Andre J. Peschong

This has been a decade of triumph, tragedy, happiness, sadness, glory and ruin.  The decade is not over with and we have had more news worthy and momentous news items than the last 100 years put together.  That is a bold statement but the millennium started off with a quick bang or better stated “pop” with the internet bubble bursting in March of 2000.  That set the stage for a massive revaluation of wealth and people’s expectations and it was the outcome of Alan Greenspan’s “irrational exuberance” statement.  That event set the tone of the decade and with every victory for the free market system to claw its’ way back there were again massive stumbling blocks along the way9/11, the worst tragedy on American soil, occurred as the markets were trying to right the ship and more buyers were entering the market.  This event shut the capital markets down for almost an entire week of trading.   Everything we as a free society held dear and sacred ground to a halt and exposed a new world where safety was a relative illusion.  This event crushed the markets on a short term basis but the capitalist spirit again prevailed and the markets clawed their way back. 

The accounting scandals of Arthur Anderson, Enron and Worldcom, to name a few, followed 9/11 by about 6 months and this shook the foundations of the capitalist system.  A fraud, not one but many, had been perpetrated on a capitalist system that prides itself on checks and balances and transparency.  If Enron and Worldcom were out and out frauds what was sacred?  Who could be trusted?  Where 9/11 banded us together as a nation the accounting scandals tore us apart from the inside.  The Iraq war soon followed and the markets were extremely reactionary to a development or attack that happened in the war.  For about 3 years this really caused heightened volatility in the markets both ours and the overseas markets.  The Iraq conflict was a worldwide development not just a domestic one.  During this time of uncertainty and to help rebuild confidence back in the domestic market the Fed took aggressive steps to continually lower the Fed Funds rate to spur lending and deployment of capital into the marketplace. 

This was a main driver of the housing boom contributing to double digit appreciation year over year which brought in massive global speculators.  It is never a good sign when speculators hit the market aggressively and if you couple cheap money with new types of loans being created such as; the 3 and 5 years ARMS, the no document loan, the no money down etc… this really added the fuel to the speculation fire.  People were using the increased “perceived” value in their homes as piggy banks to spend money on everything from additional homes to consumer goods cranking up the GDP and the consumer confidence index.  This was seen as a panacea for investors and home owners alike in the fact that everyone has traditionally been conditioned to believe that real estate is a relatively safe investment.   The real estate run up was incredible which led to the herd mentality of getting in on the action before the train leaves the station.  By July of 2007 the first shot was fired across the bow when Citigroup said that they were writing down, at the time an enormous amount, $5 billion of bad loans on their books.  This event was the initial crack in the dam which has proven the fatal crack. 

The dollar had been weak throughout this process largely because of the administrations hands off policy with supporting the dollar.  As the bad news was coming fast and furious in the US another massive bubble in crude oil was forming in 2007.   Crude vaulted from $30 per barrel in early 2007 to $140 dollars in July of 2008.  This exacerbated the pain the US economy was going through because of a liquidity crisis caused by the initial real estate run up followed by the write downs on the pools of mortgages and other financial products packaged by the young guns on Wall Street.  What followed was the failure of Bear Stearns and Lehman Brothers as well as a number of banks which was the death blow for the domestic markets.  The events leading up to the markets massive deterioration was a perfect storm made up of pressure on corporate margins due to rapidly increasing raw materials and commodities prices, pressure on the consumer from high gas prices, rapidly declining home prices and the beginnings of increased job losses and finally, the failures of financial institutions once considered “Blue Chip” firms in the US.  The topping on a year of bad news was the Bernie Madoff scandal.  The effect of this event will really be felt in 2009.  The ramifications are truly global and the amount of potential litigation that the Madoff fraud could generate may be unprecedented in the US.  The major harm from this event is similar but far exceeds that of the Enron scandal where most European countries do not trust the US system of checks and balances and believe that their investable capital are better off outside of the US markets.

Unfortunately, that is where we are currently left on the eve of a new year.  Looking back it was a financial train wreck that was literally unavoidable as the world economy has also suffered the liquidity fate.
What can we look forward to for 2009?  Let’s just say our incoming administration will have their respective hands full.  So in the spirit of the great Carnack (Johnny Carson Show), let’s see what 2009 has in store:

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• Interest Rates – Unless the economy improves dramatically, and all the de leveraging is done to provide ample liquidity, there is no tangible reason for interest rates to go up in 2009
• Inflation – This is a tough one.    The Fed has been printing so much new money that at some point it will catch up and inflation will rear its ugly head.  In 2009 I think inflation will be nominal but it will definitely be an issue in 2010.
• Stock Market – in order for the market to improve there needs to be a catalyst or the next big thing and that was supposed to be alternative energy/fuel.  That “big thing” dissipated almost as fast as oil prices fell.
• Oil Prices – I believe that normalization will occur and the barrel prices should be back up around $50 per barrel.  Oil will be more affected once inflation and rising interest rates take hold.
• IPO Market – DEAD!  Only the best of breed will get done in 2009. 
• Private Equity – Should still fair decently with a below average amount of deals getting done.  The PE guys are in for an extended exit window as there are no other alternatives other than M&A.
• M&A activity – This activity will increase significantly in 2009.  This will be the year of the buyer and “platform” company.  There will be heightened deal making happening in this arena because there is not another arena for liquidity.
• World Conflict – I fear will only get worse.  Obama has the daunting task of slowly pulling out of Iraq, making sure Iran is in check with nuclear weapons, containing the conflagration in the Gaza strip, dealing with the Somali pirates and the havoc they are wreaking on commerce, etc. etc.
• Greentech – Although not the panacea it was when oil was above $100 per barrel, I think enough attention has finally been focused on the greentech arena with Al Gore stumping for a halt in global warming that it should provide for an increase in the total VC and Private Equity capital doled out in 2009.
• My Blog – A massive uptick in sponsorship and readers….  Sorry had to self promote because if I didn’t… who would!
• China – That is the big question!  Will the global driver of economies keep its torrid pace up or will it suffer the same fate as developed countries?  China will definitely slow in terms of growth but will lead the world in output and economic growth.  When the values are still cheap by any standards the opportunity will exist for investment dollars and economic activity.  I give China thumbs up for 2009.
• Micro cap stocks – As I have said before in previous posts this is where the growth and innovation is going to come from and that translates into opportunities for investors.  I would look for value in some solid underperforming public companies with market caps below $250 million I feel there is tremendous upside in those particular companies.

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I understand that this is just another opinion in the sea of prognosticators on the web but I will be here throughout the year updating interesting developments that affect us all.

By the way this is dealflowdiaries.com 1st anniversary.  Wow what a year! Happy New Year and best to all readers this year!Pig Hunt dvd

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