As predicted in our 2008 MaxOut Savings Report Outlook, the year 2008 was marked by Crisis, Danger and Opportunity.   At MaxOut Savings Advisors, we believe that 2009 will be marked by Crisis and Change.  We will see continuing problems, or Crisis, but the government is now poised to make Changes in many areas.  This is a result of a new Administration and over six months of formulating a response to the Global Credit Crisis.  We will see many changes from consumers and corporations as people adjust to the Credit Crisis.

Looking back over our MaxOut Savings Show Report: 2008 Outlook, we were very fortunate to have provided a pretty accurate outlook for 2008.  In the 2008 Outlook, we predicted the failure of a major brokerage firm.  In all, a couple failed (Bear Stearns and Lehman Brothers) but this prediction was made by almost no other firms that we know of, so it was a big win for us.  We predicted that “cash would be King for the stock markets.”  Cash was a great place to be with stock markets around the world off 35-50%.  Over the last couple of years, we have felt that we were in the midst of a huge credit bubble driven by Wall Street investment banks.  This credit bubble had encouraged US consumers and corporations to load up on debt and speculate.  This led to a bubble in housing that has now collapsed.  We believe that it will take years for this debt that consumers and companies are now saddled with to be unwound through the system.  This will all result in a much slower economy for most of 2009 as the unwinding of the debt bubble continues.

Layoffs vs. Government Spending
For 2009, we expect to see continued slowing of economic growth and more layoffs.  We also expect a large number of bankruptcies in the system as companies and individuals fail under the weight of excess debt.  The US consumer is about 65% of the US economy and, as they reduce debt and start saving, the economy will continue to slow.

The wild card offsetting earnings shortfalls, bankruptcies and layoffs will be a massive spending program under the Obama Administration.  We now expect the fiscal stimulus program to exceed $800 billion over two years.  The Federal Reserve is expanding their balance sheet and buying assets to further aid lending and prevent financial companies from failing.  Over the last six months, the Federal Reserve has expanded their balance sheet by $1.5 trillion to $2.3 trillion in an effort to stabilize the financial system.  This appears to be working and we expect them to spend at least another $500 billion buying more loans to keep consumer lending going.  These two areas constitute a massive amount of stimulus like the country has never seen.  It should stabilize the economy and will be most bullish for fixed income investments over the near term.  Over the longer term it will be inflationary.

It is this battle between spending and stimulus programs and layoffs and bankruptcies that will create opportunities in the investment markets as investors move from fear to optimism.  We would use these pullbacks as an opportunity to buy investments cheaply.

Obama:  First 100 Days
We will repeat what we wrote about the Obama Administration in our last MaxOut Savings Report:  We expect President elect Obama to move quickly to solidify his power in Washington.  He has already been planning this changeover of power, with transition committees formed before the election.  We expect him to move decisively during the first one hundred days for several reasons.  He knows that for the first one hundred days he will have virtually no opposition from the press or the Republicans during the honeymoon period.  In addition, he will have an unlimited checkbook for the first time in US history to spend money on fiscal stimulus as our government panics about the economy.   This unusual confluence of events will give him the power to fundamentally change the face of government if he moves quickly, and Barack Obama understands this.  We believe he will use the model of massive change during the first one hundred days that Roosevelt did during the Depression.  Roosevelt knew people wanted change after a couple of years of the Depression and he moved the country to the left closer to socialism.  We would look for a huge stimulus program of over $500 billion (we now expect $800-900 billion) this year and next.  We expect to see infrastructure spending programs on highways, bridges, mass transit, weatherproofing of buildings and huge programs to help the inner-cities.  We are years behind in keeping up with our infrastructure so some of these programs will help.  We also would look for huge amounts of environmental spending in solar energy, wind, natural gas, mass transit and energy reduction.  We will see huge changes in many programs throughout government as the Democrats will view this as a once in a lifetime chance to change government.  For the automakers, look for the Democrats to use this as an opportunity to force them to make small electric cars that all the environmentalists love.  We would also look for massive reregulation in many industries, from Wall Street to the energy patch.

One interesting change has been that President elect Obama has appointed Cabinet positions as well as Czars to oversee such areas as the economy, energy and the environment.  For the economy, he has Tim Geithner at Treasury and Larry Summers as his Economic Czar. Remember that Paul Volker is in the mix as well as a “special advisor” to the President.  He appears to be doing this so he can push through large wholesale changes and he needs a larger infrastructure than usual at the top to achieve all his goals.  This is something that Roosevelt did during his tenure as President.  We believe we will see materially more changes in government in the first one hundred days than any president in the last 50 years.

We expect the Obama Administration to move decisively to implement its programs over the course of the first one hundred days.  They have a window to push through huge changes under the banner of Crisis & Change.  So far, his Cabinet picks have been generally moderate and well respected, which has lulled potential opposition to sleep.  We expect that $1 trillion federal deficits will be the hallmark of the Obama Administration.

Consumer Credit Crunch Part III
Almost a year and a half ago the credit crunch started in the sub-prime mortgage area.  It then spread to mortgages and Wall Street.  The third part of the credit crunch will morph from problems with consumer loans to problems for consumers to get loans.  This can now be seen in the inability of many consumers to get a car loan.  We also hear many stories of home equity credit lines and credit card limits being reduced. This will further cut consumer confidence and spending.

Inflation
We are now in a deflationary period as commodities have seen one of the largest drops in prices in decades. The Federal Government is now looking at $1 trillion plus deficits going forward.  The Federal Reserve has committed to spend trillions (that is the number not some type of hyperbole) of dollars to stabilize the financial system.  Over time, this massive combination of monetary and fiscal stimulus will be inflationary.  We believe that this will take the form of a rapidly depreciating US dollar at some point in 2009 -2010.  Once this starts to happen, gold and energy commodities should begin to move higher.

The Dollar
At some point the Dollar should come under pressure as the United States, along with the Federal Reserve, begins a massive borrowing program to stabilize the economy.  During the last half of 2008, the Dollar has been strong as money was repatriated back to the United States from foreign asset sales or due to the credit crisis.  Now that much of the panic selling is out of the way, the Dollar should continue to decline.  The Dollar should continue to be weak against the Asian currencies such as the Japanese Yen and Chinese Yuan.  One currency we would stay away from is the British Pound, given the severe problems with their banks in comparison to the size of the Bank of England.

Stock Market
Here at MaxOut Savings Advisors, we believe the two keys to success for 2009 will be stock picking and income.  We expect the stock market correction to continue as the US economy slips further into a severe recession. When making investments, look for income as well as growth. We would use these large swings in the markets, from greed to fear, as buying opportunities for long term investments.

We expect the large cap multinational sector to continue to do well in 2009.  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 2009 at a slower pace as consumers in many of these countries do not have the debt problems of American consumers and have much higher savings rates.  The large cap multinational 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.

For 2008, the S&P 500 declined 36.2%.  As bad as this was, many foreign indexes did much worse.  S&P Europe was down 43%, S&P Japan was down 42%, and Latin America was down 49.4%.  For 2009, many of these foreign markets could outperform the US.  There are several reasons for this.  Many countries do not have the debt problems the US has.  The savings rates overseas are much better as consumers resisted taking on debt.  The middle class in many countries is continuing to grow and that should help international stocks.  If the US dollar falls as we expect, this will help our international stocks and bonds.  We want to be invested where countries have lower debt levels to ride out the credit crisis.

If you want to invest in the financial sector, one way to invest is on the fixed income side.  Take a look at bonds and preferred stocks.  The recovery could take years and the income will allow you to lock in a long term profit and income.  In Japan, the financial sector took a decade to recover, we believe that the financial sector recovery in the US will take several years.

Weekly Oil Price Chart

Energy

The energy stocks had a very tough year as oil collapsed from $147 down to $35.  Many hedge funds and investors were forced to dump the stocks to meet margin calls.  Over the long term, oil will move higher and energy stocks should do well in 2009.  We would concentrate on values in the oil & gas sector and, to a lesser extent, energy services.  Here again it is important to look at companies with high cash levels, low debt, and a low price to earnings ratio.  During this pullback, energy companies with high debt levels could fail and, at best case, will not be able to grow as the economy recovers.  If the Dollar begins to weaken against other currencies, this will be bullish for oil because oil is priced in Dollars and a lower Dollar makes oil cheaper for other countries.

Precious Metals Stocks

The stage is now set for gold and silver to have another move upward in this gold 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 engaged in quantitative easing to support the economy.  As soon as the Federal Reserve began speaking about quantitative easing and deflation, gold moved from $730 to $860 per ounce in price.  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 extent of the problems with the financial system.  We believe that this is the start of a new leg up in the gold bull market.

US Government Yield Curve

Fixed Income

At a 2.49% yield on the 10 year US Treasury Note and a 3.05% yield on the 30 year bond, we believe that the longer term US Government bonds are one of the most overvalued assets in the world. We believe the Treasury markets are artificially priced at too low of yields as a result of a flight to quality by investors.  In 2009, the US Government could see a deficit approaching $1 trillion; this will result in massive borrowing that could push up longer term Treasury rates.  We would be a seller of long term Treasury Bonds and Notes.

Texas municipal bonds offer a great value when compared to Treasuries.   The state is in much better shape than the rest of the country and has a low overall tax rate.  In addition, in the past, muni bonds have traded at about 80% of the Treasury rate.  Now you can get 200 basis points (2%) over the Treasury rates on longer dated bonds and the munis are tax free.  In some cases, the muni bond yields have gotten so high that a case could be made to invest in municipal tax-free bonds in a qualified retirement plan.  Overall, we like the municipal bond market, the yields are tax free, and as an asset class the default rates are very low.   The best tax-free muni bonds are Texas PSF school bonds and GOs (general obligation) of states and cities.  Be careful about taking too much risk with lower rated bonds. We will see some high profile bankruptcies in the municipal bond market for 2009 as some cities have over extended themselves.

For 2009, income from interest and dividends will play a key role in returns.  We want income from bonds and stocks. 

Themes For 2009

Equity

Cash is King/ Money Markets

Income and more Income

Growth & Income Funds

Convertible Bonds

Large Cap Multinationals

Stable Demand (consumer staples)

Energy (value)

Gold & Silver

Lower US Dollar in Asia

Japan

International Stock Markets

Low Debt Companies

Stock Picker’s Market

Fixed Income

Quality Quality Quality

Convertible Bonds

Corporate Bonds
Texas Muni Bonds

Floating Rate Bonds

Overseas Markets Unhedged Bonds

Municipal Bond Money Markets

CDs

Less Than 10 Year Maturities

Sectors to Avoid

REITs

High Yield Bonds

Brokerage Firm Debt

High Debt/Poor Quality Balance Sheet Companies

US Government Bonds (over one year)

Muni Bonds from Problem Areas (MI, NY, FL, CA)

Who is MaxOut Savings Advisors LLC?

In these volatile times, investing your retirement funds can be difficult and time-consuming.  Hiring the MaxOut Savings Advisors team to manage your money or IRA rollover is a great first step.  MaxOut Savings Advisors is an SEC registered, fee-only investment advisor based in Houston, Texas.  Ted Geoca has over twenty year’s investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients using a value analysis strategy that we have developed over the last twenty years.   We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com. 

Remember Save Aggressively and Invest Conservatively!

Ted K Geoca                                    

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400

Kellan Caldwell

Doug Saam

Remember to catch:

The MaxOut Savings Show with Ted Geoca on Saturday at 11:00am on KNTH 1070AM!

We have expanded the Show to 1 ½ hours from 11:00-12:30!!!

The MaxOut Savings Show and Report does not give out financial advice.  Any recommendation may not be suitable for all investors.  Moreover, although the 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.

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