I'm going to write some more about my 2009 forecast and 2008 results in a future post but here are some of the broad ideas. One of the key things I'm expecting is a substantial recovery in base metals, energy and broadly in commodities. This is simply because prices have fallen so far that the economy can do badly and still perform better than the market is expecting. I expect that:
- This will not be as bad or even nearly as bad as the great depression
- Prices have overshot to the downside, in part due to deleveraging
- The recent situation is unprecedented and the response from government and monetary authorities has been unprecedented this will bring forward the recovery in commodity prices (at least relative to dollars).
- The US Dollar is going to go down substantially once the deleveraging ends, this will be more like quarters than years
- US Treasury bond prices are unsustainable but may remain that way for some time. They are the short of the decade but you may not see any reversal in the next 12 months (don't fight the fed, the fed wants rates very low right now).
- Many stock are an excellent buy at current prices based on the underlying value of their businesses.
- The worldwide fiscal response is targeted at infrastructure projects this will add incremental demand to commodity prices while low prices in the later quarters of '08 have reduced supply.
- The major drop in asset prices was caused by credit markets seizing up, this problem is coming to an end (based on indicators such as the TED spread) though the economic slowdown persists. Half of the reason for the decline is resolved and asset prices will start to reflect this even while economies are in recession
- The stock market will turn in advance of the economy. There will be no economic news to indicate that stock prices are going to turn.
- Broad markets will probably retest their recent lows in the first half of 2009. It could be profitable to buy some insurance at today's and increasingly higher prices.
- Commodity stocks survived 7 months into the US recession and 10 months into the bear market. They are fundamentally unimpaired and will likely lead us out of the bear market.
- Bank stocks will likely do well over 2009 because they were likely priced for the end of banking. Unfortunately they are too complicated to analyse so I won't be touching them.
There are two great articles one from the WSJ
and the other from Fortune
by Ken Fisher which broadly agree with me.
As a value investor the right question about the above is so what! As Seth Klarman explains in Margin of Safety
when you make macro calls you need to be right on the call, make it before everyone else does, make it before the market has priced it in, convert the idea into the correct trades, identify when the trend has become correctly priced and again trade out. This is vastly harder than buying undervalued securities of businesses and then selling them when they reach fair value. Therefore the only real take away is that STOCKS ARE CHEAP RIGHT NOW(especially resource stocks)!