Who Moved My Cheese, and Where is it Going?

Do you remember the book Who Moved My Cheese? It describes how to deal with life's changes. Some of us will accept change, look for a new direction and proceed toward happiness. Others will deny change and fight it all the way.

Well, the world is definitely changing as we enter 2009. Whatever the new environment is, it will be much different than anything we have ever seen. There are going to be winners -- and losers. I would like to take this opportunity to look back on 2008, and to share with you where I think we could be headed in 2009 and beyond.

First, let's acknowledge that 2008 was a disaster for the economy and the markets. The housing recession that began three years ago became a capital spending recession at the beginning of 2008. In the third quarter of 2008 we entered a consumer recession, which I believe will be the worst consumer recession since World War II. An unemployment rate that could average above 8.5 percent for 2009, combined with the loss of equity wealth many consumers have experienced in the housing downturn, could delay significant recovery until 2010.

Meanwhile, the Federal Reserve is fighting the largest deflation battle since the Great Depression. The drastic fall in energy costs is the main driver of these deflationary trends, but intensifying price concessions are playing a significant role as well.

I think we can expect further rounds of non-conventional monetary easing; buying agency paper and targeting mortgage rates is a start. We already have lost $12 trillion of equity and real estate asset valuation. Consumers have entered a major spending downturn. In fact, for the first time in decades, savings rates are rising dramatically. While the government is trying to stabilize the financial sector and induce banks to loan, there are questions about whether consumers are interested in borrowing.

Finally, it is unclear if we can achieve a truly stable economic environment until the $23 trillion real estate market stabilizes. It is amazing that even though housing starts have been sliced by 65 percent since the peak in 2006, there is still an 11-month supply of unsold new housing. We need an eight-month supply before the market will begin to stabilize.

I expect the recovery will begin later in 2009, but it will be very gradual. The bailouts have made the federal government a player as well as a referee in the financial world, and that will bring distortions in the marketplace. And credit markets remain frozen; until they thaw out, the housing market will remain weak.

But all the news is not gloomy. Things certainly are not good, but we should not let the nay-sayers convince us that things are worse than they are. For example, there has been a lot of talk about how bad the Christmas season was for retailers. But we have to keep that in perspective. Last year was a record year, so the fact that this year is down should not be seen as a surprise -- or necessarily a disaster.

Some retailers actually had good holiday seasons. Amazon was up over last year, for example, and Wal-Mart also did well. Consumers are adjusting to our new economy, switching from the higher-end retailers (such as Nordstrom) to Wal-Mart and Amazon. So the attractive retail channels of the future (such as Amazon and Wal-Mart) are seeing more consumer purchases.

Also, the price of oil is down. And even with the current unrest in the Mideast, oil has a long way to go to reach the record price of $137.27 per barrel sent on July 7, 2008. This also helps consumers and businesses.

Finally, with mortgage rates approaching record lows, the volume of mortgage applications is up significantly, which is evidence that the real estate market may be recovering somewhat.

I also believe the market has found its footings. When the Dow bounced off the 7,500 level in November, some of the bears were forecasting the next stop would be 4,000. That does not seem to be happening. Despite the challenges that the economy faces, there still are opportunities out there. At the moment there is almost $9 trillion in cash and money markets, sitting on the sidelines and waiting to come back into the market when things stabilize. That represents a huge potential for growth.

And of course, we will inaugurate a new president later this month. Perhaps the Obama administration can bring new ideas that will help stabilize and re-energize the economy and help the markets find a new direction in 2009.

Meanwhile, as I have discussed before, I continue to look for those companies that pay a dividend (I want my cheese!), have a history of consistent dividend growth and have strong financials such as return on capital. Those companies are out there, and they will begin to make money for investors as we all adjust to the new realities of our market and our global economy.

We are entering the Age of Aquarius, and the cheese has moved.

Garry K. Schaefer
Atlanta, Georgia
January 6, 2009

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