POOR RICHARD’S REPORT
Over 300,000 readers
2009 Forecasts (Stocks, Bonds etc…)
The word “billions” is being bandied around every day now. I would like to put this number in perspective before I start my market letter.
A billion seconds equals 32 years. A billion seconds ago puts us back to December 1977. A billion minutes ago Jesus walked upon this earth. A billion hours ago was the Stone Age and a billion days ago the earth was being formed. Now here is the scary part: our government spends a billion dollars in a little over 8 hours.
My point is that it is going to take a long time to pay down our debt. The consumer is tapped out and they can no longer use their home as an ATM machine. Bankers are worried about their jobs so they are not lending, despite what Chairman Bernanke is doing.
I have written in previous letters that we are fighting DEFLATION. Now the Federal Reserve has confirmed it. The best way to combat deflation is to spend huge amounts on many projects. I know that in Hartford, CT much of the inner city’s sewers are brick lined causing cellars to flood after many heavy rains. The problem with this spending is that only 6 cents for every dollar appropriated by the US Government gets to the public within the first year. If the St. Lawrence Seaway was proposed today it would take over 50 years just to get started after all the feasibility studies and lawsuits were settled.
Now that home prices are finding their proper level, homeowners are paying down debt to protect their family homestead. Any more rebates will be used to pay down various debts. Dr. Bernanke has achieved a remarkable feat. The Federal Reserve has been trying to do this for over 35 years.
Government bond are yielding what they should. They are perhaps too low, but they are now reflecting their proper market place. Government bonds are considered risk-less compared to other debt. The reason is simple, they are backed by the US Government and the government is backed by you and me. That’s right. That means us.
US Treasury bills will trade in the area of .5% to 0%. This depends on the perceived severity of our world problems. They will be used as a flight to safety. The long bond, the 30 year Treasury, is now yielding a 2.54% return. As positive events unfold, the maximum yield for the foreseeable future should be at the 3.5% area.
The low yields will allow the government, states, and businesses to make long term commitments for basic projects and manufacturing plants. Don’t forget the oil industry either. This is a long term positive.
I expect the economy to take a deep dive in the first quarter, but because of our easy money policy, it may level out and gradually improve. It will be a decade before investors will forget about what is happening now. In the meantime, unheard of values will be sprouting like tulips in the springtime. Stocks will not recover as quickly though. The playing field must be leveled. A trader should be 100% cash. Long-term investors can cherry pick in there, because like some preferred stocks, the yields can be very enticing. Remember the rule of “72”. Banks operate under this rule also. Take 72 and multiply it by whatever interest rate you are paying and the answer is how many years it will take you to break even on your money. A 10% rate will take 7.2 years. The average mutual fund is down 44% this year and that does not include the “management fees”. That means it has to move 81% before you can break even. A small (8%) loss can be made up easily. It will take less than a 10% upward move.
All debt will (and should) be priced off the comparable US Treasury bond. The higher quality will, and should, have a lower yield than that of speculative debt instruments. Preferred stocks will have a higher yield and common stocks will yield greater because they are riskier than others.
My favorite investment now is AMERCO Preferred A. They own U-Haul and it is listed on the NYSE under the symbol AO PRA. The price at the time of this writing is $18.50 and the dividend is $2.125 and the yield works out to 11%. It can be called away from you at $25.00. If the stock is called away from you your gain will be approximately 30%. This combined with the 11% return cannot be beaten by a common stock in today’s environment. There are still too many investors who expect to invest by yesterday’s rules. They expect to recapture yesterday’s losses by brilliant maneuvers today. Thus, the stock market has not taken its toll yet. The second half of the down leg could be worse for aggressive traders, but values are there for the long term conservative investor with cash.
The US Congress is going to go after the credit card companies by 2010, which will be two years too late. When inflation was first starting and government bond rates were soaring, investors could borrow at the maximum rate of 8% because we had usury laws. Back then they would turn around and buy a government bond yielding 10% and upwards. This was called disintermediation! We are now suffering under reverse disintermediation. It has to be stopped now. They should reinstate the USURY Law today. It used to be referred to as sinful. It is a simple case of money matters versus ethics. You decide.
The weak dollar helps our balance of payments in the short run and is also positive for precious metals.
The new SEC Chairman is Mary Shapiro, and there is much talk about her. I want to know what she stands for. I pray that she will bring back the uptick rule. If that was her first ruling the market would soar for weeks as the shorts sellers ran for cover. I believe she could be positive for the market.
Deutsche Bank has decided not to redeem its hybrid-capital bonds in January. Other banks might follow with their own bonds. Then again, the Fed might buy them. There is only one debt instrument whose terms are set in stone – US Government bonds.
The price of oil will stay down for sometime because certain oil countries got too greedy – just like the consumer- and now need every penny they can get. So OPEC can make lofty statements about the price of oil, but certain members and non-members are cheating to “beat the band”. Cartels never last. This could be the year they bust.
Money market funds will soon disappear in favor of Savings Banks provided they adopt some of the favorable aspects of the funds. No waiting period comes to mind.
Sub-prime crisis will be fading into the woodwork and it is more than likely that Adjustable rate mortgages will be adjusted downward. The real subprime disaster can be avoided if the banks which did it -eat it. Enough said.
THE BIG UNFORESEEN FOR 2009 WILL BE PAKISTAN.
Pakistan is a democracy that cannot work because half of the population is in mountainous areas whose tribes belong to ethnic groups in bordering countries. They have Afghanistan to the north and Al-Qaeda seeking safety in their territory. It is like a giant Capture the Flag game. Then, tucked in the southeast corner they have Kashmir, which is seeking trouble between India. They both have Atomic bombs, but India’s work better. It is a rock and lots of hard places. President Bush had Iraq and President Obama might have Pakistan. We can not win a defensive war in Afghanistan. General Petraeus has a real challenge.
In a crisis there are also opportunities. The free market system has been hit below the belt, but will recover because we are free people. When we make investments we know there are risks, and we can lose. This year we have lost. The government must set up new rules and umpires to toss out the cheaters. There are banks that grew too fast by acquisition so that they could be “too big to fail.” Well, they will fail sooner or later because the public knows or will find out and stop doing business with them. They will go where they are treated fairly and politicians who have treated us fairly will be returned to office.
The Congress must separate brokerage and banking, but allow banks to form syndicates that can compete along with brokerage syndicates. We must not deny a revenue stream to one while favoring the other.
Executive salaries should be based upon earnings. Year over year gains in earnings should be comparable salary. Declining earnings means a loss in wages. Credit should be given to shareholder dividends versus outrageous bonuses. It should not be how much money you make, but how good you are.
There should be a global regulation body that would support the general market place with ethics and a passion to make money honestly. Members would be able to trade among them selves, but countries that break rules to suit their own purpose, like Russia, should be sequestered. It should be a private club. Membership based upon integrity and honor.
Now the real scoop on our next President: on January 21, 2009, please attain a copy of his inaugural address. Then underline every theme and idea he presents. This is his utopian moment and he wants the whole world to know what he stands for. The problem is that many will not listen.
When events happen and the press wonders what he will do; just go back and reread his address. There you will find the answer. This has worked for every President that I have studied since JFK.
Cheerio!!!
Richard C De Graff
256 Ashford Road
Eastford Ct 06242
860-522-7171 Main Office
800-821-6665 Watts
860-315-7413 Home/Office
rdegraff@coburnfinancial.com
This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.
