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Wednesday, December 24, 2008

Merry Christmas, Happy New Year, and Some thoughts for 2009

As we approach the end of this year, it's this time of the year when we review and reflect how the current year has been, and our plans for the next year.

There is no doubt that 2008 has been quite possible, once-in-a-generation experience. I have never seen, in my adult life, how financial markets around the world has collapsed to the extent that it has. Dow Jones above 14k, and crashing to a low of 7.5k. Our KLCI shooting past 1,500, only to crash to 800 in the same year! Baltic Dry Index peak of over 11,000, now languishing at 800! Crude oil price running up to US$147 per barrel, only to come crashing down to below US$40, and still doesn't appear to have found bottom yet (at the time of writing). Commodities everywhere literally crashed. Financial institutions like AIG with AAA rating by various rating agencies, crashing down and losing 98%-99% shareholder value. Major institutions collapsing, gone bankrupt and blood literally everywhere. I am not sure - once this is over - that we will witness similar events to the same extent again in our own generation - these bubbles and busts that we've seen this year. Perhaps, it needs another generation to not learn the lessons of the past, so that mistakes this scale have a chance of being repeated ... call me pessimist, but based on history, we don't seem to learn the lessons of history e.g. after 2-3 generations ...

On the local political front, this year, we witnessed a most unexpected and a most amazing result this March, with BN losing an unexpected 5 states and Pakatan nearly coming into power. Sadly, things continue to deteriorate since then. Malaysia became an underweight country for foreign investors from the political uncertainty, and whilst things appear to have somewhat settled, many remain pessimistic that our country can be turned around from what appears to be heading towards the abyss. Our RM continue to deteriorate towards the end of this year, and foreign investors doesn't appear to be rushing into Malaysia to invest in our country again. Many is of the view that even when the global economy recovers, Malaysia will continue to lag and remain under-weight for some time, simply because our policies does not appear to be consistent, and investment friendly ... the Badawi administration likes to flip flop too much, and foreign investors simply hate flip flop behaviour to want to come in and invest in this country long term.

Personally for me, this year is definitely NOT a good year at all compared to prior years. I'm sure it would be the same for all of you with real trading accounts. If your trading account showed an even better result in 2008 vs 2007, then, you are an extremely rare individual, and I hope I have the chance to meet you in real life :-) Notwitstanding the absolute result, I most definitely feel that my trading has improved personally this year, than last year, but like all years, I still feel that I can continue to improve.

What are my thoughts for 2009? There are many, and predictions for 2009 always make one look stupid in hindsight, but it's an exercise worth doing every year simply because it forces one to look forward and learn ... So, at the risk of appearing stupid, the following are my own views:

1. US stock markets ... I am not expecting the same level of volatility in 2009, than what we've seen in 2008. Being an optimist, I think there's a 55% chance that we've seen "the bottom" in the Dow Jones. (It also means there is a 45% chance we might not, so, I'm not very confident here). I think we'll see 2009 being a consolidation year for US. There's no doubt that their problems are real, their economy will continue to register bad results everywhere, whether GDP growth, unemployment, prices, general economic activity, etc. but much of these were priced in when the Dow was 7.5k.

2. Baltic Dry Index ... I really cannot imagine the BDI staying below 1,000 for the entire 2009 year ... if it does, a lot more shipping companies are going to go bankrupt, and that itself will put some upwards pressure on shipping rates. So, I envisage the BDI to break above 1,000 in 2009, and perhaps heads towards 2,000 level sometime in 2009. It may not happen soon, but the odds of this happening is greater than 50/50 in my opinion.

3. Crude Oil price ... it is currently trading below US$40 at the time of writing, but I expect this to rebound in 2009. On a macro scale, inventories are at its highest today and there's fear it could stay that way for some time, and it probably would in the short term, but by the end of 2009, we should see significantly higher crude oil prices than US$40. Those with 12 months horizon will do well.

4. Global economic activity ... this is the key driver to asset prices everywhere, but China and India still needs to grow. Yes, there's a dampener, but I see these as short term effects. When things settle down as they appear now, I expect natural demand to reappear again, to stimulate the growth engine ... then, we'll see more manufacturing activities, more shipping trades, more lending by financial institutions, greater demand for energy sources and raw materials like crude oil, etc. which explains why I expect to see higher BDI and higher crude oil prices towards the end of 2009 ...

5. US Treasury ... worth mentioning that this is probably one of the last bubbles in financial markets that I'm aware of at the time of writing ... as you know, the Fed Funds rate has been brought down to 0%-0.25%, and bond prices has never been higher before in the US. The longer dated bonds are still yielding between 2%-3%, and I expect these to perhaps come down more in the first half of 2009. Expect to see the bubble bursting towards the 2nd half or the end of 2009 say, when US economic activities start to pick up again and perhaps inflation ... at the moment, it's still definitely deflation concerns.

6. USD/JPY ... this is prompted by Dali's writings on spotting market bottoms when risk aversion reduces. Over the next few years, I'm generally bearish on the USD for obvious reasons, but timing these are difficult. But when the USD starts to drop, we should see some of these funds moving to other countries such as Euro (traditionally, seen to be inverse to the USD) and AUD (being a resource rich country), not to mention other "riskier" countries. I expect to see the USD peaking in 2009, i.e. I think we may see lower average USD value in 2010 than in 2009 ...

7. Our local stock market will probably mirror US stock markets and perhaps lag a few months ... by that I mean it of course "tracks" it on a weekly basis, although with much lower volatility, but it needs at least a few months before foreign investors feel confident to return to Malaysia after global risk aversion reduces ... right now, we haven't yet seen that happening in a substantial way. So, consistent with my 1. above, I'm not expecting a rapid recovery to our local stock market in 2009 in a major way ... "ezi" mentions that 1,000 is a major resistance, and I tend to agree with him ... for this to happen, we need to see BDI rising to say 2,000 level, crude oil rising to above US$50-US$60, Fed Funds rate rise above present 0-0.25%, US$ falling, etc. etc. etc.

Anyway, it's been fun writing this article, and making all sorts of predictions about the future. But as usual, take EVERY predictions with a huge grain of salt. No one has a crystal ball that guarantees the future. And I certainly don't trade significantly based on my general and long term predictions like the above. Treat it as fun.

With that, I would like to take this opportunity to wish you and your family a Merry Christmas, and a Happy New Year for 2009!

And may 2009 be an EVEN BETTER year yet to you and your family!

Cheers!

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