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MaxOut Savings Show Report
With Ted Geoca & KNTH 1070AM
MaxOut Savings Advisors, LLC
01/03/2008
SAVE AGGRESSIVELY AND INVEST CONSERVATIVELY!!!
2008 Investment Outlook
Credit Crisis = Danger + Opportunity
As we enter the new year of 2008 the Credit Crisis is now becoming apparent to many investors. The Chinese symbol for Crisis is said to be composed of the characters for danger and opportunity
in many translations. We believe that 2008 will be the year of opportunity for
defensive cash-rich investors.
Looking back over
our MaxOut Savings Show Report: 2007 Outlook, we were very fortunate to have provided a pretty accurate outlook for
2007. We called for sub-prime lending to “cause major financial problems
as investors reduce their investment risks”. We called for a liquidity
slowdown to “result in a sizable stock market correction” and said “quality is King for 2007”. We called for global growth and a dollar decline.
We got out of China and emerging markets way too early, but we warned to stay out of the financials for the year. Overall an accurate report, we will see if we can repeat that performance this year.
Economy:
Recession
We believe the sub-prime
mortgage problem has now morphed into a credit crunch that will lead the US economy into a recession sometime in early 2008.
This credit crisis is the result of a debt bubble precipitated by the Wall Street investment banks.
We have found that most investors have a poorly defined understanding
of the effects of a credit crunch. A credit crunch or a pullback in lending we
have found has a much larger effect on an economy if there are high levels of debt in the economy. Looking at the St. Louis Federal Reserve chart of household debt growth below <http://research.stlouisfed.org/fred2/series/CMDEBT> one can see that this consumer debt has more than doubled in the last 8 years. If you look at the United States, we have seen consumer debt levels increase
from $6.5 trillion in 2000 to $13.5 trillion in 2007. During this time the consumer
debt has risen from about 75% of GDP to 95% of GDP <http://www.prudentbear.com/index.php?option=com_content&view=frontpage&Itemid=97>. We believe that the combination of
high consumer debt levels and the recent credit crunch will result in a recession during 2008.
In addition, this high level of debt together with high oil prices could result in a deeper recession than more recent
recessions.

As can be seen in
the St. Louis Federal Reserve chart below of the rate of change of household debt with shaded areas indicating a recession
<http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=CMDEBT&s[1][transformation]=pca>, recessions are often preceded by a decline in the % change in credit growth. Of the last 9 recessions, 8 of them have been preceded by a credit slowdown. The exception was the 2002 recession. The
difference in the 2002 recession was that the consumer did not slowdown materially; the industrial sector fell off as the
technology bubble burst. We do not believe the US economy will be so fortunate
this time as we are seeing a large downward change in credit growth.

Consumer Credit Crunch Part II
For now, most of the credit problems have been confined to the sub-prime mortgage area.
We believe the sub-prime mortgage problem will spread in 2008 to consumer mortgages, credit cards and auto loans. This will be the next leg down in the financial sector as the consumer shows the strain
of the high debt levels. We do not think this is the time to buy the financial
stocks. We do however expect the financials to have some sharp rallies due to
very large short sale positions in those stocks. We think you will get better
buying opportunities later in 2008 in the financial sector on the second wave of write downs in consumer loans. Keep in mind that most write-offs so far have been in the sub-prime mortgage instruments that have been
originally mispriced by Wall Street. We would be a seller of investment bank
debt and stocks as we expect more problems in the sector in 2008. We expect some
surprise bankruptcies in the financial sector during the year. We will
be watching for bargains in the financial sector later in 2008.
Stock Market
For 2008 cash
or money markets will be king. We expect the stock market correction to continue
as the US economy slips into a recession. We expect more problems in the brokerage
sector with a possible failure or restructuring of a large investment bank due to derivative and liquidity problems. We want to have cash to invest in what we expect will be some wonderful investment
opportunities that will appear in 2008. This year will be a stock picker’s
market and you want to have the cash to pick up what we expect will be great stocks at bargain prices.
Large Cap
Multinationals
We expect the large
cap multination sector to continue to do well in 2008. This sector has been characterized
by companies that are profiting from the growth that is occurring worldwide as China, India, Brazil and other major countries
are developing a middle class. This growth should continue in 2008 at a slower
pace. We expect China to slowdown led by a slower US consumer and over capacity
in many areas of production. The Chinese government has been trying to slow the
economy for well over six months; these restrictions should also start to slow the economy soon. The large cap multination
sector is also full of companies that have strong balance sheets with low debt levels.
Remembering that we are in a credit crunch, we would avoid stocks with high debt levels in general. When credit is tougher to obtain, companies with high debt levels have to cut back expenses and projects
and, as a result, are unable to grow. Their borrowing costs also rise, which
lead to further declines in earnings. The other positive about the large cap
stocks is that they tend to maintain better earnings growth in an economic slowdown.
Inflation
We believe that inflation
will continue to spread throughout the economy in 2008. Higher energy and food
prices are only now starting to spread through the pricing structure. These higher
food and energy prices are being driven by worldwide demand from developing countries.
In addition we believe some countries are using their enormous foreign currency reserves to stockpile oil and grains. This appears to be the start of more cost push inflation. Inflation hedges should continue to do well unless the US falls into a severe recession.
Stagflation
When an economy slows
down and inflation stays high it is known as stagflation. Stagflation appears
to be where we are headed. We saw this problem in the 1970s and it was not a
good time for stocks and bonds. The people that did well were stock pickers,
investors that could find growth in a slowing economy one stock at a time. This
is where Peter Lynch of the Fidelity Magellan Fund made his name. So remember,
there are always ways to make money in the investment markets.
The Dollar
The Dollar should
continue to be weak against the Asian currencies such as the Japanese Yen and Chinese Yuan.
Much further declines against the European currencies will be more problematic as we have seen the dollar decline to
a greater extent against these currencies. The same could be said about the Canadian,
Australian and New Zealand Dollars. The question mark out there is will there
be a crisis in confidence and a run on the dollar.
Dollar Tsunami???
If we continue to
see the dollar decline precipitously into 2008 and bottom later in this year or the next, we could see a dollar Tsunami. The Dollar Tsunami could occur if the dollar were to have a washout bottom accompanied
by a large asset decline in the United States. At that point in time investors
around the world could rush in to take advantage of cheap stock and real estate values with their richly priced currency. The Dollar Tsunami would mark a bottom in the stock market and a start of a sizable
rally. We will keep readers informed as the year unfolds.
Precious
Metals Stocks
Stagflation is often
good for gold and silver. The stage is now set for gold and silver to have another
move upward in this bull market. We have a number of things working in
the sector’s favor. Inflation continues to rise as commodities move higher. The Federal Reserve is cutting rates and loosening money supply to support the economy. Remember, the bull market in gold began in late 2001 with gold at $275 an ounce when
the Federal Reserve, concerned about “deflation”, flooded the system with money; they appear ready to repeat the
process again because of the sub-prime credit problems. Sovereign Wealth funds
and foreign exchange reserve funds are loaded with dollars. These funds are now
scrambling to get out of dollars and will buy gold and silver. Investors in developing
markets tend to favor the metals and now have more income. In 2007 we thought
that silver would outperform gold, this was not the case as gold was up about 30% for 2007 and silver was up about 15%. This should occur in 2008 with silver outperforming gold; either way, both metals
and their respective stocks should continue to outperform.
Commodities
Commodities should
have a substantial correction sometime in 2008 if the US slips into a recession as we expect.
The Baltic Dry Shipping Rates Index has recently shown their first decline since July of 2007 after going straight
up for almost two years. This is possibly the first sign of a slowdown in demand
for raw commodities. We believe a slowdown in the US will affect commodity demand
out of China so this warrants attention. We have to balance this off the effects
of the commodity hoard that appears to be happening with some countries. Oil
should continue to do well after a pullback early in the year.

Fixed Income
Most fixed income
bonds are priced off the yield to US Treasuries. As an example, a 10-year corporate
bond might yield 5.9% that is 200 basis points (5.90-2.00= 3.90) over a 10-year Treasury.
It is the same for mortgages, junk bonds and even muni bonds. We believe
the Treasury markets are artificially priced at too low of a yield as a result of a flight to quality by investors. Also, the equity injections some groups have invested in to help the banks and brokers have come at a very
high yield; in some cases 8-11%. For these two reasons and the possibility of
a recession we believe that the corporate bond markets will be priced lower going into 2008.
We would still stick to quality investments as the theme of the fixed income market in 2008. Later in the year look to move down the quality curve in fixed income as value improves. Texas municipal bonds are an excellent area for fixed income for high tax bracket investors. In some cases they are yielding the same return as treasury bonds and are tax free. The Texas economy should outperform other parts of the country and therefore, the muni bonds of Texas should
do well.
Themes For 2008
Equity
Cash is King/ Money Markets
Large Cap Multinationals
Stable Demand (consumer staples)
Energy (value)
Gold & Silver
Lower US Dollar in Asia
Japan
Low Debt Companies
Stock Picker’s Market
Fixed Income
Quality Quality Quality
Government Bonds
Overseas Developed Markets Unhedged
Bonds
Money Market
CDs
Less Than 10 Year Maturities
Texas Muni Bonds
Sectors to Avoid
REITs
Financials until mid 2008
Emerging Equity Markets
Utilities
High Yield Bonds
Emerging Market Bonds
Brokerage Firm Debt
High Debt/Poor Quality
Balance Sheet Companies
China Funds
Remember Save
Aggressively and Invest Conservatively!
Did
you know that the MaxOut Savings Advisors money managers can now manage your IRA Rollover at Fidelity Investments? At MaxOut Savings Advisors we use Fidelity Investments to handle our investments for
our clients. We invest in stocks, bonds and Fidelity and non-Fidelity no-load
mutual funds. If you would like to sit down with Ted Geoca at MaxOut Savings Advisors and discuss your IRA Rollover or 401-k
or just a retirement review give us a call at 713-627-0400 or email me at ted@maxoutsavings.com
Ted K Geoca
President
MaxOut Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
Remember to catch:
The MaxOut Savings Show with Ted Geoca Houston’s
leading retirement specialist on Saturday at 11:00am on KNTH 1070AM!
The MaxOut Savings Show and Report does
not give out financial advice. Any recommendation or idea may not be suitable
for all investors. Moreover, although information contained herein is believed
to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC
may or may not have positions mentioned herein. MaxOut Savings Advisors, LLC is a Registered Investment Advisor with the SEC.
You should always make investment decisions based on your own financial situation.
To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com
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