Over 2009, Unblack Swans And Transparency Thematic For Volatile Turnaround

We traditionally use our last yearly note for retrospection and broader key themes. We expect volatile turnaround markets over 2009. We see as preposterous, the claims in 2008 of “black swans”. For financial debacle, extending long term capital to weak borrowers funded with short term money has been as old as the hills. As to liquidity crunch risk, we are reminded that the first generation creates, the second generation augments and the third generation destroys. Lack of respect for client value in the last cycle has come close to destroying the spirit of the Securities Act of 1933 on disclosure and against deceit, of which Sarbanes-Oxley in 2002 appears to have only attacked symptoms. For sustained market recovery, not just fiscal stimulus to buttress demand but tangible rebuild is needed of basic investor confidence.
Quality is likely to be a key attribute. Central bank ease then liquidity removal seem to be 18 month challenges. With equity risk premiums large and earnings discounts second only to 1929/32, we expect a classical late 2009 global equity market rotation with leadership first from the U.S. market followed, as global economic confidence develops in eighteen months, by incremental performance by emerging markets. Hopefully in pass through, energy cost decline with oil back at $39.7/Bbl wti should be substantial. Globally, we see recovery of the financials as crucial to capital market recovery, industrials and info tech as incrementally linked to fiscal largesse and healthcare as favored restructuring/turnaround sector. For thematic continuity, we have reproduced our note summaries of year end 2007 (Revenge of the Liquidities) and year end 2006 (In Search of Realism for 2007) with the full notes also on our website. Realism in attribution should help recognition of the next turn hopefully in advance of and certainly as it takes place.

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