My Predictions for 2009... and What I Got Wrong in 2008

Hi Guys,

Happy New Year! It’s been a while since we last caught up. I hope you are well and that you had a wonderful holiday and a very happy New Year. I was on vacation for the holidays. We had a terrific break. We took our three boys to Disney World. What a treat! We go once a year usually around President’s Day weekend. This year we decided to do the unthinkable and booked a trip to Disney two days before Christmas. Sort of insane but so well worth it. You should have seen Christmas morning at our house. We decided to let Santa deliver the news that we were going away with the kids so we had my dad drop off a note from Santa that told the boys Santa was taking them to Disney. It was so adorable to see my oldest son Logan read the note. He was so confused. “Mom, you mean Santa is going to Disney?” “No, I replied, Santa is sending you to Disney.” It was a magical moment that will make this past Christmas morning a morning that I’ll never forget. I welled up with tears watching my two oldest boys run to the back of my apartment when we told them the bags were already packed and that we were leaving in two hours. It was perfect.  I’ll post some fun pictures as soon as we upload the images.

Switching gears for a moment, there is so much to catch up on and since it is the start of a new year I had to share some of my fun and off-the-charts predictions. I know what you’re thinking…..another list of predictions? Yes. I know every one on the planet writes a list but it’s a fun way to look back on the year and see what I was thinking at the time. I encourage you to email me your predictions so that we can share them together. No one could have predicted what happened in 2008 to some of the biggest and most established companies in the world and my guess is that this year may be even harder to predict. Take a look back at what I wrote about in 2007 and where I think the news cycle is headed in 2009.

WHAT I PREDICTED FOR 2008

1. The U.S. Dollar Rebounds

The U.S. dollar will recover in 2008, as more countries invest in U.S. companies and goods. Imports will explode. Europe will have to make a course correction because its currencies’ value is not good news for its goods and services.

2. M&A Has a Blockbuster Year

Bankers will rush to get deals done in 2008, as the likelihood of a Democrat winning the White House increases, raising the risk that President Bush’s tax cuts will be allowed to expire. A combination of the rise in the capital gains tax, plus the possibility of an additional tax on carried interest, will present problems for private equity firms and broker dealers in 2009.

3. Oil Sinks to $70/Barrel

Yes, we have more demand than capacity, and, yes, there are always unanticipated geopolitical risks that cause oil to rise. But, OPEC is not the White Knight. The economy will slow. People will drive less and spend less. The weather will not cause major headaches and all this talk of oil above $100 a barrel for the foreseeable future will be overdone. Oil will be lower one year from now.

4. Economy is the No. 1 Election Issue

Six months ago, every presidential hopeful talked about the war in Iraq. But now, if you want to be in the Oval Office, you better become an expert on the economy, because the top concerns for Americans are jobs, homes, the rising costs of buying food, driving to work and borrowing money. The candidate who can speak frankly about the economy will win the White House.

5. Patriots Don’t Reach the Super Bowl

Yes, the Patriots had a sensational year, going 16-0 in the regular season-- the first NFL team to do that in history. This year, New England does not make it to the Super Bowl. Will it tarnish the 16-0 record? I think so! In case you’re wondering, I think the Colts will beat them.

6. Record Low Network TV Viewership

The writers strike continues to wreak havoc on the major television networks and resolution is nowhere in sight. It will affect the May Upfronts and will put the networks in an incredibly difficult position. Shareholders will be angry. Companies will have to shed assets and look elsewhere to make money. This is a time when the major networks who live on prime time can ill afford to send more eyeballs to the Internet, cable television, DVDs and TiVo.

7. Videogames Go Mainstream

The videogame industry had another banner year last year and this year will surpass it. The Nintendo Wii and DS have changed the landscape. Games like Rock Band and Guitar Hero are causing not only adults and kids to buy into the industry, but corporations and retirement homes. Look for major network television and media conglomerates to buy in. We saw it with Activision (ATVI) this year. We will see it much more in 2008.

8. Award-Winning Year for Actress Ellen Page

If you didn’t see Juno, go see it. It’s a story about Juno MacGuff (played by Page), a pregnant teenager who is faced with the decision to have the baby or not, and what to do with the baby and herself as her body changes. Ellen Page is outstanding. She is charming, funny, quick-witted and will be the next Hilary Swank. She has a Golden Globe nomination. She’ll get an Academy Award nomination. She wins both. Keep an eye on her.

9. MLB Turns to Instant Replay

Major League Baseball succumbs to pressure after the steroid scandal and implements widespread instant replay by the All-Star break. Instant replay may now become a factor on a limited basis in Major League Baseball games. The collective general managers voted 25-5 to at least explore the possibility of using the video technology to help decide disputed home run calls: fair or foul, in or out of the ballpark.

10. Hedge Fund Industry Suffers

We’ve heard about the broker-dealers and banks plagued by CDOs and SIVs. The next shoe to drop will come from the hedge-fund world, which is largely unregulated and has huge amounts of leverage. It’s a business that has been booming, but everybody and their mother has started a hedge fund. This year will see many of them close shop and many of them announce major losses. Transparency in the hedge fund industry will become a big talking point.

Before you read my predictions for 2009, let me preface the list by saying, these are stories that I believe will dominate the headlines in 2009 but more importantly, they will dominate the conversations at dinner tables in homes across this country. Some of this list includes the outrageous, very unlikely scenarios, some of the list includes what some economists and strategists have predicted and some of the list includes what I hope will be changes in the way we do business and conduct our financial affairs as a result of the lessons learned in 2008. I don’t know about you, but I learned a tremendous amount in 2008 about what not to do. I don’t want to forget those lessons and therefore I hope in some fashion by posting this list, it will remain a constant reminder for me and perhaps for others not to forget.  

WHAT I PREDICT FOR 2009

 1. The U.S. Dollar takes it on the chin

The U.S. dollar faces a further and significant devaluation as the U.S. Treasury issues a record level of debt and the Federal Reserve Bank increases the size and magnitude of its balance sheet to pay for the fiscal and monetary stimulus. The value of our currency continues to fall as the debt to GDP ratio approaches or exceeds 85-90%. The recession is longer than the NABE predicts with negative GDP growth through the end of 2009. If the Fed continues to artificially deflate interest rates by purchasing agency debt, what will incentivize foreign investors who have owned our paper to help fund our deficit?

2. A major network gets sold in 2009. My bet is NBC.

NBC will get sold to Google in 2009.  In a deteriorating credit environment, a collapse in equity valuations, a need to cut costs, shed assets and address the bleeding at GE Capital, Jeff Immelt will sell NBC to Google. Immelt will be forced to sell the one asset he has said that he had no plans of selling when NBC’s Network Television ratings continue to slide and declining advertising dollars leave little room for growth.  

3. LeBron James becomes a New York Knick

LeBron James becomes a New York Knick at the start of the 2009/2010 season. He restores the New York Knicks franchise to its glory reminding us of the days when Patrick Ewing stormed the court. His love of New York, his grace under fire, his passion for winning and his pursuit of the NBA Championship will bring him to New York. Mike D’Antoni, the New York Knicks Head Coach, knows what LeBron is about after winning the gold in Beijing together. D’Antoni knows that the path to victory requires a leader that will embrace the concept of teamwork.

4. Public companies go private 

Given the turbulence in the credit markets in 2008, the lack of access to credit and the declining demand for goods and services, 2009 will be a record year for bankruptcies but that is not the big story. The bigger story will be which companies decide to take themselves private and why they do it. The days of investing in big blue chip companies with the assurances that your investment is safe have been shattered. Corporate scrutiny is at an all-time high, equity shareholders have been wiped out, the government has its hands in multiple businesses, compensation structures are being questioned and in some cases mandated with government intervention and that’s just the beginning. Executives and board members of publicly traded corporations will decide to forgo the analyst meetings, the investment conferences, the shareholder lawsuits, the increased government and regulatory oversight, Sarbanes-Oxley and the pressure to live up to long-term growth strategies and quarterly estimates by going private. It was hot for the private equity community to go public in 2006 and 2007, in 2009, if they are able to succeed, they will privatize their companies. Don’t be surprised to see someone as big as Goldman Sachs go private in 2009. 

5. The savings rate in this country will become a bigger priority for Americans

If you look back at data on personal income or what economists refer to as savings as a percentage of income, over a 50 year period, one thing is crystal clear. The savings rate in this country rises in a recession. Let’s look back for a moment at the two longest recessions since the Great Depression. In the November 1973 to March 1975 recession, the savings rate in this country was in double digits for every month except for three months reaching a peak of 12% in December of 1973. In fact, in May of 1975, the savings rate climbed as high as 14.6% In the July 1981 to November 1982 recession the savings rate in this country was in double digits for every month except for one month in November of 1982 but it reacoched a high of 12.5% in October and November of 1981. Fast forward to our current savings rate and you’ll find that the last calculated savings rate for November of 2008 was 2.8% but since the recession began in December of 2007, the savings rate has been below 1% for at least 6 of the past 12 months. The peak over the past year in May of 2008 was 4.8% but that was artificially inflated by the president’s stimulus checks. I believe Americans will do what they have done in past recessions and that the savings rate in this country will climb back up to low double digits. This is not a good thing for the economy which leads me to my next prediction.

6. Don’t believe the "second half of the year" recovery story

I don’t buy into the consensus which expects the U.S. economy to recover in the second half of the year. Here’s why. Despite every effort by the current and new administration to re-stimulate the economy, consumers will pay down debt and save more money. As my good friend Dave Ramsey talks about when he reminds us that we need to have that emergency fund, too many Americans are living paycheck to paycheck and there tired of it. Americans have learned a vital lesson the hard way. Living on credit doesn’t work. They will default, file for bankruptcy, lose their homes, move in with their friends and loved ones and the consequences will be a change in consuming behavior that we have not seen in decades. An increased savings rate as I talked about in prediction number 5 is not a good thing for the economy but history has taught us that in the worst recessions cash is king. In addition, the route cause of the weakness in the economy according to the current Treasury Secretary and some of the brightest minds in the business is housing. We have not figured out how to correct the housing problem in this country which leads me to my next prediction.

7. Lower interest rates will not cure the housing market

Despite the Federal Reserve Bank’s best efforts to reduce mortgage rates, stimulate refinancing activity and home buying, it does not address the record number of homes in or on the cusp of foreclosure. In the month since the Federal Reserve Bank announced that it will purchase Fannie Mae and Freddie Mac paper in the secondary market they have successfully cut mortgages rates to a 37 year low with a 30 year conforming loan at just above 5%. Mortgage rates are headed lower and a mid 4% mortgage for a conforming loan (up to $417,000 as backed by Fannie Mae and Freddie Mac) is likely. In fact, it’s a foregone conclusion, but will it help the 12 million households whose mortgage is higher than the value of their homes? No. There are 48 million home mortgages of which 12 million are under water according to Mark Zandi at Moody’s Economy.com. Nothing this administration, the Federal Reserve Bank or the members of Congress have done or legislated have changed the landscape for housing and it will only get worse if we do not figure out a way to mitigate the losses, write down the loans or provide greater bankruptcy leniency to homeowners. There is no one magic pill but what we have done so far has failed to address the issue. This will be President-elect Obama’s greatest challenge which leads me to my next prediction.

8. Housing will be President-elect Obama’s greatest problem -- not jobs

I do believe that the unemployment rate in this country will approach or exceed double digits. I also know that Unemployment is a lagging indicator and that we may not see the peak in unemployment until the beginning of 2010. President-elect Obama’s stimulus package will be huge but it won’t stop there. If it is not signed into law until February before Congress goes on recess, the effects will not be felt until the second half of the year. The equity markets will have a much better year. We will re-test the mid 9,000 to 10,000 level on the Dow around Inauguration day and somewhere in the end of the second quarter leading into the third quarter the bloom will come off the rose. More money will be spent, TARP will be a distant memory and home vacancies will dominate the headlines. Banks will be forced to take further write downs only this time on alt-A and prime loans. The President will be forced to retool a housing market that fails to address foreclosures and does nothing for jumbo mortgage holders who are paying 2-3% more on their 30 year fixed rate mortgages because so few private lenders are willing to lend money on larger loans with no secondary market. President-elect Obama will need to rethink the size of the conforming loan limit for Fannie Mae and Freddie Mac and perhaps increase it back to $729,750 as President Bush did in February of last year. It expired on December 31st. The great irony is that it didn’t work because mortgages rates only began to fall when the Federal Reserve Bank announced a month ago that they were going to buy mortgage backed paper. 

9. Boxing continues its downward spiral

Boxing greats like Oscar De La Hoya, Roy Jones Junior and Antonio Tarver will hang up their gloves. It will be the end of an era. From welterweight to light heavy weight, some of the greatest names and faces in the industry will fall from grace just as the heavy weight division did years ago when Lenox Lewis hung up his gloves. I still love the sport but I’m afraid that without a new set of superstars, MMA (Mixed Martial Arts) will continue to pick up where boxing left off.

10. Brangelina take the plunge and says their I do’s

It wouldn’t be a top ten predictions list without a little Hollywood glamour. Last year, I predicted Ellen Page would winner a Golden Globe and Academy Award for her performance in Juno. She did not win either but her star is still rising. This year The Curious Case of Benjamin Button will deliver Brad Pitt a new award to place on his mantle. His performance was outstanding. It was by far one of my favorite movies this year. And it’s not just because he’s cute ! Let me not forget the beautiful and wildly talented Angelina Jolie who is the envy of just about every woman. Is it possible to look that good after delivering three babies? While I have yet to see Changeling, I hear her performance was outstanding. Might they both walk away with an award for their tremendous performances? I wouldn’t doubt it. Despite claims that they would wait to tie the knot until same sex marriages were legal or until there kids requested it, the time has come for them to tie the knot. Don’t expect it to be glitzy and glamorous. I expect it will be quiet, elegant and a small family and friend affair which will make them once again the most watched couple in 2009