Welcome to the New Year

Predicting the future is a tricky business. If only you could see a few minutes ahead you could have bet on the horse that would have won the race. If only you could see a year in advance, you could have double-shorted the S&P last January and made out like a bandit by selling in November. What sort of question will we be asking next January? Will we be kicking ourselves because we didn’t stay in cash or will be regretting not buying Technology when it was so cheap? Time will tell.

If the “Santa Claus Rally” is any indication on how 2009 will be, we may be in for a pleasant surprise. The last 5 days of the trading year, plus January 2nd yielded a surprising +7.9% for the S&P 500. The old trader proverb “If Santa Claus should fail to call; bears may come to Broad & Wall” doesn’t have the same sting as it might if we didn’t have such a bounce. But is it a justified enthusiasm?

Americans, especially American traders, are an optimistic lot. It’s one of the reasons why many stock investors refuse to short a company – they think that most stocks will climb in the long term. Is that a rational position? Last year was definitely a test of such hope. The Dow Jones Industrials lost -33.8% in 2008 – its worst annual percentage decline since 1931. Global stocks fared even worse. The MSCI World Index suffered a -42.1% decline, the worst since 1970 when the index started. Maybe shorting companies isn’t such a bad idea after all, especially in light of such recent history.

Bear in mind, it was a spate of bad news that gave us the recent declines in October and November. Has that environment fundamentally changed in the past few weeks? Probably not. Bloomberg suggests that corporate earnings will continue to fall in the first half of 2009. This will extend the first simultaneous recession of the U.S., Japan, and Europe since World War II.

Companies continue to wage war against falling consumer demand and less available capital. When you can’t sell and you can’t borrow, you can’t do business – at least not for long. What’s the end result? More companies will go bankrupt and more employees will lose their jobs. If ever a President inherited more challenging economic problems when he entered office, it was Franklin D. Roosevelt. Obama will have his work cut out for him.

Several economic reports will be released in the next several weeks. The biggest is December’s Unemployment Report, due out on Friday. Analysts expect the number to rise from 6.7% to 7% – with an expected rise in future months. With Reagan-era labor lines already here, should we really expect a turn-around this soon? I wouldn’t hold your breath.