An article for those who is keen to jump to the (stock) market [SEC=UNCLASSIFIED]
Adhitya...@immi.gov.au
PAUL B. FARRELL
Doomsayers warn: 'No recovery before 2010'
Wall Street's praying for new bull, but wishful thinking not enough for '09
By Paul B. Farrell, MarketWatch
Last update: 7:19 p.m. EST Jan. 12, 2009
ARROYO GRANDE, Calif. (MarketWatch) -- Dateline: 1720. Breaking news. One
day, at the peak of its speculative frenzy, as the "South Sea Bubble" swept
through Europe faster than the plague, an "unknown adventurer" in Britain
ran this advertisement: "A company for carrying on an undertaking of great
advantage, but nobody to know what it is."
The scam was originally reported in Charles Mackay's 1841 classic,
"Extraordinary Popular Delusions and the Madness of Crowds," and updated by
Forbes columnist and economist Gary Shilling in his annual "2009 Investment
Outlook: 12 Strategies," to illustrate how little has changed between 1720
and today.
Investors never learn. And Wall Street knows it. That crafty 1720 ancestor
of today's Wall Street investment bankers and Bernie Madoffs devised what
we'd call an "IPO:" He "opened his office to crowds of investors at 9 a.m.
the next morning ... closed at 3 p.m after taking in a fortune ... then
left that evening for the Continent ... never to be heard from again."
Warning folks: Wall Street's happy-talking bulls are now hyping economic
recovery and a new bull this year. That's a slower, but equally lethal 2009
version of that famous 1720 trick.
So first let's review Shilling's forecasts for 2009. He was amazingly
accurate with his 2008 investment strategies. Expect the same in 2009 as
he's part of a growing chorus of experts who believe "the worst global
financial crisis and deepest worldwide recession since the 1930s will
continue throughout 2009." His 12 strategies, with my notes:
1. Sell home-builder stocks and bonds.
2. If you plan to sell your house, second home or investment houses
anytime soon, do so yesterday. (Yes, another 20% drop is coming.)
3. Sell some housing-related stocks.
4. Sell some consumer discretionary spending companies.
5. Sell most commercial real estate.
6. Sell some commodities. (But proceed "carefully:" Selling "some"
securities, or buying, or actively trading in today's volatile
markets demands a level of skill sets, savvy and sophistication most
investors lack.)
7. Sell emerging-market equities.
8. Sell emerging-market debt.
9. Sell stocks in general. (Shilling's forecast of a "severe recession
suggests that corporate profits, as defined by the Commerce
Department, will fall 48% from their peak in the third quarter 2007
to the fourth quarter 2009, and drop 32% from 2008 to 2009. This
forecast implies much weaker S&P 500 earnings than projected by Wall
Street analysts and strategies" whom he says "tend to be overly
optimistic, especially in recessions when analysts don't want to
offend managements of the companies they follow with low numbers.")
10. Sell consumer lenders' equities.
11. Buy the dollar.
12. Buy, carefully, high-grade bonds.
No recovery in 2009? Not till 2010, or later? Shilling's not alone. But in
the eyes of the Wall Street happy-talkers, he's just another dark-side bear
vying for the title "Dr. Doom" in 2009.
Shilling offers 10 "sells" and two cautious "buys." The dollar's one: "The
buck tends to have five-to-seven year moves, and the current one appears to
have just started. With a global recession, the dollar is the safe haven,
the best of the bad lot."
And as for bonds: While "the 27-year rally in Treasury bonds is over," the
yields on "high-quality municipals, compared to super-safe Treasurys, make
them interesting. The risk is that as the financial crisis continues, those
spreads could get even bigger. And ratings may be cut as the recession
strains state and local finances."
Another alternative: "Yields on investment-grade corporate bonds are very
attractive relative to record low Treasury yields." So "buy high-grade
corporate and municipal bonds, but carefully."
Will new bull be leading indicator of economic recovery?
Shilling is one of America's top economists. Sixteen months before the 2007
meltdown he warned Forbes readers: "The current housing weakness will
develop into a full-scale rout ... a bubble ... the house-price collapse
will induce a painful recession that will send U.S. stocks into a
tailspin." But the bigger question now: When will it end?
"If policymakers succeed in containing the mortgage mess and bailing out
financial crises related to consumer borrowing, commercial real estate and
junk securities -- and other potential financial problems -- then the
recession may well end in early 2010 as massive fiscal stimulus begins to
take hold ... if not, the slump probably will extend well into 2010 and
perhaps beyond, and might as well be given the label that such a long
downturn deserves: a depression."
Contrast that with Wall Street strategists who make their living selling
securities that generate big commissions and fees. They don't like the
conservative forecasters. So it's no surprise that another regular on the
Forbes investment team, Bob Froehlich, author of "A Bull for All Seasons"
and chief investment strategist with Deutsche Bank's retail funds, recently
dismissed Shilling as a "perma-bear" whose forecasts are "dead wrong."
But a year ago Froehlich predicted the market would stay above 14,000 in
2008. And later Deutsche Bank's stock tanked from a high around $128 to a
low about $22.
Yes, money managers are optimistic ... but 30% returns!?
The main reason Wall Streeters expect a new bull market in 2009 is the
growing belief that the markets hit bottom back in November. Last week a
Wall Street Journal article reported that "Suddenly, a Market Turnaround:
Dow Is Up Nearly 20% From a Low, Other Markets More; Is It a Tease?"
That same day, in comes a "decidedly optimistic, opportunistic approach to
the economic downturn and the effect it has had on the financial markets."
The source: Brent Wilsey, president of Wilsey Asset Management. His "9
Reasons 2009 can Deliver a 30% Return for Investors" got my attention as I
read Shilling's 42-page "Outlook for 2009." Wilsey's reasoning begins with
the key assumption that we've hit bottom: The "market is forward thinking
and can be ahead of the game by six months."
The contrast with Shilling offers an interesting counterpoint as you
examine your own investment strategies for 2009. Assuming the market did
bottom a few months ago, he predicts "the market could begin a strong rally
in April. And even if the economy isn't going to improve until later in
February 2010" he again extrapolates back six months predicting the "market
could begin a strong rally in August" of 2009.
Then a huge leap of faith: "With companies trading at today's levels it's
more important to be invested than to try and time the bottom." Bottom
line: Start buying stocks now. Now? But first, examine the nine upbeat
assumptions driving his 30% forecast, edited for comparison:
1. $12 trillion cash on the sidelines: Just 10% would be a $1.2 trillion
investment.
2. Low interest rates: Cheap money usually has a positive effect on the
economy.
3. Low stock valuations: Forward earnings P/E ratios on many companies
are under 10.
4. Low consumer confidence: Low confidence often signals a rebound in a
year.
5. Banking fundamentals improving: The banks are working through this
mess.
6. Low gas prices: Add another $300 billion to $500 billion back into
the economy.
7. Increased labor productivity: Companies become cost effective, boost
stocks.
8. New president: Typically boosts confidence, optimism and spending.
9. Federal money: And President-elect Barack Obama's ready to pump $1.2
trillion into the economy.
OK folks, the ball's in your court. Two opposing forecasts. But now you
alone must decide on the direction of the market, economy and your
investment strategy, facing so many "ifs," so many unpredictables.
Stop and ask yourself: Maybe you should ignore all predictions, especially
any made by the Wall Street voices that got us in this mess in the first
place. Maybe you should just wait, patiently, pray ... and do nothing.
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