As we look ahead to 2009, I think there are reasons to be optimistic about the markets. We put an extremely volatile 2008 behind us. In the final trading sessions of the year, we saw high levels of volatility. While that can be partially attributed to light volume and shortened holiday-trading sessions, it was certainly a fitting footnote to a year many investors would like to forget. As we move into a new year, I believe we will begin to see more normal market conditions restored, bringing many opportunities. 
The CBOE Market Volatility Index (VIX), seen as a barometer of investor uncertainty about the stock market, has retreated 35 percent from its highest levels reached during the highly volatile months of October and November 2008. During that time, investors had sought safe-haven investments, as evidenced by the rallies in the U.S. Dollar Index and Treasury futures. Gold, a market that often serves as a safe-haven in a flight-to-quality environment, was one of the few commodities with a positive performance in 2008, but still underperformed many gold bugs’ expectations as we saw a deflationary environment hit most commodities.
Light at the End of the Tunnel?
The stock indices posted big gains in the final trading sessions of the year and are so far starting out 2009 on a positive note. I believe that’s an indication we are beginning to see a bit of renewed confidence in the economy. Some recent investor surveys have shown very optimistic outlooks for the market in 2009. We may not see significant gains in the first half of the year, but the lower levels in the VIX show that fear of further declines may be subsiding. Further evidence of this was evidenced in the sharp decline in Treasury bond prices in the last two trading sessions of 2008, as investors started to seek higher yields to hold long-term government debt. Investors may be starting to see the light at the end-of-the-crisis tunnel, and won’t want to be holding low-yielding Treasuries for the long-term. Appetites for riskier assets are showing signs of return, including more willingness to seek alternative investments.
As fear subsides, I am looking for a return to the bull market in commodities as inflationary pressures build. Commodities have experienced major corrections since many reached reaching record highs this last summer. Crude oil, for example, fell 50 percent in 2008. Demand destruction due to economic circumstances, a stronger dollar, and de-leveraging by hedge funds caused many commodities to sell off substantially. We may see more de-leveraging in the first part of the year, but with the longer-term economic outlook starting to look a little rosier, I think we have seen a bottom in many commodities. I believe fear of depression will turn to fear of inflation that will cause a rush to commodities again.
Inflation Likely to Return
As I talked about in a recent article on hyperinflation, I believe the amount of money being printed by the U.S. government to finance the record bailouts of 2008 will cause a sharp decline in the value of the dollar. This decline will be accelerated as people gain confidence in the market and exit positions in safe-haven instruments. The European Central Bank has declared their intention to limit interest rate cuts in order to prevent inflation. Unless economic conditions worsen in the European Union, I believe they will hold true to this policy, causing a rally in the euro currency against the dollar.
We have seen heightened tensions in the Middle East recently, and as a result, we have seen a quick jump in crude oil prices from their recent lows. This, in combination with a rally in the stock market, may be enough to have put a bottom in the oil market. Many commodities are tied to the price of crude oil as costs of production and transportation affect their prices.
A cheaper dollar and higher oil prices are highly inflationary in my opinion, and will cause rallies in many commodities this year. Tighter credit markets may limit the amount of money farmers can borrow, creating the potential for lower plantings in the spring and a reduction in supply. With demand returning as economic conditions improve by late 2009, I am looking for agricultural commodity prices to rise. In my opinion, rising food and energy prices are on the horizon, and investors should protect themselves now by gaining exposure to commodities. It wasn’t long ago that retail prices at the gas pump were pinching our wallets, and fear of food shortages caused riots in third-world counties and limits on the amount of rice consumers could buy at some stores here in the U.S. As inflation rears its ugly head, we may see similar situations in our future.
Trading commodity futures and options is not for everyone, and involves high risk of loss, especially in these market conditions. I think it is very important to establish a trading strategy appropriate for your individual risk tolerance before entering any market. For assistance in exploring current market opportunities, please contact me to develop a strategy that fits your individual risk profile.
I highly advocate the use of options to gain exposure to commodity markets, as you can position yourself for long-term trends and more clearly define your risk. But be sure to discuss any option strategies with a licensed professional to be sure you understand the risks involved.
I wish you all the best of luck, and a healthy and prosperous 2009!
Matt Roma is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached toll free at 866-231-7811 or via email at Mroma@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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