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2009 Year in Review: The Second Chance Saloon

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Taking stock of what was, what is, and what will be.

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The question becomes one of logistic feasibility. If foreign nations could replace the U.S. dollar as the global measuring stick without pulling themselves into an abyss, they would have done so long ago. That is easier said than done in an interwoven derivative-laced finance-based machination but it remains a viable future scenario.

Motion and Movement

January Thought
: When asked about my year-end price target on the S&P, my answer is constant. Tell me what the dollar will do and I'll offer an educated guess on stocks. Indeed, since the beginning of 2002, our financial machination has operated through the lens of "dollar devaluation vs. asset class deflation."

My sense for 2009 is that-all else being equal-we'll see wild movements and a wide range, perhaps with S&P 600 as a nadir and one (if not two) 20% bear market rallies filled with false hope and empty promises.

Update: The fall from grace at the beginning of the year knocked the tape from above S&P 900 to a heretofore nadir of S&P 666 (a 26% decline). The attendant rebound-which seemed inconceivable to many as we dangled in the abyss-tacked on close to 40%.

While one could argue we've seen two 20% rallies (stacked atop each other), it remains my view that we're traversing through a "W" and S&P 956 may well serve as the widow's peak of that pattern (given the perceived window of upside opportunity has passed).

Pension Panic and Puny Munis

January Thought
: The unfortunate aspect of our current conundrum is that in many ways, the cancer is bigger than the patient. It is analogous to a financial dike springing holes faster than the government can invent fingers.

Unfunded pension plans and bankrupt municipalities should jockey for mindshare in 2009 as the financial crisis evolves. The government will fight fire with fire - perhaps allowing citizens to withdraw from their retirement accounts without tax penalties - but that solution is transient at best.

As Bennet Sedacca recently wrote on Minyanville, "Municipals have no liquidity, no natural buyers, virtually no research and awful fundamentals. Unlike mortgages and other items you can trade electronically, it would be much harder for Uncle Sam to manipulate municipals, with the notable exception of state general obligations. I would not be surprised to see massive failures in this space."

Update: To quote our own Minyan Peter from his excellent missive last week (with the understanding that California isn't alone in this predicament):

"Today officially begins the third derivative: municipal finance. This is where our delusional desire for low taxes and extensive public services collides with an irreconcilable maelstrom of high unemployment, lower housing values, and truly unaffordable retiree commitments.

I don't profess to know how this one will resolve itself. As an interim step, California has announced that it will be meeting its obligations using script–IOUs. I don't know how long employees and vendors are willing to work for nothing more than a promise. But I do know that it's entirely unsustainable.

But I can't emphasize how important it will be to watch this one. To date, as bank executives and auto industry leaders have thrown up their hands, the federal government has stepped in to fill the void – albeit with unintended consequences.

How willing Congress and the White House will be to save California is unknown, but I don't think it's an exaggeration to say that "As goes California, so goes the nation."

And, not surprisingly, with unintended consequences.

Indeed, if I were to finger the leading potential downside catalyst for the second half of the year, it would be this particular theme.

The Employment Conundrum

January Thought
: Acute market watchers have long derided the Bureau of Labor Statistics for producing economic figures that aren't representative of true market conditions. Indeed, if we calculate unemployment to include discouraged workers, as it was measured prior to the Clinton administration, current readings would be closer to 15%.

While it's no stretch to assume a further uptick in unemployment-remember, it was 25% during The Great Depression-the ironic twist is that those with jobs will also feel the pinch.

Expect relative pay cuts, rather than salary bumps, to be a central theme this year despite folks working twice as hard to absorb the productivity chasm.

Update: While the unemployment rate is at the highest level since 1983 (and continuing higher), the numbers only tell part of the story as overcapacity in the labor markets manifests.

Salary cuts have gone global, from BT Group PLC (BT) recent offer for employees to take time off in return for salary reductions to workers at Dutch postal company TNT VN (TNT.AE) choosing pay cuts for a job guarantee. Meanwhile, closer to home, industries of all shapes and sizes are lowering their salary benchmarks in an effort to trim expenses in the face of slowing demand.

Industrial Revolution

January Thought
: The financial crisis of 2008 was akin to a forest fire; scary and dangerous but a necessary evil that will ultimately allow for fertile rebirthing and greener pastures.

The entire spectrum of industries-from finance to media to retail to philanthropy to academia-will be forced to reinvent themselves as the new world order emerges. This isn't necessarily a bad thing, as a phoenix will rise from the scorched earth in each of these sectors. The leaders coming out of a crisis are never the same as the leaders that enter it.

Update: I view The Great Depression as a framework for optimism. Disney (DIS), Texas Instruments (TXN), Continental Airlines (CAL), Hewlett-Packard (HPQ) and The Washington Post (WPO) are proof positive that the greatest opportunities are bred from the most profound obstacles.
No positions in stocks mentioned.
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