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Happy New Year everyone. I predict it will be a happier year and we should take heart. That said, the near term isn’t going to feel so good. The jaw boning about a stimulus package is causing speculators to push oil prices up a little, trading today in the upper $40 range, and looks poised to reach $50. It is generally thought that a supportable, sustainable level for oil is $50-$60 per barrel. This will cause gasoline to move up a bit to maybe $1.75 during January and February. If the stimulus is passed by Congress and the economy does begin to rebound we could see gasoline around $2.50 or even higher by the summer driving season.
Are stocks cheap or are they positioned to fall still further? The pessimist in me says that there is still more pain to be had in the first half of 2009. I think it is coming to a place where it will be time to buy equities again. But when we do it will be like a sales piece I saw recently that depicted a child sitting in front of a dinner plate with only lima beans left to eat. He is clearly unhappy with the idea of having to finish his plate. The caption read “This is what buying low feels like”. I’ve heard others say “the time to buy is when you’d rather vomit”.
Much of the excesses in the stock market and the commodities market have been purged. The commodities outlook will brighten IF the government stimulus takes hold. The time to buy them is … just before you think that the stimulus is going to take hold. Risk is related to reward, or should we say that reward is a function of risk. If you get in too early, you’ll hate yourself in the morning. If you get in too late and miss the big moves, you’ll hate yourself in the morning.
I think volatility is still quite high, although substantially lower than it was a month ago which means basically no one is comfortable with their positions and they are hedging like crazy. At the end of the day a hedge simply offsets misjudgments. The greater the hedge the less overall risk…and the lower the reward if you were right. Interest rates will remain low to encourage people to purchase homes. Remember, homes are the key to growth in the USA. Until people have faith in the stability of the value of homes the economy will not begin to turn. When that happens, interest rates will begin to rise, probably about 3 months after any serious uptick in housing sales. The Fed is already fearful of inflation. Then short term CD’s are again of interest. Fully insured and earning more. In the long term, interest rates will normalize. 30 year fixed mortgages in the 5.5 – 6.5% range for solid credit scores and 20% down. It will be quite a while before the 5% or no down payment loans will be available and they probably won’t be cheap for a long time to come. I would not expect housing prices to rise substantially for about 3 -5 years. This is good news and bad news depending on where you are in life. The high growth areas of the past (CA, NV, AZ, FL) will take longer to recover than the rest of the real estate market. If you’re young and have a stable income and have saved a few dollars, a lot of money can be made in the next 20 years in real estate by those who can wait to cash out. Now is the time to buy if you are that kind of investor. I’m not making any 20 year bets. I really wish I were 10 years younger.
Let’s think about what the real estate situation means. If future home loans are going to require a significant down payment then young people will need to rent a place OR live with their parents longer. If they need to save to buy a house, they will need to spend less, buying less expensive more economical cars for example. The young home owner of tomorrow will have to shift their life style significantly from the behaviors of that age group of the early 2000’s. This cultural shift will change life as we have known it in almost every industry. Slower sales means fewer jobs. Older workers having to work far longer to make up for the devastation their 401(k) has experienced will mean fewer opportunities for young people to advance. Slower advancement means slower earnings growth and longer savings horizons. The slower pace of business development will impact tax revenues as well. That will bring public employee pensions under scrutiny and result in far less generous retirement conditions going forward. Restricted health care benefits, older minimum retirement ages to reduce the pension cost for the municipal and state budgets are likely. When it comes to cutting pension benefits or sports at the high school, who do you think will win? Just raise taxes you say? Well, that is counter productive to revitalizing the economy. In the short term I’m sure the Obama team will have a program to assist States and through states, municipalities. In areas where there is an option to annex, watch out for the big city grab.
Since there is some reluctance to mess with people already retired, lock in any benefits you can as soon as you can. When the tax problems come, and surely they will, you want to be a part of those already collecting. This may hold true for Social Security as well.
If you are expecting Mr. Obama to waive a magic wand and make everything better, grow up. Four years from now I predict we will be in a better place that we are now. Since most of us don’t realize where we are now, we may not readily recognize that it is a better place we are in 4 years hence. Perhaps we will be disappointed, and want change. Perhaps we will realize that we have a long way to go and re-elect Mr. Obama. Time will tell.
In the mean time be happy 2008 is over. 2009 is full of Hope.
