New Year Rally, Obama’s Plan, Shorting in 2009, The Second Wave of the Housing Bust, and More!

  To accomplish that feat, the market shrugged off the only piece of data worth noting… the Institute for Supply Management (ISM) manufacturing survey started off the new year at a new 28-year low.

  We have to say we love the financial media chatter on this first business day of the penultimate year of the first decade of the new millennium. On the one hand, the president-elect is promising a $300 billion tax cut to accompany the now $775 billion stimulus package working its way through Congress.

On the other hand, a consortium of state governors are calling for Obama to expand his rescue package to over $1 trillion. Leaders of New York, New Jersey, Massachusetts, Ohio and Wisconsin petitioned the president-to-be Friday for around 300 billion extra bailout bucks, mostly to help offset state budget shortfalls.

Meanwhile, 40% of government debt held by public investors will mature in the next 12 months… roughly $2.5 trillion. Meaning they’ll have to roll it over at whatever rate the market will bear at the time.

“It’s curious,” one reader wrote, capturing our mystification over the weekend, “that full-grown adults are willing to bet their lives on a new medicine because it worked on 2-ounce mouse, yet they can’t believe that what happened in a ‘tiny’ economy such as a Zimbabwe or an Iceland can happen in a big economy like the United States.”

Happy New Year!

  “Investors will initially welcome the promise of fiscal stimulus from the incoming administration,” writes Rob Parenteau, steward of The Richebacher Letter, “before realizing the nature of the challenge ahead. If Dr. Richebacher was correct in his assessment, nothing less than the entire global production structure needs to be reoriented.

“Asian production results point to a depression developing in that region. And the world is starting to realize it can no longer rely on serial asset bubbles and credit-financed consumption. But the apparent solution — so far — is for countries around the globe to reach for an increased public sector role in the economy. We are beginning to see hints of protectionism, as well. As the old regime breaks down, this is the solution developing before us… by accident.

“We sincerely doubt Dr. Richebacher would see public deficit spending and protectionism as a road back to sustainable economic growth. Rather, we would vastly prefer to see a rebalancing of the global production structure and a simplification of finance. Asian nations must become more domestic demand driven. And the Anglo-American nations, in particular, must save and reinvest earnings in tangible capital equipment, rather than mergers or stock buybacks. That is clearly a longer-term project requiring adequate changes in prices, incentives, income and capital, but it is a project he repeatedly championed for the length of his career.

“In the meantime, desperate fiscal and monetary measures around the globe during 2009 may help cushion the nightmarish blow wrought by the failure of the old global economic and financial arrangements. But they are unlikely to be a sound basis for the next leg of growth.”

  “2009 should be a year,” Dan Amoss comments further, “when fundamental analysis should start to matter once more. That will be a welcome development, because 2008 was a year when the following strategy worked best:

1) Sell short any stock or ETF, without bothering to do any fundamental research
2) Invest the proceeds in Treasury bonds, preferably with as much margin as possible
3) Repeat Steps 1 and 2, over and over.

“Clearly, this ‘deflation trade’ strategy is not sustainable over longer time frames — not in an era of worldwide paper money standards. In fact, I’d expect that such a shotgun-based investment strategy of short S&P 500/long Treasuries could lead to big losses in 2009.

“The economy will remain weak, but I think the worst of the widespread market carnage is behind us. Future damage should be concentrated in sectors with horrible fundamentals.”

  But for now, investors are happy to bid stocks up… AND buy the dollar. The dollar index is up a point and a half from Friday, to around 83 this morning, heading thus far in the direction of its credit crisis high of 88.4 set on Nov. 21, 2008.

“The dollar is kicking up its heels once again,” writes EverBank’s Chuck Butler, “and this is to be expected during this Obama bounce. The markets are swayed by the smooth-talking President-elect’s call for $300 billion in tax cuts, a job creation program and (possible) $1 trillion economic stimulus package.

“But all these things cost money, lots of money, and money we don’t have, unless… we just go and print more. This is why I believe that once all the euphoria of the Obama presidency has run its course, the markets will do a V8 slap to the forehead and realize we’ve just dug ourselves a deeper hole!”

  Gold hasn’t been too pleased with the dollar’s uppityness. In fact, she’s downright depressed. The spot price fell $30 over the weekend… below $850 an ounce this morning.

“In 2009,” forecasts Ed Bugos, keeping his eye on her meds, “economic conditions will deteriorate. Unemployment will reach double-digit rates before the year is out.

“As the year wears on and investors sort out the fallout of 2008, I believe that there will be fewer plausible investment alternatives to gold, and that markets will begin to realize the errors of the government’s current policy. The big winners in all this will be gold shares, which will perform better than gold, as they have been absolutely cheapened beyond belief, and risk premiums fall.”

  Despite dollar strength, oil has greeted the new year with glee. Light sweet crude jumped 23% last week. In dollar terms, that’s nearly a $9 leap, to $48 this morning.

Last week was the black goo’s biggest since August 1986, after… hmn… a global equity rally and strife in Gaza.

  Mortgage rates have pickled to at least a 37-year low. The average 30-year fixed loan went for 5.1% last week, Freddie Mac reports, which is the lowest since the company started keeping track in 1971.

No surprise, then, mortgage applications are at a five-year high. Mortgage application activity stayed around 1,200 last week, the Mortgage Bankers Association said. That’s the most weekly apps since July 2003.

But these historically low rates and the surge in mortgage applications aren’t doing diddly for the housing market. 83% of all applications recorded last week were for existing homes. And why not? If you can lock in for 30 years at or near 5%… go for it.

  Meanwhile, the next leg of the real estate bust is already coming down. In nearly every major city, 10% of office buildings are now vacant.

“Virtually every market in the country will see a rise in vacancy rates of between 2-5% by mid-2009,” Bill Goade, head of CresaPartners, told The New York Times this morning. According to a report by Real Capital Analytics, an estimated $400 billion worth of commercial real estate loans come due this year, $107 billion of which are already delinquent.
 
Of course, you can leave it to Wall Street to make matters worse. Approximately 60% of all commercial property loans made in 2006-2007 were securitized into the same kinds of debt tranches and CDOs that set the credit crisis in motion in July 2007.

The banks sitting on them now? They rank among the only firms to escape calamity in 2008. Bank of America, J.P. Morgan and Morgan Stanley hold “tens of billions of dollars” worth of the stuff — each.

Oy.

  “Imagine my surprise,” writes a reader headlining a smattering of random e-mails we received over the weekend, “upon finding the following clue in the Sunday crossword puzzle of The Miami Herald: ‘2 down: 2008 documentary about the national debt’

“It has a lot of vowels, so I predict I.O.U.S.A. will be the answer to many crossword questions for years to come. Would you have predicted a development like this for your film in your wildest dreams? What a country!”

The 5: Amen. And… we have an ‘in.’ The Miami Herald picked up The New York Times crossword puzzle from the week before. Will Shortz, the editor of The New York Times puzzle, played the role of lead protagonists in Patrick and Christine’s first film, Wordplay.

By the way, the Critics’ Choice Awards will be announced this week. After we published the link for audience votes , we blew the survey to pieces. At one point, we had over 80% of the votes. The only other movie or actor to get reviews similar was Heath Ledger for Best Actor, who clocked in at about 84%. The Dark Knight was up there too.

It’s all absurd, of course, but kind of entertaining to check out. You can do so here. There are a bunch of reader comments on the site too.

  “It seems to be going on under the radar,” writes another reader, on a completely unrelated subject, “but there has been some serious buying action in the uranium miners since Obama was elected. Maybe these people think (or know) that uranium will be the new Green in 2009?”

The 5: We suspected as much as well… on Wednesday.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Just a reminder, we’re encouraging sign-ups for the next free installment of the Agora Financial Retirement Recovery Webinar series. If you haven’t already participated in one of the Webinars and would like to… you can sign up for free here.

This week’s installment covers a champion income strategy we think will pan out well in 2009 while we await the outcome of the world’s concerted bailout strategies. Check it out Income on Demand — it’s free… right here.