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A year ago around this time, banks were trembling, but none had gone under. The stock market was down 4% from its October low but was expected to excel in the coming presidential election year. Few thought that crude oil could sell for more than $100 a barrel.
The Federal Reserve's reputation for rescuing investors through quarter-point cuts in interest rates was intact. Inflation was a clear danger. Chinese growth could only go higher. Emerging markets were a haven. Private equity and hedge funds were the smart money. Home-building, banking and insurance stocks were cheap. Fertilizer and steel stocks were an iconoclastic path to riches.
So much for the conventional wisdom, huh? We will look back on 2008 -- the worst year for the stock market since 1931 -- with all the fondness reserved for hostage takers. But before we say goodbye and good riddance, it's worth pausing a moment to reflect. So here are my own hits, misses and lessons learned from the past year.
Dec. 20, 2007: Stock market 'winter' is moving in
Sometimes you get lucky. My good fortune with this column, aimed at forecasting the coming year, was interviewing Paul Desmond of Lowry's Reports and veteran trader Jim Rogers, who explained why the next year would usher in a rip-roaring bear market.
Desmond said his measures of demand and supply suggested investors should go to cash immediately and chill.
"You need to put the idea that the Fed or some other force will ride in like a white knight out of your head," he warned. "Don't buy into lower values too early. Cheap becomes a very relative term in a bear market, as people don't respond to value -- they respond to a sense that they need to just stop the pain, as they'll dump fast-growing, seemingly valuable stocks with abandon."
Rogers declared that Fannie Mae (FNM, news, msgs) was a fraud and that Citigroup (C, news, msgs) was technically bankrupt and likely to fall under $5 a share, yet added he believed the government would not let them fail: "They'll nationalize them in some way. It's wrong, but they can't let the two largest lenders in the nation go down."
Rogers added, "Stocks are done, and many favorites will go down 80% after people figure out how long they've been reporting phony earnings."
And now? Desmond says every metric he follows is screaming that the bear market is at an oversold extreme and should end -- except the two most important metrics: There are still too many sellers and not enough buyers. His prescription: Stay in cash, and don't come out of the bunker yet.
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Jan. 4, 2008: 10 market predictions for a glum '08
My forecast: "For investors, the new year will be defined by a titanic struggle between governments' efforts to flood the world's faltering financial system with cash and banks' efforts to hoard it all for themselves."
I called for at least one major bank to go bankrupt and argued that Countrywide Financial and Washington Mutual (WAMUQ, news, msgs) would be "purchased for loose change by larger competitors." I also called for credit card issuers American Express (AXP, news, msgs) and Capital One Financial (COF, news, msgs) to hit new lows on write-offs from deadbeat customers. They've fallen 57% and 31%, respectively.
I also forecast that a "relatively new security" called the credit default swap would wreak havoc in 2008 -- as they are unregulated and had never been tested in a crisis -- and that therefore banks should be avoided all year and that the Financial Select Sector SPDR (XLF, news, msgs), an exchange-traded fund, should be shorted. In fact, credit default swaps were responsible for bringing down American International Group (AIG, news, msgs), and XLF has dropped 57% this year.
I also said the idea that emerging markets would "decouple" from the developed world -- and could do just fine despite a market tailspin in the U.S. -- was rubbish. In this column, Satyajit Das, a derivatives expert based in Australia, called the notion a "narrative fallacy" shaped to reconcile unconnected facts. My recommendation was to buy Short MSCI Emerging Markets ProShares (EUM, news, msgs), an ETF, and indeed it did rise 39% in value.
I have to eat this one: I recommended agricultural stocks like Monsanto (MON, news, msgs) and Bunge (BG, news, msgs) on expectations for a continuation of the farm boom. They fell 31% and 65%, respectively.
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Jan. 10, 2008: How the smart money got it wrong
This was really sad. I wrote about how some of the smartest investors in the market had already bought into the bank disaster too early and had their portfolios shredded.
I interviewed Richard Pzena of Pzena Investment Management (PZN, news, msgs). He was defiant, insisting that he expected to double his money in Citigroup, Fannie Mae and Freddie Mac (FRE, news, msgs) over the next three years. I said, "I think he's dreaming, but he does manage $25.49 billion more than I do, so perhaps you should lend him an ear."
In the interview, he said that few banks had much exposure to the subprime loans at the center of the controversy and that Citi at the time was "a great global franchise that's inefficiently priced." He added that his analysts had put their money where their spreadsheets are -- buying more Fannie, Freddie and Citi for their personal accounts than at any time in the past five years.
"They believe they have properly analyzed these franchises and should buy even though they don't know when the turn is coming," Pzena said. "There's no dissension about this position within the firm. Buying low is a strategy that has never failed to work."
Citi was $25 a share then, down from $50, and is $7.82 now after having briefly traded between $3 and $4. Fannie was $35 then, down from $65, and closed at 84 cents Monday.
So Pzena was a tad early and paid the price: His own company's shares are down 78% this year. But there's hope: Now that the government has a new supersized program to directly cut mortgage rates, the stocks should finally get a substantial lift, at least for a trade.
Continued: The big threat of muni debt
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