2009: The year of Hope

Looking back on 2008, there really was not very much good news for the investment community. Most major stock indexes were down by 30-40% making 2008 the worst year for investing in a very long time. The crash in the market forced many hedgefunds, mutual funds and individual investors to de-leverage and de-risk their portfolios. This process hammered many of the small cap resource stocks that we follow creating some very enticing opportunities.

The good news that should come out of this mess is that the shake-up in the financial community will make our investment climate safer in the long run. Gone are the days when anybody with a heartbeat will be given money....lets hope! We should also see tighter reporting in financials and more transparancy in the markets....we hope! Hope definitely is the theme for 2009, spurred by the inauguration of President Obama. So where does this HOPE lead us for making some money in the investment world in 2009? I have compiled a list of personal predictions for our year of hope (2009).

1. Gold and Precious Metals will Shine in 2009- The stimulus programs that the US and other countries around the world are proposing will require the printing of billions of dollars to fund. Governments have decided to sacrifice their currencies to prop up a very sick economy. The increase in money supply will eventually result in inflation (price of goods/services will rise). The one way to protect yourself from this is to invest in precious metals. Another driver of these safe haven investments will be continual conflicts around the world. As food crisises increase, nations will be forced to fight and protect their resources. This instability in the political world will attract nervous investors in hard assets like gold and silver. Like other resources, there will be less production of precious metals in 2009 because of depleting reserves in major mines. As demand rises, there will be a shortfall in available physical metals causing the metals to become even more precious. You just can't print a gold bar like you can a dollar bill.


2. Oil will hit a gusher in 2009- The dramatic collapse in the price of oil over the last 6 months has left many people wondering if we will be going back to $10 a barrel oil. The world recession has caused investors to question the vitality of the energy business. With factories shutting down, people not driving and less overall energy consumption in the world, it appears that demand destruction is in full force. The reality is that speculators drove the price of oil up to $144 but have also drove it to its current level. People will not go back to heating their houses with wood and riding horses. Demand for energy will continue around the world and unfortunately our world production is dropping. (Peak Oil) Oil is a non-renewable resource and thus there is a limited amount of it in the world. One of many recent developments in the energy scene supporting that view occurred this week when we learned that the output at PEMEX, Mexico’s state oil company, fell 9 percent in 2008. This is, unfortunately, a trend solidly in motion: from its peak production of 3.8 million barrels per day in 2004, Mexican production is now ringing in at just 2.8 million bbl/d, a startling drop of 1 million bbl/d in just four years. Another reality is that many oil producing nations require a much higher oil price to maintain their current levels of living. The IMF recently compiled a list of break-even prices that various oil-producing nations require in order to avoid a budget deficit in 2009. Those figures are as follows: Bahrain $84, Kuwait $34, Oman $78, Qatar $24, Saudi Arabia $54, United Arab Emirates $24, Algeria $60, Azerbaijan $35, Iran $90 (!), Iraq ($94), Kazakhstan $67, and Libya $53. Oil companies and exporting countries have acted fast in their cutting of production to ensure that oil prices return to a much more profitable level.

3. Real Estate is still not out of the hole- The subprime crisis which has decimated real estate prices around the world is not over yet. The speculators and greedy mortgage companies that fueled the Real Estate boom are either bankrupt or in jail. Home ownership which has been viewed as part of the American dream has become a nightmare for many. As prices continue to decline, many people cannot justify the payments that they are making and are simply walking away from their houses. This can be seen in a recent bloomberg article that stated:

Jan. 21 (Bloomberg) -- Home prices in the San Francisco Bay Area fell 44 percent last month from a year earlier as discounted, foreclosed properties lured buyers, MDA DataQuick said.

Falling prices coupled with increased unemployment and tighter lending requirements have essentially killed the real estate market. Why would someone want to buy a house that will be worth less next year? I personally believe that we will continue to see a decline in house prices this year and thus would not recommend anyone tread into these rough waters at this time. The deals might seem good now but wait till next year....

4. The China Dragon will continue to Roar- Although rattled by declining demand for its exports, China will continue in its trend to becoming the New Economic Engine of the world. They are predicting a drop in GDP growth from 9.3% to 6.9% this year. The key is that they are still growing their GDP, which not many other countries can say. The Chinese have also been much more responsible with their debt both as a country and as invididual consumers. Most Chinese have savings accounts unlike their american peers. Industrialization will continue in China as part of an economic plan that will be funded by a well financed government that has much more control over its economy than the US has. Meanwhile, millions of Chinese are moving into the middle class tax bracket each year, filling the void left by the US consumer who is regressing to lower class (by debt standards). This new influx of consumers will be aiming to acquire all the luxuries that other middle income earners around the world have made essential parts of their lives. Some economists/historians have gone as far as suggesting that China's economy resemblies the American economic situation during the Great Depression. Before the depression, Britain was the world economic power but after the depression, the US emerged as the world power. We could see the same occur with China taking over for the US as the new Economic power in the world. It helps that foreigners led by China – were responsible for buying something like 80% of the U.S. Treasury bonds sold over the last couple of years. China has essentially become the bank for the US and will profit from the massive socialization of the american economy.

5. US Dollar will continue to Fall- The fact that the US Dollar has fallen by over 40% over the last few years is lost by many. This trend will continue due to the massive printing of dollars that is occurring. The buying power of a US Dollar will continue to erode and the biggest benefactor will be commodities and the nations that produce those commodities. This will result in one of the biggest transfers of wealth that has ever occurred in human history as money flows out of the US into resource rich nations. Obama will need a weaker currency to make its exports more competitive on the global markets. The debt ridden US will need a lower currency to melt away some of the debt it has on its books as well. Overall, fiat world currencies are all in trouble and it wouldn't surprise me to see a new world currency within the next ten years.

6. Agriculture will grow your portfolio- As the world population continues to grow, demand for food will continue to rise. This demand will benefit agricultural producers like Agrium, Saskatchewan Potash, etc. I recommend buying a basket of these companies through an ETF with great tickers like MOO and COW. The movement of more people into the middle class will also have a positive impact on the agricultural sectors as the quality and quantity of food required to sustain demand will rise. Food is a basic need (not a choice) and thus will be less impacted by the recession than other consumer driven areas like electronics.

7. Infrastructure will keep the Economy from Falling Apart- Anyone that has listened to the news lately has probably heard that one of the key components of the economic stimulus packages is investing in North America's aging infrastructure. Obama keeps expanding his promise of jobs that will be created by this investment which I think is now at over a million. Just today the Canadian government announced that they would be investing 7 billion dollars in infrastructure projects this year alone. Companies that work in this area (ex. Stantec, Cemex, etc.) will benefit hugely from this government money and will thus see their bottom lines increase. This will be good news for investors in the area. I recommend buying an infrastructure ETF like Brookfield Global Infrastructure to take advantage of this trend in 2009.

8. Smallcaps will continue to get their kneecaps taken out by Creditors- Being a small company in 2008 was to say the least...awful as the small cap index was down 80%. Some of the best bargains in the land are in this area but unfortunately the bankers who hold a small cap's companies future in their hands will not see it this way. Lending will be very constrained and investors that have been absolutely burnt by last year's massacre will not be willing participants in private placements at a tenth of the price of the original buy-in. To survive, small cap companies will have to be very conservative with their cash (if they have any) and will have to merge with other companies to improve their financial shape.

9. The Green Team will Win- The inconvient truth is that people (including the government) have woken up to the fact that we are destroying our planet. Part of the government infrastruture stimulus will be directed at green projects like wind energy, high-speed transportation systems and solar energy. Rising energy costs coupled with increased pressure from environmental groups will force people to begin to use more environmentally friendly sources of energy. Governments will ensure this occurs through green tax incentives.

10. Death by Mutual Fund- The mutual fund concept has been around for close to 50 years and the industry has become massive over that time. The original concept of pooling resources and then let a group of investment experts invest those assets was a great idea at the time. Unfortunately, over time this good idea has been tainted by greed and mismanagement. 2008 has done little to affirm that people should be paying 3% for the expertise of investment managers since many of them could not foresee the crash in the market. The mutual fund industry is also crippled by the fact that the structure of a mutual fund only allows the investor to make money when the market goes up. People are starting to figure out that they can't just trust their money to others and hope that at the end of the day they have something to show. The front end and back end loads that are paid out to advisors for putting their clients money into funds is starting to reveal its ugly head as advisors have changed their focus from good management to good fees. One benefit of seeing your portfolio cut in half is that it causes you to take a closer look at what is happening in your investments. This closer look will cause investors to think twice before they trust the individuals that are running these funds and those selling them to them. The Madoff Ponzi scheme will also have a determental impact on the industry as investors will demand more transparancy on where their investment money is actually going. Another crippling blow to the industry is the irresponsible investment by many money managers in high yielding products like asset backed commercial paper. Many mutual fund managers are now petrified to make any decisions which will cause a further lull in their returns and ability to beat the market. With the advent of low fee ETF's, investors have the ability to invest in markets that they believe will do the best. They essentially will have the ability to make money when the market goes up and when it goes down. You will start to see more investors using this technique as they become more aware of it. They will probably have to fire their advisor first though as they won't be the first touting it as an investment product since many do not contain any fees or perks.

Overall, these are just a few of my thoughts as we move into 2009. I believe the stimulus packages proposed by governments around the world will cause an "Obama" rally that will be short lived. We should see a retesting of the market lows starting in June led by dismal corporate earnings, rising unemployment, tightening credit and a free fall in real estate prices. We are not out of the mess yet as this recession could last longer than most expect. The buy and hold strategy touted by many will prove to be the downfall of many portfolios including Mr. Buffett's. An active investor will be able to take advantage of the volativity in the market and protect themselves from downswings by setting stop losses. The club will have to move its focus to companies and/or investment vehicles that will take advantage of the current uncertainity in market and will be survivors that emerge out of the chaos. We will continue to try to find great investment opportunities by finding tomorrow's great companies. In our search, we will have to be extra diligent in analyzing the financial situation of the company to ensure that management is making good decisions with the capital available. Keep in mind the saying, with crisis comes opportunity!