Economic Predictions for 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Must Hold in Here

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The major U.S. stock indices hit five year lows yesterday. The Dow and the S&P 500 are now going to test their 2002 lows, also the 1998 low in the case of the Dow, around 7200 and 775 respectively (mentioned many times in this blog as the target price to look out for). Nasdaq is heading toward a support level in the 1250 to 1300 range, the shoulder area of the reverse head and shoulder pattern that it made in 2002 to 2003. Its stronger support is around 1100. This would be the next place to look for a market sell off to stop. The Dow, and even more likely the S&P, would be below their 2002 lows if this happened. The charts offer little guidance for any significant breaks of the 2002 lows, since there is no significant support until much, much lower levels.

Once again yesterday was a crash day, with all the major U.S. indices closing down 5% or more. I have lost count how many times this has happened in the last three months. The gains from last Thursday's mystery rally were completely dissipated in four trading days. The Dow held up the best with only a 5.1% drop, but closed at 7997, the first close below 8000 since 2003. Small caps were the hardest hit, with the Russell 2000 falling 7.9%. The S&P 500 and Nasdaq were in between with 6.1% and 6.5% drops respectively. Financial stocks had the biggest losses, with Citibank leading the way down with a 23% loss (the New York Investing meetup has been saying since fall of 2007 that Citi is insolvent and the market is now realizing it). Bank America, JP Morgan, Wells Fargo, and Goldman Sachs all had 10% or greater drops. GE, the next major bailout prospect, fell 10%. Autos of course were also hit hard, with GM falling 10% and Ford 25%. Ford barely remained above penny stock levels.

What is currently roiling the market, other than the usual unrelentingly bad economic news, was that the bailout prospects for the auto industry fell apart on Capitol Hill yesterday. Members of congress grilled the auto chieftains on their extravagant spending, including the private jet trips they took to the hearings. While there is certainly profligacy in auto company spending, it can't compare to Wall Street. The TARP legislation failed to eliminate multi-million (or even deca-million) bonuses given to Wall Street management, their high salaries, lavish executive perks as was revealed recently with AIG, nor the dividends they are paying to their shareholders with government bailout money. Suddenly Congress has discovered that taxpayer money shouldn't be wasted irresponsibly with auto companies (whose political contributions can't match Wall Street's). While overall this is certainly a good thing, the economic impact of all the major U.S. auto companies going into bankruptcy should not be underestimated. Market action yesterday made that very clear.

Having a policy of selective government bailouts is the worse of all choices. A government can bail out no company if it wants to maintain a free market system or it can bailout every company if it doesn't. The government certainly shouldn't do bailouts based on political favoritism. At hit or miss bailout policy also is likely to insure the least results for the most money spent -. something the U.S. government has proven particularly adept at in the last several years.

NEXT: Five Year Lows are Bad, Eleven Year Lows are Worse

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Trojan Horse of Earnings Surprises

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Last spring Ford reported an unexpected profit. Even though this was inconsistent with almost all other information about the auto industry at the time,which was indicating serious collapse, the press trumpeted Ford's superior performance and that happy days were here again for the company. The stock shot up. Billionaire Kirk Kerkorian who had begun buying Ford stock in early April, announced he was willing to buy another 20 million shares at $8.50. The stock closed at $1.72 yesterday. The auto companies are now fighting for their lives trying to get desperately needed bailout money from Washington to prevent impending bankruptcies. Shareholders could get wiped out.

This morning Hewlett Packard announced surprisingly good earnings. This also seems inconsistent with reports from the rest of the industry. Intel, which has a broad international market similar to HP's was gloomy in its outlook in October. Nevertheless, HP stock shot up 15% in premarket trading and this helped prevent a drop on the open that could have sent the indices to new lows. HP's justification for its better than expected profits is that it sells printers and computers all over the world and this insulates it from economic problems in the U.S. An interesting statement considering that Intel and many other tech companies can say the same, but they are either already having problems or are negative on future business prospects. Unfortunately, the 'magic' that HP is using to produce its great numbers can't be deconstructed yet, since the full details will not be released until November 24th (Thanksgiving week when many traders in the U.S. will be away).

U.S. stock indices are once again scrapping along the bottom. All the gains from last Thursday's sudden explosive and still unexplained turnaround have not yet been dissipated, but they could be soon. A pattern of a big rally and then losing the gains in three to seven trading days seems to be the current norm. All the major indices have made three passes around their lows so far. The Nasdaq and Russell 2000 have made succeeding lower lows, while the S&P 500 tried to put in a double bottom and then made a lower low last Thursday. The Dow put in its low so far on October 10th and then has been trying to put in a double bottom subsequently. The technical picture has been improving somewhat, but in a major bear market like the one we are in, the technicals should look really good before you can put any store in them. Lows so far are 7774 on the Dow, 819 on the S&P and 1429 on the Nasdaq.

The current drama going on about the proposed auto bailout in Washington should be watched carefully. A bankruptcy filing for one of the major auto companies would be as devastating to the U.S. economy as Lehman's filing was for the stock and fixed-income markets after it took place in mid-September (the Depression era equivalent was when the Fed refused to bail out the New York Bank of the United States and this caused a chain reaction of bank and business failures throughout the economy). The lame-duck two month period between the presidential election and the new administration is a risky one for both the economy and the markets. No matter what happens, little government action should be expected.

NEXT: PPI and CPI - Don't Get Excited Just Yet

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Auto-Asphyxiation - GM, Ford Gasp for Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

No industry better symbolizes 20th century American commerce and culture than does autos. It was in the U.S. that mass production of cars were perfected by Henry Ford and the idea that the average person could own their own vehicle first took hold. It was widespread ownership of automobiles that allowed the post-World War II U.S. to become a suburban chain store nation. Now, the three remaining major U.S. auto companies no longer seem to be viable businesses and the implications are not just economic, but social and political as well .

The problems with the auto companies didn't just happen overnight, but first became evident in the 1970s. When oil prices started to soar, the American consumer turned away from the huge gas guzzlers that Detroit manufactured and the Japanese car companies with their fuel-efficient products gained major footholds in the U.S. market. Chrysler eventually needed a $675 million bailout in 1980 to continue operating. Detroit failed to heed the warning however and the lesson it learned from the events of the 1970s was that the government would bail it out if it messed up and it should try harder to get government restrictions and limitations on foreign imports. Auto industry lobbyists also subsequently did everything possible to overturn federal laws that mandated Detroit produce fuel efficient cars. So in the last ten years, this allowed them to saturate the U.S. market with low gas mileage SUV behemoths and pickup trucks. Now another completely predictable surge in fuel prices has taken place and the Japanese along with Korean auto manufacturers are there to pick up the pieces. An industry that has repeatedly lambasted government interference in its operations and used its political power to undo government programs that could have preserved its economic viability, now is begging the government to interfere by bailing it out.

This is not to imply that auto sales aren't hurting all around because of the economy - they are. Year over year industry sales were down 32% last month and while Ford was in line with a 30% drop, GM had a much worse 45% fall. Similar figures can be found for 1930, the first year of the Great Depression by the way (read that sentence again). GM has has been bleeding red ink since the end of 2004 with a total loss of $73 billion. Ford hasn't been much better off, but managed to report a surprise profit in the second quarter of this year. At that time the New York Investing meetup pointed out that this supposed profit was completely bogus, although the financial media trumpeted it with blaring good-news headlines. For a few days Ford's stock surged, but within weeks began to collapse. The low in Monday's trading was a $1.90 and GM had fallen to a new 50 plus year low of $3.02. GM stock dropped almost 25% on the day because it had announced that its 49% owned GMAC credit arm was likely to go under and its spun off part's supplier Delphi might not emerge from bankruptcy.

Bad earnings are not what forces companies into bankruptcy though. Running out of cash is what pushes them over the edge. By this criteria, GM is likely to go under sometime next spring and Ford might last a little longer. A massive government bailout for the entire industry is of course inevitable. The bailout actually started last year with $25 billion in loans in the 2007 energy bill and an additional $25 billion loan attached to a bill for funding for the Iraq and Afghanistan wars this September. Detroit now wants part of the Wall Street bailout bill money, although the Bush administration is hostile to this suggestion, so Detroit may have to wait until early 2009 to be saved from itself by the federal government.

NEXT: AIG - Bailing Out the Bail Out ... Again

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.