Looking Back: And Good Riddance
By Jude Bedell

Good riddance to 2008, the year of the housing crisis, banking meltdown, $5 gas at the pump, government bailouts, car wars, recession and an election too. Santa Claus barely showed up at shopping malls. And let’s not even mention Bernie Madoff’s Ponzi scheme. Please.

Let’s dispense with the gory details and dwell on what specifically effects your money, your net worth, your cash flow, your peace of mind or lack thereof.

Investors are struggling with an internal battle: logic suggests sticking to a discipline and buying stocks at once-in-a-lifetime lows, yet fear of another collapse is preventing them from pulling the trigger. We need to invest in a recovery; things will not improve on their own. The Federal government has been busy taking action. By the time investors reach their comfort level, however, the Market will have already moved higher.

The economy may well get worse before finally improving. However, the Stock Market, as a discounting mechanism, tends to recover 6-9 months in advance of an economic recovery.

In 2009, we plan to proceed cautiously yet decisively with focus on protecting assets from further decline. Further, we will definitely be searching for growth opportunities. We need to look past the housing and credit mess. Investors focused beyond the next twelve months will be rewarded.  

Dividends matter. We covet companies that generate significant cash flow and raise dividends on an annual basis. In 2009, dividends will be once again in vogue. In fact, since 1926, dividends represented over 40% of investors’ return from S&P-500 stocks. Companies have a responsibility of representing shareholders interest at all times, and returning capital is one of the best proven ways to enhance investment. Despite the free-fall in crude oil, and the global economic slowdown, energy remains a key to growth. Demand has declined as recession set in. But the crude bubble, which burst over the summer, won’t take long to re-inflate. We anticipate oil prices moving higher in 2009. Energy companies that explore and produce oil and natural gas will remain at the heart of our investment strategy. 

In 2009, renewable energy will continue to be a major theme, with the Obama administration and our investment strategy. The collapse in crude prices hurt the shares of alternative energy companies, but make no mistake, renewable energy remains a decisive growth industry for years to come. With cheaper oil, alternative energy sources seem less competitive in the short-term viewpoint. Oil is unlikely to stay at these low levels for long, however, and we need to relieve our dependence on foreign oil and develop cleaner more efficient sources of energy. The need to introduce alternative sources like solar, nuclear and wind is real, and it’s now. Government subsidies are still necessary to foster creativity and inspire innovation. This is an investment in our future. These are growth industries in their infancies. We were early but we are committed to investing in this trend. 

It’s no secret that China represents the best growth story of the century, but after its stock market declined nearly 70% in 2008, investors are timid. A stellar Olympic showcase and record economic growth make it clear that China is a global force. Investment opportunities abound in China, and the cost of investing is much cheaper. China needs to grow, and will grow to keep up with its population and rising standard of living. The Chinese consumer will be a theme for us, as their thirst will be quenched, from coca cola to crude. Demand for finished goods will skyrocket, which spells good for health care and tech. Emerging markets, led by China, India and Brazil, represent 85% of the world’s population, yet less than 25% of the global economy. These emerging economies should see significant growth for years to come. In 2009, covered calls will become a staple in our portfolio strategy, to enhance returns and lower risk. We will be quick to take profits on strong rallies, and will use covered calls to hedge positions where we see the opportunity. We can’t control the Market, but we certainly can control the flow of capital. We will continue to let the trade come to us. Covered calls provide an infusion of cash up front, while simultaneously cushioning a decline. Covered calls enable your shares to work as hard as you do. 

Despite the damage that 2008 brought, our system is not broken. To be sure we were battle-tested, and the financial infrastructure was bent to the max, but we will survive. American ingenuity is peerless. We have always responded to crisis with conviction and purpose. Joe Kennedy coined the phrase: “When the going gets tough, the tough get going”. It still applies. This crisis we face is not just economic. It’s a loss of confidence which has been shaken to the core. We need to rise to the occasion, and seek out the next great investment opportunity … the next great theme … the next killer app … the idea that will redefine investing and get us back on track. We need to invest in America again.    

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What caused the credit freeze? Greed, debt and the madness of crowds, reminiscent of Tulipmania in the 1600’s, only this time housing was the game. Our economy was driven by inordinate amounts of debt: Federal debt, State, Corporate and Consumer. All reached unhealthy levels. People bought homes with no down payment. Their mortgages were sold, then packaged ending up as collateral for more debt. This feverish demand propelled asset prices higher across all asset classes including housing, commodities and stocks. So called “Financial Engineering” created great wealth, but masked the repercussions. The use of debt has always been a tool, particularly when running any functioning economy. It is both good and essential when used responsibly. The misuse of leverage caused calamity.

Municipal bonds survived the credit freeze, particularly the ones that are already escrowed in U.S. Treasuries. The reason we own bonds is twofold: predictable cash flow and known outcomes. Corporate bonds lost market value during the credit freeze but have rallied back nicely of late as investors reward strong balance sheets and solid cash flow.

Preferred Stocks were clobbered since most were issued by banks and insurance companies. They are income plays but do not boast a known outcome or certain maturity date like bonds. Their attractive dividends and $25 par values remain intact for the most part but their prices have been beaten up due to investor aversion to anything financial. Once liquidity and confidence return, preferred stocks should continue trading up, however, it is the safety of the dividend that is foremost, not the market valuation.

Home mortgage rates will drop in this low interestrate environment. Americans will finally get it about debt versus equity, speculation versus investment and fear versus peace-of-mind. Saving for a down-payment will return to the American vernacular as millions of homeowners lock-in 1950-style mortgage rates around 5%. Even first time home buyers will have the chance of a lifetime to buy cheap homes with affordable mortgages that should be 30-year fixed, just like the 1950’s. 

Looking Into: Obama for America, Obama for Investors By Eric Chang The 2008 election was a historic event and in 2009, we expect some significant results. There is no doubt that President-elect Obama will have a full plate awaiting him on January 20th. The first half of the $700 billion Troubled Assets Relief Program (TARP) has been allocated. The second half requires Congressional approval and we expect the focus to be on providing liquidity to the credit markets. This could consist of reducing mortgage rates and the temporary transfer of bad debt from financial institutions to the U.S. government.

In December, the White House announced a bridge loan to automakers GM and Chrysler to the tune of $13.4 billion. The Obama administration will be left with the critical decisions. To safeguard the taxpayers’ money, we expect Obama to exercise some necessary regulation in these industries.

Obama wants to create three million jobs in the next two years. The unemployment rate of 6.7% is expected to continue to increase in 2009. A key part of the proposed solution will be a $850 billion stimulus package spent over two years. Here’s our best estimate of where the money will go, and its impact on the following areas:

Infrastructure ~ $200 billion The build-out for infrastructure (roads, bridges, airports, railways, etc.) has the potential to be the largest since the building of the national highway system in the 1950’s. Projects are shovel ready, but state budgets remain under pressure. Every $1 billion spent on infrastructure would create nearly 40,000 jobs. 

Going Green ~ $150 billion Gasoline was over $4 a gallon in July. We are currently paying less than $2 at the pump. Renewable energy is viewed as less important now. We disagree. The renewable energy component in Obama’s economic plan would create jobs while it reduces our dependence on oil. We expect a general shift in jobs from more traditional industries to jobs focused on manufacturing and installing the solar panels and wind turbines. 

Healthcare ~ $150 billion Universal healthcare should be a signature of his administration. We think implementation of universal healthcare will be difficult in Obama’s first couple of years given the state of the economy. However, one area seems immediately achievable; expanding SCHIP (State Children’s Health Insurance Program). For electronic medical records, the benefits are clear: reducing medical errors, improving quality of care, and decreasing the number of unnecessary tests, all leading to cost reductions to the healthcare system. Biotechs and generic drugs should continue to outperform old line Big Pharma stocks.