So far, the 2009 forecasts that I have read have one dominant theme: timing of the new bull market. A few of the well-known "seers" have already decla...
So far,
the 2009 forecasts that I have read have one dominant theme: timing of the new bull market. A few of the well-known "seers" have already declared either the October 2008 lows or the November 2008 lows as the start of a new bull market.
As bold as this may sound at a time of deepening economic contraction, many conventional fundamental and technical forecasting models also point to such a bullish scenario. Regrettably, this economic contraction, triggered by the unprecedented global meltdown in the credit markets, has been anything but conventional by the norms of the last 50-60 years.
I believe that the frequently maligned market comment, "It is different this time," applies to this market and the economy. Witnessing the frantic efforts of the Fed, including some never before taken actions, to resuscitate the credit market and the economy is the clearest confirmation that it is indeed different this time!
Over the last 12 months, the U.S. government allocated approximately $7.2 trillion to various bailout packages and programs. As of early December 2008, $2.6 trillion has been already spent. The largest sums already spent went to Term Auction Facility ($1.6 trillion), Commercial Paper Funding ($304 billion), Troubled Asset Relief Program ($205 billion), Economic Stimulus Act ($168 billion) and the AIG bailout ($117 billion).
Yet the resulting impact of spending the first $2.7 trillion and the reduction of the federal fund rate to 0 - .25%, has been rather limited. The most notable and controversial achievement has been an explosive rally of bubble-like proportions in U.S. treasuries of all maturities. The rising treasuries have resulted in a decline in the yield on 90-Day bills to the ultimate low of 0%, and longer-term treasuries to their lowest levels in more than half a century.
The Fed is well aware that historically low yields on treasuries do not benefit business or help individual borrowers. With shell-shocked banks reluctant to lend, these borrowers are now targeted with billions in bailout money. Back in November 2008, I commented on the historically wide spread between the yields of 10-Year treasuries and BAA rated corporate bonds. The treasury yield of 3.97% and the yield on BAA resulted in a spread of -5.52%. By the end of last week, the decline in their yields to 2.14% and 8.12%, respectively, actually increased the spread to 5.98%.
I suspect that it will take all of the already allocated $7.2 trillion, and then some, to halt the slide in the U.S. and global economies. If Japan's experience since the early 1990s is a precedent, the recovery will take an "L shape" rather than the more usual "V-shape." Similarly, the equity markets will probably be stuck within a wide trading range. In such markets, trading rather than the buy and hold approach is likely to be a more effective strategy.
While we are closer to the eventual bear market bottom than to the previous bull market top, I would be surprised if the market does not make a major 2009 trading bottom 5.0% to 10% below the November 2008 lows.
