Rudi On Thursday

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On the door that leads to my office hangs a sign I crafted myself, it reads:

“Beware, all ye ready to enter, for inside this room anything is possible.”

Not really, but it’s an old idea of mine. Maybe one day I will put it into practice. I thought it was apt to start my first editorial of the year with this idea. Apart from reminding myself I have to continue entering my office with a blank mindset -and keep my analytical mind open to everything that lies ahead of us- I am currently of the view that anything can and will happen in the course of 2009.

One of the market watchers I read early in the year predicted that investors will be better off taking guidance from the upcoming Chinese New Year which will be the Year of the Ox. As such, investors should shy away from too risky, not well-thought of or even impulsive decisions this year and rely on patience, extensive research and an eye for credit more than anything else.

(That’s another way of stating we are above anything still in the next chapter of a drawn-out bear market. Investors better not get carried away by the early positive signs into the new year, unless they want to risk significant disappointment, and corresponding financial losses).

To stay with the Chinese theme: it has oft been mentioned the Chinese explain the meaning of crisis by combining the words for “danger” and “opportunity” (presented as a fact in many speeches and movies, but demoted as an urban myth by various linguistic experts). Even though this may not necessarily be correct, I think it still best describes the path forward for investors in 2009.

At the start of last calendar year, I advocated prudence, this year I think investors should be out there, circling around and participating in the markets.

While doing so they should keep in mind it’s still a thin line between “dangers” and “opportunities” – as shown by Leighton Holding’s ((LEI)) profit warning this week and the subsequent de-rating of the stock by major stockbrokerages.

As such, the overall environment should be much better than in 2008 when at times it seemed no decision whatsoever could yield any measurable, tangible financial benefits, while no asset was able to escape either the Global Financial Crisis, the loss of risk appetite, or the global economic down turn.

A lot has been said about The Rally in 2009. The new year had only just begun and I already spotted the first expert emails in my inbox predicting The Rally would likely take off in January. If anything, my conviction has only grown throughout the Christmas Break that this year will not bring just one rally, it will provide investors with multiple rallies. And each of them will combine those two opposing characteristics: “danger” and “opportunities”.

During my analyses last year, I concluded the two most important forces during a bear market are “disappointment” and “hope”. I still believe these two factors are governing global financial markets and they might well do so until we write 2010. Taken from this perspective, investors have elected to commence the new year on a new elan – this is the first phase of “hope” this year.

How long and how far it will carry, nobody knows, because we don’t know what might trigger the next “disappointment”. But with the challenges ahead as we know them -global economies entering recession, global property markets correcting, consumers in developed countries under stress, businesses hibernating into conservation mode (if not survival)- there will be plenty of room for “disappointments”.

Within this framework, I can only repeat the view I expressed last year: 2009 will continue to see phases of “hope” and “disappointment” succeed each other. However, there will be one key difference in comparison with 2008: the ruling undertone will not be as negative as it has been between November 2007 and November 2008. Market developments since Christmas should serve as an illustration of this.

Probably the best way to look at financial markets right now is to compare them with a team of athletes that has been beaten mercilessly in the first round of the game. Coming back from the break, the challenges facing the team are no different, it’s the attitude of the athletes that has changed. Instead of focusing on the negatives, the team has adopted the view it can only get better, at some stage during this round, and the athletes are prepared to take it on the chin while waiting for those better moments to arrive.

This is why the 20%-odd rally since the lows from October last year is taking place against a background of truly horrible economic data, including from China.

Here is one scenario I think every investor in the share market should seriously take into consideration: during the seventies stock markets gyrated heavily higher and lower but by 1982 shares were still at the same level as they had been in 1964.

During that period -18 long years- rallies occured of 30-50% (and even more) – but as said, at the end of those 18 years shares had barely moved at all.

It’s a scenario that is not oft referred to by mainstream media, or by stockbrokers and tipsheets, or by market watchers, but a few highly regarded experts I read during the end of year break believe this is but a plausible scenario for the years ahead. Why? Not because our situation now is one-on-one similar to what happened back then, but because the problems the world anno 2009 is facing -the factors that took us where we are right now- are so devastatingly strong and persistent; it will prove more than likely too optimistic to expect that one day the world economy will simply jump up and start running again.

What we are more likely to see is a more gradual, if not slow, path of recovery for economies in the US, the UK, the rest of Europe, Japan and possibly China too once a bottoming process has been completed. It is not inconceivable that long after economies have stopped falling into the abyss, consumers will continue struggling with credit cards and other forms of debt, with higher unemployment and with no more boosts from government handouts.

Always keep in mind: no matter how strong investor appetite can flare up, any rally can only be sustainable if it is backed up by economic performance.

Of course, we don’t know yet what 2009 is going to bring us. There are still too many unknowns in front of us, but whether we like it or not, we are going to find out, one way or another.

Given all of the above, it is my view that investors should stick to the same two-pronged approach I advocated in 2008: on one hand try to participate in (and benefit from) the rallies that occur when “hope” is ruling the financial world – but make sure you’re not buying energy and resources stocks at too high price levels like many of you did last year.

On the other hand, if you are looking for longer term investment opportunities, I remain of the view that sustainable dividends are the best way forward. As I explained last year, buying stocks such as the banks, Boral ((BLD)) and David Jones ((DJS)) at current price levels should provide investors with double-digit dividend yields for as long as they own these stocks.

Imagine a scenario whereby share markets post one rally after another, but they’re not making any net gains compared with where they are right now. You wouldn’t necessarily care that much if you would still receive a healthy dividend each year, would you?

With these thoughts I leave you all this week.

From next week onwards my weekly editorial will again be made available to non-paying subscribers with a delay of half a week.

Till next week!

Your editor,

Rudi Filapek-Vandyck
(this week only supported by Grahame and Andrew, but the others will join us soon).

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