Four Investing Tips for 2009

It's 2009. For many people this could not come soon enough. While we should take away some lessons from 2008 (Don't miss " How to Evaluate Your Portfolio This Year"), 2009 will bring its own set of twists, turns and challenges. Here are a few things that I will be looking at closely in 2009.

1. Negative Extrapolation: Avoid It!

There is a tendency in bad times to predict that conditions will worsen. On the flipside, when times are good there is a tendency to predict that conditions will get even better.

Last year saw some of the most outrageous calls of negative extrapolation by many analysts, commentators and professional investors (particularly the trend-trading technicians). This has instilled serious fear among investors. However, as bad as things may appear, 2009 may turn out to be a turning point for the economy and the stock market.

Quick review: The Dow Jones Industrials Average closed 2008 down 33.8% -- the worst year for the Dow since 1931.

According to Dow Jones Indexes, the worst performing year for the Dow was 1931, when the index dropped 52.7%. The second worst year was 1907, when it dropped 37.7%. And now, 2008 is the third worst year ever.

Now consider the following.

Excluding 2008, the Dow fell by more than 20% nine times: 1903, 1907, 1917, 1920, 1930, 1931, 1932, 1937 and 1974. Here's how the follow-up years performed: 1904 (+41.72%), 1908 (+46.63%), 1918 (+10.51%), 1921 (+12.72%), 1931 (-52.67%), 1932 (-23.07%), 1933 (+66.69%), 1938 (+28.06%) and 1975 (+38.32%).

At LakeView Asset Management (my firm), I keep S&P 500 data going back to 1950. Before 2008, the worst year for the S&P 500 was 1974, when the index dropped 29.72%. In fact, other than 2008, the S&P 500 fell by 20% or more only twice since 1950: 1974 and 2002. How did the S&P 500 do after '74 and '02? In 1975 the S&P 500 rose 25.77% and in 2003 the index rose 26.38%.

With the exception of 1931 and 1932, the equity markets experience significant increases the year following a 20% or greater decline. So before you believe the negative extrapolation that is being spread, take a look at these historical data points for some quantitative support and ideas.

2. Economic Cycle Investing

In the last quarter of 2008 economists (finally) confirmed that we were in a recession. (On some accounts, this recession may have begun in the fourth quarter of 2007.)

While 2008 was a year in which very few stocks were able to escape the carnage, 2009 will likely be a year in which a new economic cycle will begin to emerge. Thus, we should begin to look for early economic cycle sectors and stocks to begin to invest in. According to Tony Crescenzi, who writes for RealMoney Silver, consumer confidence "fell to its lowest level ever dating back to 1967" and goes on to write that consumer "confidence is likely to follow a pattern that dates back about 40 years, whereby consumer confidence levels increase around the time of a presidential election and into the inauguration period and beyond."

So what are those early cycle stocks? In general these are the stocks and sectors that begin to benefit from a lower interest rate environment and slow economic growth. Thus, we want to focus on the financials, (though we have to be very selective, given the current financial crisis), paper, chemical, transportation and low multiple/lower growth technology stocks.

There are two excellent sources to learn how to invest in economic cycles. The first is chapter 5 ("Spotting Stock Moves Before They Happen") in the book Jim Cramer's Real Money. The second is Fidelity's Webpage on "Business Cycle & Stock Performance."

3. Benefit from the Obama White House

We have had a tremendous amount of monetary stimulus through TARP and other Treasury programs. There are indications that those may be beginning to work. Now President-elect Barack Obama has a fiscal stimulus plan on deck to build infrastructure and create jobs.

There will be a redirection of government spending from military projects to that of infrastructure and healthcare. As a result, expect a decline in government-fueled projects at defense contractors, such as Lockheed Martin ( LMT), Northrop Grumman ( NOV), Raytheon ( RTN) and Boeing ( BA).

Offsetting that will be domestic programs that will be designed to create jobs and rebuild decaying infrastructure. In addition power generation will be another focus for the federal government. Some stocks that could get a boost from such capital spending programs are Aecom Technology ( ACM), Fluor ( FLR), McDermott ( MDR), Foster Wheeler ( FWLT), Manitowoc ( MTW), Shaw Group ( SGR), Jacobs Engineering ( JEC), KBR ( KBR) and Chicago Bridge & Iron ( CBI).

Healthcare providers and biotech pharmaceutical manufacturers will also benefit from Obama's desire to deliver more affordable healthcare to all citizens. The form of this government spending is still unknown. However, we can identify some potential beneficiaries, such as Universal Health Systems ( UHS), Amedisys ( AMED), Amgen ( AMGN), Gilead ( GILD), Celgene ( CELG) and Genzyme ( GENZ).

There are also some interesting exchange-traded funds that might be investment-worthy based on these themes: PowerShares Dynamic Biotech & Genome ( PBE), Biotech HOLDRs ( BBH) and iShares Dow Jones U.S. Healthcare Providers ( IHF).

All that said, be careful. 2009 will be a post-presidential election year, which is historically the worst in the four-year election cycle. Of those bounce-back years I listed earlier, only 1921 and 1933 were post-presidential election years.

4. Will 'Dead'Industries Be Resurrected?

Many industries and sectors were decimated last year -- home builders, automobiles, financials, retail and semiconductors to name a few. I believe we will see signs of life from one or more of these sectors in 2009.

My belief is that the most likely sector candidate for resurrection will be the home builders. Interest rates are at record low levels and inventories are beginning to be whittled down. At the same time, banks and the federal agencies are working with existing homeowners to avoid foreclosure.

Still, it is possible that some home builders will not survive. On the other hand, the strongest will not only survive, but will emerge even stronger. In my opinion, the best managed homebuilder is Toll Brothers ( TOL) and the worst managed is Beazer Home ( BZH).

Your Homework

I believe 2009 will not be an extrapolation of 2008. There will be opportunities to capitalize on a bottoming economy, improving financial industry and government stimulus. Here is some homework to help you seek opportunities in 2009:

  • Select an index which is likely to emerge as a leader after having a significant down year. This could be the Dow, the S&P, technology, small-caps or perhaps a blend of two or more.
  • Indentify "early cycle" stocks and sell "late cycle" stocks, such as defensive and consumer staples.
  • Research ways to benefit from Obama's fiscal stimulus plans.
  • A Bonus

    Check out my tongue-in-cheek " 10 Things That I Will Not Miss About 2008" on my Finance Professor blog. Enjoy it and have a happy, healthy and prosperous New Year.
    At the time of publication, Rothbort was long SSO, DDM, KBR, MTW and PBE, although positions can change at any time.

    Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

    Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

    Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

    For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at Scott appreciates your feedback; click here to send him an email.

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