Mid-Year 2008/Early 2009 Forecast

by David Urban | July 6, 2008

Print

 

“What to say, what to say. Nothing said, what a waste.” – Eddie Vedder, Pearl Jam

Well, well, well, where do we go from here? The first half of the year was a wild and wooly ride, from an opening slide to a rally back up and then a retest of the 1st quarter lows. Looking back at the article from the beginning of the year, I seem to have done fairly well and now it is time to look ahead to the second half of 2008 and early 2009.

First, I would like to make mention of my prediction that Hillary Clinton would win the presidency. Before the primaries begin it is tough making this type of call but I do believe I have the party right as the Democrats will sweep adding seats in the House and Senate, while retaking the White House.

Party head Howard Dean deserves a significant amount of credit for retooling so swiftly. After the 2004 election it appeared the Democrats had their backs against the wall but he not only righted the ship but orchestrated an amazing turnaround.

That said, both candidates, Barack Obama and John McCain are not pro-business and I expect that weakness to be covered with the selection of Vice-Presidential candidates. Two last names to remember are Webb and Romney. Webb can help turn a major red state blue while Romney brings a pro-business background.

In addition, the selection of the next Treasury secretary will be extremely interesting.

One final political comment, the race for the White House will be closer than people think.

Now, onto the economy, stock markets, and commodities.

Slow economic growth will continue into 2009 as the US gets hit by continued uncertainty from the business community over the Democratic Party’s policies and the Option ARM mortgages which will begin to reset. If an ‘official’ recession will happen it will happen late this year, early next when the new government can get it out of the way as has been done many times in the past.

The US Federal Reserve is now trapped with no way out. On one side is the financial industry which needs wide spreads in order to rebuild their balance sheets. The second side consists of homeowners who have seen the equity in their homes disappear as housing prices fall back to normalized levels. A third side is the new administration which will not want the Fed to impose additional pain on the consumer and economy teetering on the verge of a recession. The fourth side consists of Option ARM’s holders whose mortgage will start to reset. Meanwhile, commodity prices will continue to rise and consumers’ budgets become even more pinched.

The stagflation which began in April of last year will continue for the foreseeable future.

The fallout in the banking sector will be hit less hard than most expect due to increased attention following the problems of the last 12 months. The ones who have problems will be those who have not properly prepared for the upcoming resets.

Look for strong or large banks to begin acquiring weaker banks in the large cap and mid tier sector. Mid cap banks with exceptional balance sheets will be in high demand during the capital rebuilding phase as excess capital will be at a premium.

As for the stock market, expect continued sideways movement. Call it a bull or call it a bear but you should look at a graph of the Dow Jones Industrial Average going back over 100 years. On it you will see periods lasting approximately 15 to 25 years where the average moved sideways setting the stage for the next major bull market. It is my opinion that we are more than halfway through this sideways movement with at least another 4-6 years to go and any major moves within this trend are sideways moves with a bull market beginning sometime after 2012.

Looking over the Asian markets, two that pique my interest are Taiwan and Japan for different reasons. Taiwan due to closer ties with China which should reinvigorate the business sector and Japan as it finally begins to emerge from deflation. The Japanese emergence is on the backs of the commodity bull market which is forcing prices higher for Japanese goods. The key here will be when personal income emerges from its malaise and begins to rise. That is the inflection point.

Oil and commodity prices – Yes, a stronger dollar should hold down prices to an extent but as the price of gold and other commodities in terms of Euros and Yen shows, it does not stop the advance, just slows it down

Gold & Silver – The next oil. The forces keeping the price at bay and within a trading range should acquiesce to market pressures and new job pressures as their terms wind down and thoughts turn to acquiring new employment. In other words, if your job was pretty much ending the first Tuesday in November would you be concerned with the gold/silver price or would you be looking forward to a vacation/new job?

Gold and silver are at important inflection points. Sometime within the next few weeks we will begin to emerge from the base they have built over the past few months. I would like to see Gold prices fall by $100 and silver prices fall $3-4 dollars one final time before we take off. There are some moving averages which I would like to see touched before the next liftoff. The averages are still a bit too high for my taste but I have been scaling into gold stocks over the past month so one cannot complain.

For those wondering what gold stocks will do well I will disclose my measuring stick. I am only interested in juniors with a mine of at least 8 million ounces of gold and/or 100 million ounces of silver. Why those numbers you ask? They seem to be the measuring sticks for the majors when considering investing in juniors who love 10-15 year projects. Large projects are cornerstone projects which you can build a company around and/or allow them to more than replace a year’s production.

If the management is really aggressive they can use the project to begin acquiring other mines and create a new mid-major or major mining company.

Mergers between companies similar to Rio Tinto-BHP Billiton are not unlike the merger between AOL and Time Warner. Signs are appearing that an end to the commodity bubble is approaching. Investors should take note that despite all the talk of commodities being a hot sector, some hard asset prices have collapsed.

Investment picks – gold, silver, cattle, lean hogs, fish, and chicken. Basically, any kind of meat or fish as skyrocketing feed prices flow through from feed to meat and fish prices.

As an additional aside, I sold my oil and coal stocks last week and plan on buying back my positions in a few months.

 

Copyright © 2008 David Urban
Editorial Archive

contact information

David Urban | Kingston, PA USA | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.