This is my final column for 2008; so, it’s time for the requisite journalistic navel-gazing.
Join me as I dig into a big slice of humble pie with the calls I got right for dessert.
In my first column for the year, published on March 27, I said:
Despite last week’s Fed cut and the subsequent huge rally, I am far from certain that the carnage is over. As I see it, the true valuations of the underlying assets under all this mess are yet to be revealed, and many banks, particularly regional banks with a large book of mortgage-related business, may yet fall. I am not convinced that the Fed has enough ammunition to prevent it, and I wouldn’t call a bottom in the financials just yet.
Even I underestimated how true that statement would prove to be. The financials had only begun to slide. It would be July before the real selloff began, erasing more than half the value of the entire sector by the end of the year. Even so, there were pundits aplenty calling the bottom in March, trusting that the Fed had the tools to stop the bloodshed.
In that column I lambasted the $30 billion of taxpayer money that was extended to JPMorgan Chase to let them take over the assets of the failed Bear Stearns and compared it to the bailout of Chrysler back in 1979.
Little did I suspect that would look paltry compared to the massive socialization of the banking, insurance and real estate sectors that was yet to come, and that continues to this day with the automaker bailout. Bernanke and Paulson have now pulled out all the stops and made it clear that they’re willing to buy any amount of toxic assets from anybody in order to stem the market’s declines.
Now, 2008 will go on record as the year that the US gave up on its free market principles and became a socialist country, and under "conservative" leadership no less. I can’t think of a single prognosticator who saw that one coming.
I was also correct in saying:
Unfortunately, the crisis of confidence in the credit markets has caused a major shakeout in the stock market, and perfectly good energy stocks (including many that I have owned and promoted in these pages) have been whacked hard.
The bottom line is that we’re no longer in a trading environment that makes sense based on fundamentals. We’re now in a world that lives and dies on capital flows, a fairly esoteric world that most investors don’t follow, and one that is heavily influenced by hedge funds and other big money players.
That observation was roundly proven by the end of the year after a massive spike and collapse in commodities, especially oil.
On the other hand, as oil prices shot into the stratosphere in Q2, I was swept up in the commodity frenzy along with everyone else. In late July, about two weeks after oil prices peaked, I asserted that the new floor for oil was $125 a barrel on Yahoo’s Tech Ticker and that the prices were largely driven by fundamentals.
That probably qualifies as my worst call for 2008. I underestimated the influence of speculators in the market, the way that oil prices would respond to a very tight supply situation, and most importantly, the way the ensuing global deleveraging of investments would take the legs out of just about everything in the market.
Even so, I should point out that if oil had stayed above $100 a barrel, the world would still be drilling and investing enough in energy projects to ensure future supply. Instead, the crashing of commodity prices has now guaranteed that we will be facing a serious supply crunch when the global economy recovers, as I have written repeatedly for the last month.
On April 1, I observed that the trendline for oil prices since 2002 pointed to $85-90 for 2008 and ventured that oil would trade in the range of $85-150 for the year. I nearly nailed the high end (oil peaked at $147) and correctly forecasted that gasoline would be in the $4 range by summer.
I did not foresee the massive selloff that would occur in the second half of the year, though, or the depths to which oil prices would sink. Nor did I anticipate the glut of gasoline from foreign refiners that would crush the American independent oil refiners, which I discussed in late April. I did note that "until global demand cools off, there’s no way out of the oil price trap," but there were very few analysts indeed who foresaw such a severe global recession unfolding by the end of the year, or the demand destruction that would attend it.
Back then, there were many who claimed that emerging markets had "decoupled" from the world’s top economies and would remain fairly unscathed by their financial meltdown. (So far, I haven’t seen a single one of them admit their error, though.) I never bought that argument, but there is no question the high gasoline prices were not, in fact, here to stay. I definitely did not expect to be able to fill up my tank for $35 by the end of the year.
Through the months of June and July, all was well for energy and commodity investors as prices skyrocketed to new highs. We were making good money while the rest of the market tanked. My read of the broader markets, especially the financials, was on the mark as well, and those who followed me profited by shorting financials through Q2 and Q3. My biggest concern then was the parade of bad ideas that was trotted out by our esteemed leaders in Washington to address the pain of high gasoline prices.
By mid-August, however, it was clear to me that the markets were behaving irrationally and that there were some big scary things moving under the carpet. I turned bearish, warning about the perils of trading in an "Upside-Down World," a "particularly dangerous market for longs" that had "simply lost its mind." While commodities were looking like good buying opportunities after a sharp selloff, I warned:
Just don’t try to be a hero. Watch the important support levels closely and choose your buy points carefully. Be patient. Accumulate your favorite long positions—and a few shorts for good measure, like SKF and FXP—gradually. And then hold them and hold on.
By mid-September, it was clear to me that "the selling is indiscriminate" and could "go on a whole lot longer than anybody would like." "The better part of valor," I said, "is to keep your head down and your powder dry, and live to fight another day."
That now looks like my best call of the year. Just two weeks later, ironically coincident with the annual US peak oil conference, the market plunged and the S&P 500 proceeded to lose more than a third of its value through the year end.
I got my thanks for that in mid-October, when one regular reader of my column wrote to say that after reading the article "I found one of his analyses of this nation and the world’s economy so foreboding that with the exception of one small IRA, I liquidated all of my stock positions. Do you understand why I’d like to build a shrine to honor the man?"
As sweet as that was, I had another serving of humble pie still to come. I continued to lose money on the short side and the long side for several months more. I learned a valuable lesson then: to take my own advice!
For the remainder of the year, I became increasingly concerned about future supply, as low prices prompted the cancellation and delay of many important energy projects. Those concerns remain; although, it does look like oil may have found a new floor at this point, given the recent price action and the weak response to newly reduced demand projections.
On the whole, I’d say I read the market pretty well this year. I got cautious at the right times and capitalized on the greater part of the commodity spike and the financial downturn. But my firm predictions, like those of just about everyone else, were probably no more accurate than a coin flip.
I don’t berate myself for it though, and if you lost money in the market this year, you shouldn’t berate yourself either. There are plenty of much richer and more experienced people than us who lost just as much, or more. It was just a really, really tough year. I’m sure you all will join me in wishing it good riddance.
In the new year, I plan to start us off on a much better foot. The time is ripe for bargain hunting in the commodity sector once again, gold is making a rebound, and as I have been anticipating, the specter of inflation appears to be rearing its ugly head.
This time, I plan to learn from my errors and get it right. Won’t you join me?
Here’s to a happier, and more profitable, new year!
Until next time,
Chris Nelder
P.S. For some, the bargain hunting for 2009 started a few weeks ago. The problem is that the window of opportunity is closing as the world moves out of 2008’s financial crisis. Then again, many of my readers have already begun to position their investments for that turnaround. If you’re interested in finding those undervalued investment gems, perhaps it’s time you check out the $20 Trillion Report here.
