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In 2008 we saw some
of the most dramatic financial events in a century:
* $trillions of
subprime mortgage implosion, which bankrupted the entire US banking system.
* Lehman's fallout
with entangling positions in equities, futures, real estate, and derivatives
in the $hundreds of billions. The magnitude dwarfed LTCM.
* Biggest squeeze on
the dollar. Despite worsening fundamentals, dollar rallied 20% in the second
half of 2008 as banks refused to loan and assets are sold to pay dollar debts.
* Largest
de-leveraging process. Margin calls caused severe corrections (-50% or more)
in broad equities and commodities.
* Unprecedented
intervention with multi-$trillion financial bailouts and record-low interest
rates of near 0%.
What's in store for 2009?
We will make our
calls with the aid of following charts
Gold:
Case for:
Gold is liquid,
compact, universally accepted, and can not be created or diluted at will. As
investors face zero% yield, uncertain economic times, and daunting deficits,
it's no surprise that gold came through 2008 unscathed.
Case Against:
Gold has faired very
well while all other asset classes endured severe correction in 2008. Gold
right now is near its historic high compared to oil and copper. It is an
emotional investment, which makes the top and bottom difficult to call.
Verdict:
I look for side-way
action for gold between $700 and $1,000/oz as markets battle through fears of
depression to come to grips with inflation.
US Dollar:
 
Case For:
USA is the
world's largest economy by far. US dollar is the most liquid currency and
de-facto settlement currency for global trades. As we go through the
deleveraging process, dollars will continue to be raised for debt repayment. Comparatively
speaking, currencies that make up the dollar index basket are in no better
shape.
Case Against:
US budget
deficit will exceed $1 trillion/year, well over 5% of GDP for the foreseeable
future. This puts a strain on the dollar. There are also record amount of
dollars abroad yet to be diversified and spent.
Verdict:
The factors that
drove up the dollar are temporary; therefore a dollar correction could be
underway soon. I see dollar index between 88 and 72 for 2009.
S&P 500:
Case For:
S&P 500 dividend
yield is on par with interest rate yield; something not seen since 1950's and
provides support for equities. Globalization helps Americans tab into new
markets (for example, there are 350 million smokers and net-users in China) and enables international investors tab into US equities. Lastly the financial
sector has been decimated and is weighted minimally in the index.
Case Against:
The world economy is
slowing down. Many companies are straddled with debts and phased-out
products, and likely won't survive.
Verdict:
Today's dollar is
perhaps half of what it was 10 years ago. The S&P500 index is trading at
a decade low. At zero % interest rate, I don't see much downside and would
peg S&P500 between 800 and 1,200 for 2009.
Gold Stocks:
Gold stocks provide
leverage to the gold price with high fixed cost and low marginal cost. Gold
stocks couldn't shake off the equity bloodbath and disappointed investors by
losing 30%+ in 2008. The action for 2009 will remain volatile as margin calls
will continue to cause weak hands to sell into strong hands. There are also
many poorly managed gold companies that won't survive through permitting
issues, high operating cost, and geopolitical risk. Gold equity valuation is
about earnings and ounces in the ground. I am not wildly bullish on gold
stocks yet as speculative spirits could take months to return. However a
modest rebound to 150 from current 105 is very reasonable and represents
healthy percentage gains.
Oil, Copper, Silver:
Case For:
In 2008, Oil and
Copper staged the biggest crash in their respective history with oil losing
75% in 6 months ($145 to $35/barrel), and copper down 70% from $4 to
$1.25/pound. Commodity prices such as nickel, zinc, and oil are at decade
lows having adjusted for inflation. The large contango in oil futures
suggests big moves could be ahead. With the margin calls winding down, the
slightest addition of speculative money will provide oil with substantial
lift.
Case Against:
Inventories are
piling up for oil and select commodities. The global slowdown will continue
to put a demand constraint on commodity usage. Many of the oil investors are
licking their wounds and might not return in short order.
Verdict:
Faced with imminent
dollar correction and inflationary monetary policies, commodities at today's
prices have more room to go up than down, particularly zinc which peaked much
earlier and therefore has a stronger base. My calls for oil are between
$40-$60/barrel, copper $1.25-$2/pound, silver $10-$15/oz, and zinc 60cents to
$1/pound.
S&P TSX Ventures
Index (Proxy to Junior Mining Stocks):
Case for:
In the heat of the
credit crunch in Nov 2008, we saw a handful of junior mining issues trading
at upwards of 70% discount to cash values. Toronto saw zero IPOs in Q3.
Unless oil dives to $20 and copper goes below $1, I would say the
capitulation has already occurred in the junior resource sector.
Case against:
Majors such as Teck
and Rio Tinto are straddled with debt and depressed commodity prices, this
makes junior buyouts less likely. Financing junior issues will continue to be
difficult, and speculative appetite (i.e. dispensable cash) will not return
to the 2008 level with growing unemployment.
Verdict:
Look for 700 as
bottom and 1,250 as peak for 2009. Bargains abound today so you can be very
selective. Avoid gigantic low grade deposits with big promises and big CapEx.
Buy companies that are debt free, cash-rich with confirmed economic deposits,
and preferably already producing or developing with secured financing.
Global Equities
(using Shanghai Stock Exchange Index as Proxy):
Case for:
The index lost a
stunning 70% in 2008 and currently rests on decade-long support level. China's GDP growth while slowing still projects to be 5-10% for 2009. Asia is minimally
involved in the subprime crisis and Asian consumers have collectively better
balance sheets than American counterparts.
Case against:
Exports to US
account for 10-20% of China's GDP, US slowdown invariably affects the Chinese
economy. Lingering economic concerns and shrinking investment capital means
spring-board style rebound is not likely in 2009.
Verdict:
In Asia, 2009 will
mark a major shift of focus from US exports to developing domestic
consumption. Despite good fundamentals, I am not wildly bullish on Asian
markets just yet. However a decent rebound of 20-25% from currently depressed
level is achievable in 2009.
Conclusion:
Since 2001, we saw
world GDP grow at the fastest pace since WWII, doubling to $55 trillion. Fundamentally,
industrialization of Asia and Middle-east spurred growth and vast commodity
consumption. On the investment side, dollar savers of 20 years came to the
epiphany that dollars are no better than Brazil Real (literally based on
currency performance) and started the massive flight from dollars.
This dollar
diversification coupled with low interest rates further fueled commodity,
real estate, and equity markets world wide. All this is at the expense of the
dollar, which lost some 60% measured by the dollar index. Gold predictably
went up 300% from $250/oz to over $800/oz.
2008 is a hiccup to
the above trend. Housing implosion bankrupted US banks and caused temporary
hard squeeze on the dollar. Helicopter Ben and Mr. Obama have promised to
take whatever fiscal and monetary action necessary to revive the economy. And
those official don't mince with their words as witnessed by the Fed's
purchase of $trillions of bad loans and Obama's massive fiscal stimulus
proposals. All this seals the death fate of the US dollar and will likely
invoke imminent panic from dollar holders.
Growth in Asia and
elsewhere in the world will not stop just because no more dollars are coming
from the US consumers. Pick China as an example; frankly would China worry about not getting more dollars when it already has $1.5 trillion?
Granted the US economy is in emergency distress mode, but can the US population, which account for 5% of the world population, really drag down the rest of
the world for years and years to come? I think not.
In fact, from a long
term worldly perspective, 2008 might be the catalyst that accelerates global
wealth distribution and growth going forward. When will we see good times
again in Shanghai and Buenos Aires? When will happy patrons return to the
empty restaurants and department stores? Processor doubles in speed every 18
months. While growth maybe anemic in 2009, don't count out packed seats in
the Vancouver Winter Olympics in 2010!
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager
at Mau Capital Management. He is a CFA charter holder and has degrees in
Economics and Engineering from Rice University. He previously studied under
Mr. James Turk, a renowned authority on the gold market, and is specialized
in investing in junior gold and resource companies. Mr. Lee's articles are
frequently cited at major resource websites and a esteemed speaker at several
major resource conferences.
Please visit www.GoldMau for
instant market alerts and stock updates.
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