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Goodbye, 2008… Hello 2009!

January 10, 2009 – 2:08 pm

At a final look at 2008, Fidelity Magellan, the largest and long established bellwhether mutual fund, lost 49% for the year. The CGM Focus Fund which was the best performing mutual fund in 2007 lost 48% in 2008. The average mutual fund loss for last year came in at 39%. There are a couple lessons to be learned. One is don’t blindly buy the largest mutual fund thinking it is safe and secondly don’t chase performance. Last year’s winner does not mean it is going to be this year’s winner.

But we have to look forward. What will 2009 bring us, both in the economy and the stock market? The big economic news this week was the jobs report out this morning which showed a loss of 524,000 jobs with an unemployment rate reaching 7.2% in December. Earlier in the week we had the ISM report, factory orders, construction spending and pending home sales. Most of these reports were for November and across the board they were weak. That was and is expected. It was October when the financial system collapsed and we are going to see several months or more of follow through of weakness before all the efforts to re-inflate the system start to show any result. Expect bad reports for a while.

However, the stock market has already priced in a very weak economy. It has started to rally from its depths and though many do not believe this is a sustainable rally, only a bear market rally that will weaken and roll over, a bottom has been put in. Of course it is a possibility that we could go lower. However, since very dire predictions for the economy have been built into the prices of most stocks it is normal to have at least a strong bounce in stock prices. A return to normalcy would suggest that a rally might last for several months before losing steam and give us some kind of retest of the lows. In October of 2002, in our last recession, the market bottomed and retested that bottom in March 2003. This market will not be the same as this economic slump is much deeper but so was the speed and depth of the market collapse. So the scale is sharply different in the two recessions but the pattern of the stock market lows and recovery so far is very similar.

The question that the experts are all asking themselves is will the Paulson and Bernanke efforts coupled with the Obama stimulus plan work? Will our politicians get it right? I have some serious doubts, but at the same time there is great hope.

I like the infrastructure improvement spending; the U.S. needs that and has needed it for some time. Also, tax breaks for individuals and small business are a good idea. These things will help as will cheaper gas and food prices. But then again- will it be enough?

No one can tell us. There are some hopeful signs that the economy is working its way through the problem; cheaper mortgage rates and interbank lending is starting to improve, but those are baby steps and the new rules the lenders are implementing appear to be very Draconian. Banks at some point are going to have to begin lending. That is the only way they can make money. Right now they are frightened thus they have tightened up standards to such a degree that loans are difficult to come by.

Looking past the current economic recession, inflation will likely return. It is a lot more familiar to deal with than the current deflation we are facing today. Inflation is an old friend, one which we know well, but if inflation gets out of control because of the liquidity we want and need today, then that excess liquidity can destroy the economy a year or two from now. I am referring to all the spending that is going on by our government. Printing money is inflationary and it could be ‘very’ inflationary if the government does not remove the excess liquidity at some point. As in all things it is the timing that is difficult.

Therefore, it is time to be invested not frightened. It will be a bumpy road but as the year unfolds it should be a good one. Keep your stops and be ready to exit at any time but on balance be in the market for 2009.

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