2009: A Year In The Desert?
Jan. 31, 2009

I have read that foot travelers in the desert are destined to walk in circles because most of us have one leg slightly longer than the other. And while it may seem you are walking in a straight line, you are actually walking in great circles because the longer leg tends to push you ever so slightly into the opposite direction.

In order to keep from walking in circles we need points of reference or guideposts. If you travel at night you can use the stars to direct you, or the sun in the early morning and early evening. We need a mountain top or some distinguishing part of the landscape to counteract and override our natural walking tendency. The problem right now is there are too many guideposts and they offer conflicting advice.

Here are some examples:

- Mercedes car sales are off 35% but debutante balls in Houston, New York and elsewhere are huge, expensive and well attended affairs.

- American companies laid-off 2.6 million workers in 2008…BUT 45 jobs go unfilled at the Los Angeles Times for reporters who can manipulate digital information. We have a national shortage of nurses and pharmacists.

- Long term fixed rate mortgage interest rates are near an all time low and the affordability index is at an all time high, BUT home buyers find it difficult to get approved.

- Americans are finally saving again BUT there is no incentive to do so, with bank’s paying 2% interest, US treasuries bills paying 0% interest, and the S&P 500 index paying 3.14% dividends.

- America’s corporations have more cash and are in better financial condition than anytime in the last ten years, BUT corporations are declaring bankruptcy in record numbers.

-The number of voters paying no income tax reached an all time high. AND charitable giving also reached an all time high in 2007 of $306 billion. Two million acres of land was added to wilderness roles (cannot be developed or even managed) last year.

-People on the dole reached a 26 year high of 4.6 million, BUT the average Firefighter in Vallejo, California earns $171,000, and a San Francisco county jail nurse earned more than $350,000 in 2007 and will make more in 2008.

There are always plenty of guideposts, but right now there are just too many contradicting one another. Add to this confusion the extreme volatility in commodities, financial assets, currencies and full time employment.

- Lumber hit a twenty three year low at $139 per thousand board feet. Lumber mills are closing.

- Oil is $37 a barrel, down 70% from its high last July of $147 a barrel

- Aluminum price declined 70% from its high last summer

- Loan issuance plunged 55% in 2008 from $1.69 trillion in 2007 to $764 billion in 2008, the lowest since 1994.

- US stock market declined 38% last year, the worst since 1931.

- Underemployment is approaching 14%

- US Dollar against the Euro started and ended the year at about 1.4, after it zoomed higher by 23% in the third quarter only to plunge by nearly 20% in the fourth quarter.

This extreme volatility, both up and down and up and down again, is making it very difficult to plan. Lack of visibility and the lack of predictability make it too difficult and risky for businesses to commit to new projects, and for individuals to commit to new investments. Risk-taking is discouraged.

And we have been treated to a non-stop litany of bad news for the last six months from the media. There is good news, but it is not being reported. Good news does not sell newspapers or increase viewership.

While it is too soon to be certain, it looks to me like we have seen the peak in fear and we are at or close to the bottom in the stock and bond markets. That does not mean a recovery.

The panic we saw during the 4th quarter was something to behold. It drove all treasury investments, (supposedly risk-free) to historic lows. The 3 month T-bill went slightly negative, which means you pay the US government to invest in its bonds, and the 10 year Treasury note reached 2.0%.

92% of all US stocks declined in price during the quarter. High yield bonds hit a historic high against Treasuries of 22% over the 10 year Treasury note. There was no place to hide.

So, where are we? Are we walking in giant circles with the illusion we are getting somewhere? It is extremely hard to read the guideposts right now and chart out a safe path. It is impossible to make useful long term business plans with the lack of visibility and predictability in the price and availability of resources.

What to do?

Wait. Don’t wander. Wait for the guideposts to get clearer. Wait for visibility.

If you are already invested in safe, high yielding assets, stay there.
If you are in cash, don’t be in any hurry to leave. There will be plenty of opportunities. If you are not saving, start.

I believe this turmoil and uncertainty is a long term positive for our economy. We have misallocated resources for 20 years now. And we must suffer loss before the reallocation of resources to more productive uses can begin.

Live long and prosper,

Mike Williams, CFA

(back to commentary)