Rest Up

This past year will no doubt be written in history books as one of the most dramatic years in the financial markets. We witnessed the height of the housing bubble and then participated in the credit crunch. All these events created an environment of distrust and mistrust. This atmosphere persists today. Although the volatility we lived thru in the months of September and October have died down quite a bit, uncertainties galore remain.

What can we expect this new year? The housing situation will slowly work itself out, as demographics and the American Dream and low interest rates will spur interest. The credit crunch is still being crunched - this is a far tougher situation to rectify. However, sooner or later the financials will have to start making moves and when they do things will brighten up a bit. I don't know whether it'll be in 2009 or 2010. Most important, though, is that we should see improvement in the unemployment figures. I expect to see a rebound in the latter half of 2009.

In the meantime, rest up! It has been an arduous 2008. No doubt, we've seen many more low points than high ones. Regroup. Rethink. Reenergize. 2009 will be an exciting year. It could be the year where wealth will be made.

Historic Fed Day

I can't help but think to myself that the Fed is ahead of the curve this time. In the beginning, one year ago, it appeared that the Fed was slow to act. And when it did act, it was too conservative. 

Then the credit crunch/recession picked up steam and the markets slowly started falling apart. And then, of course, all of us remember the October/November days where the market broke down, routinely trading down 400-800 points.

However, thru this period the Fed has acted more and more promptly. Looking back, it was as if Bernanke & Co. were prescient, knowing exactly what they would do given a certain scenario.  I don't fully believe it, but their actions over the last 3-4 months have been superior.

Forget moral hazard. Forget inflation. Forget all that stuff. What we're facing today is REAL and different than the past. The jobless claims are meteoric. Banks are still not lending freely. Consumers are not spending, with some reports citing that some are cutting back 50%. Homes are still falling albeit at a less precipitous rate. And this is occurring worldwide. People around the globe are more or less going thru the same events.

The Fed actions will be mimicked over the next few quarters by other central banks. They have to. They have no choice. Their independent economies are NOT as decoupled as these countries think they are.  It's almost impossible to think otherwise given the overwhelming market share of the American economy.  If America is suffering, so will the world.

Zero rates will benefit banks and ultimately benefit the consumer. In essence, the American economy will be able to work itself out of this recession with the support of the Fed. Obviously, all branches of government will have to kick in. Foremost, fiscal policy will need to address unemployment and housing. Obama's stimulus plan will be key. He's more on top of this than many give him credit. In fact, I think he will perform superbly...how? Under-promising and over-delivering. 

I look forward to see America back on its feet. The markets are typically 6 months ahead, so the rally we had today is real. The Fed has spoken and as the axiom goes, "don't fight the fed."

Credit Crunch

The credit crunch has been with us for a year now and we certainly have felt it. And not just those on Wall Street. In fact, the Main Street crowd is arguably more affected since they are the overwhelmingly large majority. 

How have we been affected? For one thing, home prices have fallen off the cliff from inflated levels. That means wealth contraction as most everyone's single largest asset is their home. What else? We've seen massive layoffs by small and big companies alike. That means less stable income stream and thus contracted spending. Furthermore, people are worried. We read about companies going bankrupted. We hear that banks aren't lending. We see our credit card interest rates skyrocket. Panic is literally in the air.

The air of fear is prevalent and heavy. Everyone and his dog (love that phrase) are paranoid that we're entering a prolonged period of recession, if not depression. We hark back to memories of the tech bubble bust and 9/11 and remember the pain, both physical and emotional.  Those were trying times.

This time, we're involved with a more opaque subject. Credit crunch. Main streeters don't exactly know what this means. But, get this, it's been with us for a year. During this past year, believe it or not, financial literacy has blossomed. People are more concerned about their finances than ever before and thus are more engaged. All of my friends have talked about the economy, unemployment, stocks, etc. These are folks who in the pass have deferred this topic. And, now, they are engaged! This is great!

It's great because we have involvement. Yes, folks may be decreasing their retirement contribution rates and may have altogether stopped contributing. Yes, portfolios are suffering huge declines. Yes, things are bad. But, the thing is (and this is key!) things will get better. And when this thing turns around, we'll be so much more better than before. I expect a wave of new money to come into the markets. I expect people to be more educated and picky and will not go with the same gimmicky investing/trading they've done in the past. Yes, I do expect a new bull market. And, I for one can't wait.

Bottoming is a Process

If you're as negative and bearish as you were two months ago, then you're not doing your homework. You haven't been following the news and haven't witnessed the ascension of Obamamania. President-elect Obama is integral to getting us out of this recession. His leadership and plans for, dare I say it, economic recovery are vital to this nation and this world. Obama and his team have been saying and doing all the right things unlike the current administration. They are on top of the game and that will immeasurably aide in the process of the stock market finding a true bottom.

On top of Obama, central banks around the world are lowering interest rates. Don't underestimate the effects of low rates. Governments were worried about inflation (as mandated) a few months ago and couldn't act soon enough to stave off recession. Now that commodities and oils are dirt cheap, there's freedom to act as required. And it is required that rates be brought down to stimulate activity. Banks will be able to make gob loads of money given a certain rate and consumers will be tempted to borrow.

Also, the credit markets are slowly unfreezing. Yes, banks are still extremely cautious about lending to any Joe, and they should be. There remains a chunk of assets on their balance sheets that are hard to price, so capital requirements remain high. Heck, it may even be strategic to keep building a stockpile of dough to buyout struggling competitors in the future. Either way, the credit market is not as bad as it was just two months ago.

Housing prices are more than halfway over with the repricing. No doubt homes were expensive in the past few years. People say there was inflated demand but nevertheless the American Dream of homeownership was being played out - it will continue to be the American Dream in the future. Buyers will come back. I have a friend who bought his first home 6 months ago. There are others like him who will benefit from discipline and necessity. The repricing will allow a new, more financial savvy, bunch of home buyers in the market. And ultimately they will help stabilize and allow real long-term price appreciation. Oh, and let's not forget that low rates allow for refinancing, a boon for many struggling banks - and it benefits the consumer as well.

Many,  many more events have happened that has allowed some light to shine thru the tunnel. We're certainly by no means out of the dark yet. Long way from it. But, we're not in hell anymore. Recognize it and act accordingly. History tells us that stock markets bottom six to nine months before the real economy comes back...my best guess right now is that we're bottoming over the next 3 months.

Recession - Yes, Please.

This week, we were "officially" told that the US economy began its recession last December.  I couldn't be more happier.  Everyone and his dog already knew it, and if they didn't, well, it doesn't matter.  Recessions are marked by negative growth and that translates to job losses, business closures, dwindling consumption, etc.  It gets people depressed and businesses scared.  But, it is necessary.

Why?  Because recessions gives us time to get better, to improve, to innovate.  It is during a recession that business need to cut back on excesses and focus on the things that they do really well.  They cut down on needless expenditures and hone in on improving efficiencies.  As cruel as it sounds, they have an excuse to lay off marginal employees.  It gives them a chance to retool their business models that have gone haywire in the money-is-easy days.  

More importantly, recessions teach people that a good life isn't a privilege.  It is something that must be worked towards and earned.  If you're making a $40,000 salary, you shouldn't be living in a $400,000 home.  Period.  You shouldn't be eating out 5 times a week.  Period.  You shouldn't be vacationing 3 times a year.  Period.

Recessions allow for restructuring.  It gives a chance for aligning your priorities again.  Scale back on luxury and concentrate on your bread-n-butter.  Recessions allow us to get ready for the next up leg in this everlasting quest to move forward with life.  Get your business in order for the next round.