Things have been....predictably boring lately. A slow but natural December into January mini rally of 3% or so - but nothing exciting. Volatility is down and so is the volume of stocks being traded each day. But what do you expect - it was a holiday season and people were getting their finanical affairs in order for a stable year-end.
Now, with the return of earnings season starting next week, 2010 will start to shape up. So let's recap the events of the upcoming year that will have an affect:
(1) Strong Q1 earnings season - corporate profitability should be strong and continue to fuel higher valuations.
(2) Unemployment appears to have stabilized - the question now is will hiring being? However, I dont think this is a must for short term positive action in the market. I think stability is enough. Actually, (speaking short term) I think that higher unemployment ensures that the Fed Reserve doesn't raise interest rates this year which means a continuation of the easy money, liquidity driven gains/rally of the past 9 months. If this is true, watch for commodities to continue to gain. Unemployment at 9% by year end would be a best case scenario in my opinion.
(3) End of Mortgage Backed Securities Purchases by the Treasury -- this will stop at the end of March and will end a $1.25 Trillion program of purchases by the Treasury. This was used to keep 30 yr fixed rates low and encourage stabilization and growth in housing. The question is -- will housing remain stable or make a double dip once the crutch is removed? I think it remains stable with a minor dip. Not much strong growth but stability is enough.
(4) The effect of the nearly $800 billion stimulus should begin to wane after 1Q 2010. The stimulus has (no doubt) spurred GDP growth. The question is - will there be growth without it. Will the handoff from government lifeline to private market innovation and growth exist??? This is the million dollar question that will start to show in 2Q 2010 and reveal the reality of the economy's strength.
(5) Fed Raising Rates - it needs to happen to prevent later inflation damage; it won't happen this year due to unemployment and the amount of economic slack that should keep inflation somewhat under control this year. A place where inflation may appear - import prices and through commodities. Which leads to...
(6) Rising commodity prices -- the return of $3 gas is nearly here. If the price of crude oil (currently at $83) gets to $95, which is more likely than not, that would have a similar effect to what $147 crude oil had in 2008. Is another commodity bubble possible? Money must go somewhere in a liquidty driven rally -- two thoughts are commodities and weak dollar bets; maybe a double wammie since they go hand in hand.
(7) Elections in November -- markets hate uncertainty and elections can cause uncertainty. Thus, a post election rally wouldn't be uncommon.
(8) A weak dollar - helps export trade and drives liquidity rallies but a strong dollar is the sign of the strongest economy.
(9) State governments - 36 of 50 states face significant budget shortfalls, we're talking 20% levels potentially. That means that services will be cut back (including support programs) and that unemployment will remain high (since governments will be required to likely go on hiring freezes). Also of interest, if the federal government is forced to help states with budget shortfalls, its just another debt burden that will inevitably be repaid by taxpayers.
And for a minor comment on a few sector:
My favorite = Tech. I honestly think that the smart phone craze is the new internet boom of 2000. It's estimated that smartphone content and user numbers will more than doulbe by 2013. Consider how content driven and accessible not only our culture has become, but also that India and China (with much larger user opportunities) are right on board and you have a real chance for a boom. Also consider that tech gadgets resulted in solid sales this Christmas - which was one of the toughest Christmas seasons of decades. Tech companies use huge profit margins, limited employment costs and the benefit of yearly improvement in manufacturing (Moore's law, etc) to create better products more cheaply. That's a great formula for growth.
My least favorite = Financials. Banks have made bucca money lately and may for a little longer. Banks are borrowing federal money at almost no cost and somewhat lending it out to make easy money. Plus their investment firms have ridden the recent rally all the way to money town. However, as the economy returns, both of those avenues will be gone. That's why the tenet is true - financials are the first to go down and the first to recover in recessions.
Others plays of interest = natural gas. It's the cheapest and cleanest energy alternative. I don't see the US going uber green overnight. The money isn't even being properly allocated that way, not in a serious way. I like nuclear energy and nat gas. Nuclear scares people too much and takes too long. If nat gas gets more national attention and support it could be great.
Final point == I don't know what the stock market should be valued at right now. Do I think its gone up to quickly and that a 20% correction would be fair? Yes. Will that happen, I don't know - esp with the continued low interest rates existing. The point is - i think - to see the headwinds and acknowledge that LONG TERM growth wont exist until fundamentals are addressed. Can I see the Dow at its current level three years from now? Yes. Can I see it charging towards its 2007 high before the next fall? Sure. We have a lot to work through in the economy before its healthy again, including but not limited to eventual tax increases, removal (if thats possible) of governmental control/stakes in financials and autos and MOSTLY housing, energy alternatives, systemic risk, liquidity driven rallys that INEVITABLY must burst, unemployment, unemployment, unemployment, less debt loaded consumers, and refraining from legislation that hampers growth and limits private investment (such as high corporate taxes, cap and trade programs, capital gains taxes, double taxation).
Sincerely,
Your FIFA Champion who is currently on fire with both Blackburn and Chelsea
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