Wednesday, January 7, 2009

2008 Economic & Political Summary & Review

2008 Year End Metrics:

DJIA -33.8 %
S&P500 -38.5 %
Oil -54.0 %
Gold + 6.0 %
US$ + 8.0 %

(returns from the year-end edition of the WSJ)

What a year. The numbers above tell the story in black and white. There was no place to hide but US Treasuries. As far as my advice from the beginning of the year, I was spot-on about oil for the first 6 months, but had no idea a financial crisis was in the works which would cut the legs out from under oil demand such that oil would fall as far and as fast as it has. As such, energy and energy services investments, my favorite pick at the beginning of the year, enjoyed a wonderful first 6 months and then just got hammered as a result of the financial crisis and subsequent drop in oil demand. Hopefully, anyone listening to me didn't have to raise cash and sell these investments (except for perhaps tax reasons), as I still believe the long-term prospects for energy related investments are bright. Despite $145/barrel oil, supply never got much above 86 million BPD. Production at the top 3 oil majors (XOM, CVX, COP) was down year over year. The precipitous drop in oil prices have already led to a big decline in oil investments going forward. This will lead to an even large price spike the next time (assuming the world economy survives the current crisis). See my Seeking Alpha articles for more on this sector. I have shown a 2008 oil price chart below.

2008 Oil Prices

The other big story of the year was the financial turmoil caused by (imho) years of unregulated financial markets combined with low interest rates and fraudulent lending practices. As a result we saw a plethora of US finanical and insurance related businesses bite the dust: Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, AIG, Washington Mutual, the list goes on and on. Tax payer bailouts were used to fund government takeovers of the financial and insurance industries. The US government now controls or has major stakes in companies controlling 80% of the US credit card market. All this happened under the so-called "conservative republican" president Bush. The country moves closer to fascism at a rapid pace. Now that our civil liberties are gone (wire tapping, "patriot act", detaining without the right to a lawyer, torture, etc. etc.), the government is now hard at work on two fronts: stealing tax payer money, and contolling citizens' finances. Look for more abuse and fraud at this level. At the same time $700 billion was handed over to Paulsen with little to no restrictions on where the money would go (you guessed right - it went to the salaries and bonuses of the Wall Streeters and bankers that caused the crisis to begin with), the comparatively small amount to bailout the US "little three" automotive companies caused a firestorm. I suppose in addition to sending $700 billion dollars a year out of the country for foreign oil we'd be better off having to buy our electric and hybrid vehicles from asia as well. Sure, Toyotas and other foreign auto manf. have plants in the US, but we'll still be trading in our addiction to foreign oil for an addiction on foreign batteries...and those will be made in asia if the US doesn't wake up.

My suggestion to remain out of the S&P500 was a good one, as that index is still under water for the last 10 years, badly so after inflation and the fall in the US dollar are taken into consideration. The future for the broadest measure of US economic performance, the S&P500, continue to look terrible in my opinion. If not for the inclusion of energy companies like XOM, CVX, and COP the S&P500 index over the past decade would look simply abysmal. Stay out of it.

I was right wrt gold. It was one of the few investments to remain in the black for the year. I continue to favor gold for US investors. That said, my advice to put some money in Vanguard Precious Metals, which looked like a genius call until mid-year, turned out to be a disaster as the deleveraging we saw in the 2nd half of the year just crucified this fund. Wish I had had kept my VGPMX money in gold coins instead. Gold hit $1000 during the year, but backed off as it was sold to delever and position for the deflationary period people expect as the economy contracts big-time. Same with another gold pick I made: Fidelity Select Gold, which got clobbered, but has been coming back as of late. That said, continuing financial instability, and the opinions of many that the US dollar is a fiat currency (which I subscribe to), has kept the price of gold falling significantly. A 2008 chart of gold is shown below:

2008 Gold Prices

The US dollar made a fool out of me as did US Treasuries. I still cannot understand their strength. The financial mismanagement of the country has all but guaranteed long-term bankruptcy for the country. Current low yields on US Treasuries tell me to stay away as they have no where to go but up. You want safety? Buy gold coins and take possession of them. If you have to buy US debt securities for safety and diversification, buy I-bonds. The ones I bought back in 2002 are yielding 5-6%, tax free (until i sell em). In today's market, those safe returns are a blessing. Even today, I-bonds should be considered. Yes, the fixed yield portion of the I-Bond is down to 0.70% for the current period. But, when oil comes back, and it will, inflation will rear it's ugly head, the economy and the markets will take another tumble, and these bonds will start yielding. So, why buy a standard US Treasury that yields close to 0% when you can buy an I-bond? US dollar index is shown below.

2008 Chart of US $ Index

The zero coupon bond fund (BTTRX), my main suggested hedge against deflation, did very well after the leverage unwinding and flight to "quality". It gained nearly 40% toward the end of the year, but I sold it this week after it went down 7% in 2 days as people finally realized long-term treasury yields have no where to go but up (and the price down). The 2008 chart for BTTRX is shown below:

2008 Chart of American Century BTTRX Fund

Some of my picks and their 2008 performance:

XOM: -14.8 %
CVX: -20.7 %
COP: -41.3 %
BP: -36.1 %

Returns above do not include dividends. Not too awful considering the S&P returns.

As expected, XOM faired the best during the financial turmoil. However, at one point in the crisis even XOM traded down to $56/share(!) at the height of fear. XOM continues to benefit from its pristine balance sheet and operational efficiencies. Chevron performed admirably, but BP got hammered over the failed Russian venture, and COP (my #1 big oil pick) got penalized for making more big investments at the top of the oil price peak (middle east ventures and the big australian nat gas purchase). That said, COP is currently trading at valuations where the dividend yield is roughly equal to the trailing PE ration (4). This stock is a steal at current prices.

Looking ahead in 2009, I continue to see very hard times for the US economy. Unemployment will pick up, profitability for the S&P50 will continue to sink, and I just cannot understand why the US dollar has not tanked with Paulsen and Greenspan printing money as fast as they can and giving it to the same old inner circle of thieves.

The big picture is this: as long as the US government continue to attempt fixing what is structural commodity problem (our addiction to foreign oil) with monetary and fiscal policies, the outlook is bleak. After 8 years of military imperialism to gain access to Middle Eastern and Caspian Sea oil (see my latest Seeking Alpha post), we are bankrupt, with nothing to show for the money spent. No trans-Canadian pipeline to bring Alaskan nat gas to the lower-48. No natural gas refueling stations on our interstate highway system. No social security funding. No health care funding. The Bush administration doubled the entire US debt in 8 years and we have nothing to show for it. NADA.

The only structural fix for the US economy is adoption of a strategic long-term comprehensive energy policy (see my policy by clicking on the link in the upper right hand corner of this blog) combined with excellent execution and financial discipline.

Despite current low oil prices, we *still* are importing 70% of the oil we use.
If the US does NOT adopt a comprehensive energy policy, the debt will continue to balloon, the currency will (at some point) sink like a rock, the S&P500 and equity markets will continue to suffer, and US savors and investors will lose their wealth and watch their standard of living erode.

The big oil interest in Washington, DC...while hating Muslims and Arabs in one breath, continue to spout out energy policies which do nothing but transfer American wealth into the pockets of these same people, terrorists, and countries such as Russia, Iran, Iraq, Saudi, and Venezuela. How ironic that the big tough pro-oil guys are simply enriching the people they hate so much. How typically "American". At times, I am ashamed to be one myself.

For the year ahead, I continue to advise US investors to:

1) stay out of the S&P500 and all broad market averages.
2) buy XOM, CVX, COP, and BP
3) buy I-bonds instead of US Treasuries
4) buy (but not all at once) and take possession of gold coins

I sure don't envy Obama. That said, we have a chance for quite possibly the worst president in US history to be followed by one of the best. That said, I am not impressed with Obama's rhetoric wrt windfall profits taxes on US oil companies. I am not impressed with his stimulus policy which appears to be lacking in the natural gas transportation infrastructure that we so badly need to build. I am also extremely dissapointed in his pick to head the SEC. Michael Milken, Madoff, the principals of Long Term Capital Management. For Obama to appoint Ms. Shapiro to lead the SEC, a woman who once hired a Madoff family member, is not a good sign at all, imho. What we needed was someone *outside* the SEC with a background at the FBI or CIA. The SEC hasn't caught one significant fraudulent operation since it began. It's a bit like the fox watching the chicken coup - at US taxpayer expense. Disgusting.

Anyhow, I hate to end on a down note, but at this point I am tired of typing. All the best for you and yours in 2009. I sincerely hope it will be better for all of us than 2008. At least George Bush will be out of the White House. Not that is ending on an up note!!


sv koho said...

Interesting wrap up of the years festivities Fitz. I for one fail to see the relevance of Jews in finance or malfeasance. The banking, insurance and certain corporations are still calling the shots and receiving their bailouts despite the almost universal objection of most of the untutored American public. We may be stupid but we're not that stupid and the sad part is that it has made not a whit of difference. The presses are running, the dollars are flowing to thieves,and criminal incompetents. Paulson and Bernanke have promised $8.5 Trillion which exceeds our entire M2 money supply. The bankers and wall street crfiminals are getting away with it because they control the government and the congress and the courts and the media. Until some heads start appearing either figuratively or actually on pikes. this tsunami of bailout money will continue inexorably forward to a total collapse of the currency. Obama is an intelligent replacement for an inarticulate imbecile but IMHO the play is the same, only the actors are different.

Anonymous said...

Fitzman - where have u been? All the stuff happening and u r writing about Georgia Tech football? Come on. Nice wrap up though . . . not sure I agree with you on oil, but not sure I disagree either. n-e-i. Yhe previous commenter (sv koho) doesn't see the relevance of your comment on Jews in finance and malfeasance. Yet he says the "banking, insurance, and certain corporations are calling the shots"...I wonder if he/she has ever looked at the CEOs and who is running these companies? I don't regard your comment as placing you in the category of an anti-semite. Is it anti-muslim to take extra precautions at airport security when a young arab man with a Saudi Arabian passport comes through the line? NO! it's *smart*. Same with your Jewish observation. So, i agree, putting Shapiro in as the SEC watchdog is like the wolf guarding the chicken-coop.

Anonymous said...


I pretty much agree with all you've said, except with the part about Shapiro hiring a member of the Madoff family. He met the Madofs/his future wife while on the job, meaning he was hired BEFORE there was any connection. Given the media coverage of this connection, and its background/history, its a bit disappointing you missed it.

old trader