A. Gary Shilling, 01.22.09, 06:00 PM EST
Forbes Magazine dated February 16, 2009
What's in store for 2009? There will be a continuation of the financial crisis, the worst since the Great Depression. Washington will be tied up bailing out banks and underwater home mortgages. Expect meltdowns in securities backed by credit card debt, home equity, student and auto loans as well as commercial real estate.
There is a chance that federal bailouts and President Obama's stimulus maneuvers will be enough to bring an end to the recession by early 2010. Otherwise, it will persist and qualify as a depression. Either way, 2009 will be a dismal year for businesses and most stock investors.
Don't be fooled by bear market rallies. It's way too early to get back into U.S. stocks. S&P 500 earnings will drop to $40 in 2009. Apply a generous bear market multiple of 15 to this and you end up with the S&P at 600. That's 25% below today's price.
Housing prices could fall another 20% before they hit bottom. Consumer discretionary stocks also have further to fall.
Oil may be close to a bottom, but copper still looks ripe for shorting as the worldwide recession deepens. Commercial real estate is just beginning to buckle, so stay away from REITs, which will face cash crunches in 2009.
Avoid emerging markets, especially China. China's fiscal bailout contains lots of smoke and mirrors, and social unrest is mounting. We may be seeing the final days of the Mao dynasty.
I'm bullish on the U.S. dollar, as it's the safe haven in a sea of global turmoil. And I'm not giving up on Treasurys despite the fact that the 30-year plowed through my long-held target yield of 3%. The big rally is over. But with 2% deflation, a 3% yield becomes an attractive 5% real return. So hold on to your Treasury bonds. You can also lock in good yields on top-flight corporates and munis today, but don't be surprised by some ratings downgrades.