9.8% on Friday we’re not far off….

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.

The housing market has played out almost exactly as I expected.  We’re seeing the typical seasonal bounce and relief rally that most bubbles experience.  I fully expect a negative to sideways pricing trend to develop in late 2009/early 2010 as the laws of supply & demand reassert themselves.

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 has been horribly wrong.  I fully expected the Fed to begin supporting the dollar as signs of recovery appeared evident.  That hasn’t happened.  In fact, they’ve made it clear that they have no intention of supporting a strong dollar – a clear sign that the economy is still very weak.

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 sure stabilized.   Again, the level of Fed intervention took me by surprise as they have trashed the dollar.  Oil has averaged a price of $58 this year – higher than I expected.

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

The FTSE 100 is up 13% year to date, the S&P is up 17% YTD and the Shanghai Composite is up a whopping 50%+.  The numbers aren’t exactly right, but the idea was….

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.

Again, the idea was right, but the execution appears entirely incorrect.  The Fed is unlikely to raise rates in 2009 though inflation has certainly taken over deflation as the public’s primary concern.

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

This was the lay-up trade of the year.  TIPs have outperformed t-bonds by over 23% this year.  Any bond trader could have easily allocated 100% of their portfolio to this trade and achieved outstanding risk adjusted returns in just 6 short months.  It’s safe to say that you wouldn’t be working Q4 if you were a bond trader with this one trade on….You’d be on a beach awaiting your bonus check.

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 filing bankruptcy after massive government assistance I think it’s safe to say that this one was dead 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.

My long-shot of the year.   The Russian stock market is up over 100% this year.  Enough said.

Overall, “better than expected”….