Tuesday, January 06, 2009

2009 - Part II

Continuing my outlook for '09

Housing - It's hard to imagine the housing market getting much worse in 2009. I think that housing is going to become an increasingly localized story - great pockets of weakness around financial centers like NY/Boston/NC or where overbuilding continues (Florida/CA). I think the volume of inventory will eventually sink primarily due to pulled listings rather than actual sales. However, if inventory falls and interest rates remain low you could see a shift in confidence that might perk up some housing markets sooner than most people think.

Markets - It's hard to stay married to any idea right now with regards to the markets. There is a little bit of a January effect (money is reinvested in January) going on and people are still trying to ascertain what impact the Obama stimulus package may have.

I think that there is a chance that the markets try to wind a little higher from here - all of the technicians seem to be on the same page that the Dow is going to 9,750 -10,000. However, that pesky thing called reality is probably going to come back to haunt us fairly soon. I said back in October that there was a scenario under which I could see earnings for the S&P 500 falling to $40-$50/share (the estimate was over $90/share last January). Consensus estimates are falling and I saw my first $42/estimate for S&P earnings today. At today's prices, this prices the market at over 22 times earnings. This would be expensive for stocks during a boom time - and insanely expensive during a recession.

There are scenarios where stocks could trade at 8 to 10 times earnings and this puts a low end of the trading range of 4,500 - 6,000 on the Dow Jones Industrial Average. So, in summary - I think we may rally up another 10% before falling 20-40% and finally rallying again 10%+ in Q4. Volatility rules the day.

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