The year 2008 left investors gasping for breath, one that will go down as one of the worst years for investors. All investors, not just those invested in equities, are reeling from losses and are left scurrying for safety. Assets within money market funds and securities backed by our United States Treasury have ballooned as risk left the scene quicker than Elliot Spitzer.
We are confident that 2009 will be better (how can it not be?). Our projections for this coming year are based on a couple of assumptions, the first being that as the new year gets underway negativity will be in vogue at various points as the economic and corporate data that is released will paint a picture of an economy whose total output as measured by Gross Domestic Product will most likely shrink at an annualized rate of between six and ten percent during the first half of 2009. Any bouts of market upside will be met with skepticism. Skittish investors, those that believe it is different this time, will be scared out of the market again this year. That said, as sure as the sun rises after a cold, dark night, greed will eventually overtake panic and capitalism will once again win out.
Despite the sour economic news, a new sense of optimism will arrive along with the administration of President Barack Obama. Eventually, many who believe the glass is half empty will now look at that same glass as half-full. The psychology of the American economy and along with it the American Economy will improve as we progress throughout this New Year. Furthermore huge government infrastructure programs, meant to upgrade the bridges, roads, tunnels and schools of our nation, whose price tag will approach $1 trillion will mask economic weakness and create jobs.
Change is coming not only to Washington but throughout the United States. Last year around this time, consumers labored under $4 per gallon gasoline. Any discussion of lower energy prices was met with a lecture on supply and demand theory from economists. We even bought into the higher energy prices forever scenario. But, lo and behold, the unthinkable happened and gas prices tumbled. It is our belief that the unthinkable will happen again in 2009 and that is that the markets will make their way higher as the year progresses. We believe that slowly the pendulum is shifting and the risk will once again be with those that our out of the bond and stock markets rather than in them.
With the above in mind, the following represents our “Nine Investment Themes for 2009.”
Number One, all good things must end. Absent economic Armageddon, the rally in U.S. Treasury prices has pushed the yield to levels that make them wholly unattractive. The yield on the ten-year U.S. Treasury is currently 2.37%. We believe that investors should sell longer dated Treasuries and invest the proceeds into corporate bond funds. They should consider Loomis Sayles Bond (LSBRX) as well as the Oppenheimer International Bond Fund (OIBAX), both of which were pummeled during 2008 along with the “non-treasury bond market” but have solid long term records. In addition, the Oppenheimer International Bond Fund may also benefit from a dollar that could weaken during the year as our national budget deficit mounts.
Our second investment theme for 2009 is “big is beautiful.” We are both 6′4″ and weigh over 200 pounds (please no scales)hence big is something we embrace. The economy has shredded the competition for some of America’s larger companies, also known as “category killers.” Consider Bed Bath and Beyond (BBBY) which has delivered a knockout punch to Linens ‘N Things. Nike (NKE) continues to run circles around its competition as it benefits from a strong balance sheet and strong international sales. Finally consider Intel (INTC) as its balance sheet has $12 billion in cash, a seventy percent market share and is built to withstand a weak economy as its major competitor, Advanced Micro Devices (AMD) struggles.
Number three, don’t get too comfortable. This market humbles everyone so it makes sense to get paid to wait. Dividends are an important component of total return with U.S. Treasury yields at these historically low levels and Certificates of Deposit yielding a nationwide average of barely two-percent for a one-year commitment. How about an investment in Verizon Communications (VZ) with a dividend of 5.3%? FIOS and the Blackberry Storm are providing some pizzazz in these tough times and we believe Verizon rides through difficult times with its somewhat recession resistant business model. Exchange Traded Funds (ETFs) also provide diversification so we believe the iShares S&P U.S. Preferred Stock Index (PFF) whose dividend yield exceeds ten percent as well as the iShares Dow Jones Select Dividend Index (DVY) whose dividend yield exceeds five percent may be appropriate for your investment portfolio. One note of caution is that the DVY has a forty-percent exposure to financials which could may provide unwanted volatility.
Number four, take some risk. It is ironic that many investors want to become more cautious AFTER stocks have already fallen forty-percent. They forget the time-tested adage of “buy low and sell high” choosing instead to lock in these losses and move to more conservative investments. Despite the fact that became the ultimate four-letter word in 2008, many solid companies that got pounded will survive and eventually thrive. Consider Manitowoc (MTW), the huge crane maker from Wisconsin, one of many companies that will surely benefit from President Obama’s proposed stimulus package. Other similar companies include Chicago Bridge & Iron (CBI) and Shaw Group (SGR). Also, equity investors may be wise to consider an ETF that mirrors that NASDAQ 100, the Power Shares QQQ (QQQQ), a tech laden composite that is forty-plus percent from its fifty-two week high. Once again, the new administration seems to have made an upgrade to tech infrastructure a priority.
Number five, inflation will come back and it will be somewhat welcomed. During the first half of 2008 as Americans pumped $4 per gallon gas they moaned and complained. Food prices soared and gold spiked BUT (and this is a big but) the economy held up pretty well. Now nobody wants a return to $4 gas and rampant inflation but with the Federal Reserve printing money willy-nilly to combat this crisis, the dollar should weaken and long-term interest rates should rise. For this reason some exposure to commodities makes sense. Consider Exxon Mobil (XOM) the world’s largest integrated oil company or the Energy Select SPDR (XLE) to benefit from rising energy prices. Oil service companies Schlumberger (SLB) and Halliburton (HAL) could also make some sense. Finally, take a look at the Vanguard Inflation Protected Securities Fund (VIPSX), a no-load, open-ended mutual fund that invests in inflation protected bonds. In a world of rising inflation these bonds could provide solid risk-adjusted returns.
Number six, “infrastructure” will become the buzz word of the new Obama administration much like energy independence was the buzz word during the latter years of the Bush administration. We believe that the infrastructure play might be a bit different than was initially viewed. Yes, traditional “shovel in ground plays” like those companies noted under number four above will benefit, but technology infrastructure and alternative energy plays may endure longer with more upside potential. For this, symbol QQQQ is interesting but so would Cisco Systems (CSCO), a company that provides the highway to the inter- as well as to the intranet. We may look back on the monetary commitment to the technology portion of President Obama’s infrastructure investment much like that which was spend to get companies past “Y2K.” Education, long an Obama focus, could make countrywide internet access a priority. John Chambers, CEO of Cisco Systems, has done an excellent job managing through this financial crisis and with $ 27 billion in cash, Cisco should ultimately thrive. Trinity Industries (TRN) has struggled recently as the economy has stalled. However, this heavy cyclical corporation, a leading manufacturer of rail cars, guardrails, barges and wind towers should be a major beneficiary of an infrastructure program. We believe that Trinity’s stake in wind tower production has not been fully recognized by Wall Street. We can envision wind, that cheap, efficient and environmentally friendly source of power as a great alternative to carbon fuels for an administration aiming to be different and innovative.
Number seven, are you scared? A little bit of fear and adrenalin is never a bad thing. However, that historic level of fear that investors felt during 2008 will never be completely out of one’s mind. The bitter taste of 2008 will linger throughout this year. What to do if you will not dare put even a toe back into the stock market but want better returns than the meager one to two-percent offered at your bank? First and foremost avoid the temptation of fixed-income investments of longer-dated maturities as you may discover that “interest rate risk,” the risk that you are stuck in a low-yielding investment as interest rates climb, is as nasty as the principal risk shouldered by investors into the stock market. For that reason, we believe that the PIMCO Total Return Fund (PTDDX), a fund with a track record of eight up years over the last nine, a fund with a positive total return during 2008, might limit some of that risk for bond investors. With an average maturity of five years and a meaningful percentage of the assets of the fund sitting in cash, renowned fund manager William Gross, should be able to admirably navigate the rising waters of inflation. Want a stock that’s relatively safe? ()notice the word ‘relatively!’)? Johnson and Johnson (JNJ) may be as close as you can get. This healthcare and consumer products company with its Band Aids, baby powder and diverse nutritional and OTC health care products may be the perfect antidote for an ailing economy. Its three-percent dividend makes JNJ even more attractive.
Number eight, we regress back to the mean, aka semi-normal times, when stock investors are compensated for taking risk and those out of the market are punished. Winston Churchhill once stated, “may you live in interesting times.” To that we respond “C’mon Guvnor, gives us those boring but happy times that we loved so well and miss so much!” Any whiff of an economy that is stabilizing may send stocks sharply higher with some of the beneficiaries being JP Morgan Chase (JPM), Three M Company (MMM) and Deere (DE). These large companies have all been in both out of favor and exist in economically sensitive areas. However, they possess strong balance sheets, international exposure (for better or for worse) and at this time pay dividends that are generous and secure.
Finally, number nine, cash is king. But remember, so was George III and Marie Antoinette for the politically correct and we all know what happened to them. We believe that we are well in the midst of a bubble in cash as investors shun risk like the plague. That cash, now sitting in money markets, U.S. Treasuries and short-term Certificates of Deposit will eventually look for a new home, one whose return is not so meager. As investor appetite for risk returns, we believe this bubble in cash will burst resulting in a slowly accelerating exodus into first bonds and then stocks, ultimately helping these markets to begin to gradually repair themselves during 2009.