What to Watch for in 2009

Don’t read too much into the 3% rally we saw on the first trading day of the new year as volume was very light. Look at any chart – it was a trader’s dream. Stock charts went from the bottom left to the upper right in a near-perfect line. A better indicator of which way stocks will trend in the near term will be Monday’s action. Personally, I think people are a little too optimistic about a recovery.

Here’s what the market is pricing in: Basically, everyone on CNBC is expecting the economy to turn mid-year (I should really say “hoping” instead of “expecting”). That means the stock market should begin to trend upward as it anticipates the future. If you think the economy will be better six months from now, then you should be a buyer of stocks. However, if you disagree with the majority you should be a seller of stocks on any rallies. I see the market rallying in January and peaking in February when the stimulus package is finalized. Companies will continue to lay off workers left and right and many more businesses will disappear. Unemployment will continue to rise and we will be stuck in this sideways market.

What to watch for in 2009:

The Dollar versus the Euro (and Yen):

The trillions of Dollars the U.S. government is pumping into the economy will eventually cause inflation, but at what point will inflation kick in as we are still in a deflationary period? Will gold be the beneficiary (however, according to the charts gold is still in a bearish trend)? Much more downside risk remains in the Eurozone and the ECB will have to cut rates further creating relative Dollar strength.

Crude Oil:

The bubble has been broken. Don’t expect oil to be at $147 anytime soon. Many of the speculators that bid up oil have been washed out of the market. When all the so-called experts were calling for $200 per barrel, oil peaked. Now I see the reverse happening. These same experts have recently called for $20 per barrel and OPEC has pledged to significantly reduce output. Oil looks as if it might be bottoming. However, there is ample supply waiting to flood the market. Because of the steep contango in the futures market, the big oil players have been buying oil at very low prices ($30-40), storing it on tankers, and waiting to sell it at higher prices ($50-60) in the future.

TARP $ and The Banks:

Where will the government allocate its remaining $350 billion (assuming Congress approves)? How much consolidation in the banking industry will occur? Will small, regional banks go bankrupt? Will the banks begin to lend to the average, everyday consumer again?

The Big Three:

It is just a matter of time before these jokers are back in Washington asking the government for more money. Will a merger occur? Will they file for chapter 11 bankruptcy protection? Will they stop making cars that no one wants to buy?

Obama’s Stimulus:

I’ve been hearing $750 billion. I’ve also heard $1 trillion. Either way, it will be a lot of money. Pay attention to his tax cuts and infrastructure plans. Look for the commodity/material/energy names to continue to rally into Obama’s inauguration. Sell the news! What happens if the stimulus doesn’t work? What does the government do then?

Mortgage Rates & Housing:

What will the government do to lower mortgage rates and stimulate home buying? Will any homebuilders go out of business (I hope so)?

The Bond Market:

Toward the end of 2008 everyone wanted to own Treasuries (the safest investment out there because they are backed by the U.S. government). Interest rates on short-term maturities were and still are near zero. Cash flooded into this market in recent months. Will a mass exodus occur in 2009 to the stock market? Or will interest rates remain at historic lows? If the latter, don’t expect any significant or sustainable rally in equities.

Employment:

Watch the weekly initial jobless claims number to gauge the strength of the economy. This is the most up-to-date metric. Will unemployment tick up to 8-9% like some people think? Or will Obama’s pledge to create 3 million jobs prevail?