Saturday, February 7, 2009

Forecast 2009: There Will Be Blood

"Forecast 2009: There Will Be Blood

2009 will be a year of complete destruction for the US economy. 5 Million will lose their jobs. The Dow Jones Industrial average will break below 6,000. Municipalities will fail. Insurers will fail. The unemployed and foreclosed American population will take to the streets and begin rioting. The Greatest Depression is upon us.

Sound far fetched? We welcome you to read our archive section from 2007. issued warnings of the coming stock market collapse and successfully predicted the coming depression which is now at hand. At the time, our view was also “far fetched.”

January Barometer

Analysts like to give their full year forecasts in December before the year begins. It makes sense considering the amount of new years resolutions and the endless assortment of “Top 10″ lists for the coming year that one tends to see at year end. From a practical standpoint, however, it makes must better sense to forecast the financial markets after the crucial month of January has past.
Historically, stock movements in the month of January has been an accurate predictor of the following eleven months. Technicians refer to this as the “January Barometer.” According to the Stock Trader’s Almanac, the January Barometer predicts the year’s direction with a 74% probability. To coin the old Wall Street saying - “As January goes, so goes the year.”

So how did January go? January 2009 was the worst January for stocks EVER. All of the major sectors finished the month down while the market (S&P 500 index) lost 11.3%. Traders and portfolio managers also use the barometer to sort through different industry groups. Generally speaking, if an industry group does well in January, it tends to do well the rest of the year and vise versa. Here’s the break down of January performance:

healthcare -0.04%
utilities -1.48%
tech -4.88%
energy -7.94%
staples -7.31%
materials -11.92%
discretionary -13.29%
industrials -15.53%
financials -27.01%

Every major group was down for the month. Healthcare and utilities held up the best which you would expect in a fearful market. These groups are defensive in nature. The US financial sector shed 27% in the month of January alone! Bottom line - The January barometer is predicting a year of carnage.

Great Depression Part Deux

Are we in a depression? In 2007, when we wrote about the coming stock market collapse and depression to follow, it seemed to be a very far fetched notion and was met with disbelief and even a few harassing emails. What a difference a day makes. Sure, the mainstream media won’t dare call it a depression but you must consider that they were denying that we were in recession until very recently. Let’s examine the state of the US economy.

Automobile Industry: The number of vehicles sold in the US has been decreasing at a gradual yet continuous rate since 1999, when nearly 8.7 million vehicles were sold in the US. The auto industry is in depression.

The latest retail sales numbers show the consumer is not consuming. The numbers have been falling off a cliff over the last 6-8 months. Retailers have been closing their doors and filing chapter 11 at an alarming rate. Not to mention the constant announcements of layoffs. This trend will accelerate this year. Retail is not in depression but is surely heading there. Fast.

Financials: The financial index is crucial to the economy. Market technicians follow the financial index and use it as a leading indicator to the stock market. When financials begin to under perform the stock market when prices are rising, it’s a good idea to get out of the stock market. The financials began underperforming in in early 2007 and we published pieces warning our readers to sell the financials and the market as a whole. This was the final warning in our view.

The financial sector collapse is continuing. Major banks which were household names in 2007 have disappeared in 2008. The remaining firms are surviving only by government intervention. The largest US banks, Bank of America and Citigroup ARE BANKRUPT. They ARE insolvent. They will surely not exist in their current form by years end. The financial sector is in depression.

2009 Predictions:

Ten or more municipalities will fail this year. This will cause a panic in the municipal bond market as the municipalities will either default or threaten to do so absent a government bailout.

US Government Loses AAA Credit Rating- If the ratings agencies weren’t dominated and owned by US interests, this would have happened in 2008. I believe the situation in the US will become so dire that even the ratings agencies will have to downgrade the United States in 2009 OR begin to issue negative outlook warnings amid global outcry.

A major US insurance company fails: The insurance stocks look to be heading to the same place as Lehman, AIG and Bear Stearns did. The costs of hedging their portfolio risk has been skyrocketing as weary investors fall back on insurance company “Guarantees” to cover there investment losses. They dont have it. Some companies look stronger than others but I’d put my money on Hartford being the one to go.

The largest US banks cease to exist in their current form: As far as banks go, Citigroup and Bank of America are insolvent. They are bankrupt. They’ve been kept alive by trillions in US gov aid but, in the end, they will cease to exist in current form. This may suggest the “Bad Bank” scenario or a complete nationalization but they can not function for much longer as they are.

5 million Americans lose there job in 2009. Sounds like a high number but remember that we lost 3 million in 2008. The first few weeks of 2009 indicates a frightening acceleration in this trend.

Riots/Protests/Social Unrest: With the acceleration of job losses and foreclosures the citizens of the US go the way of Iceland, Greece, Spain, France, Latvia and Bulgaria and begin rioting in the streets due to the economic conditions.

Dow/Gold Ratio Hits 5: This ratio has been declining since 2000. Even throughout the previous “Bull” market, as the Dow was making new highs in cash terms, it was making new lows in terms of gold. In other words, the Dow Jones, adjusted for inflation, has been crashing for almost 9 years. Currently, the Dow is at a 20 year low in real terms. We expect the ratio to hit 5 this year. 5 ounces of gold will buy the Dow Jones. At current gold prices, the Dow would have to be under 5,000 however, we do expect that gold prices advance higher this year and so expect a higher figure for the Dow.

Dow Jones Break 6,000: What of this “Second Half” rally the media is selling? We believe it is not only wrong but completely reverse. In our view it is more likely that the Dow rebounds slightly in the early months of 2009 and then continues a sharp decline in the second half. We anticipate the Dow Jones breaking 6,000 in 2009....