Picking Stocks for 2009. January 16, 2009

PICKING STOCKS FOR 2009. January 16, 2009.

I’m expecting 2009 to be a better time for investors. Not an easy time, as in the one-sided market of the late 1990s when everything one bought went up, but an easier time than 2008 – at least for those willing to engage in a little market-timing. And that’s although I expect rallies will only be bear market rallies within an ongoing bear market.

Why an easier time then?

Last year my newsletter’s market-timing strategy portfolio gained 9.2%, one of the very few advisory services that were up for the year in which the S&P 500 lost 38.5%, hundreds of mutual funds and hedge funds closed due to heavy losses, and even ‘best investor in the world’ Warren Buffett was down 31.8% for the year. But it wasn’t an easy year. The extreme volatility made for stress, and the need to stick with mutual funds and ETF’s due to the higher risk in individual stocks took some of the fun out of it.

The outlook is different in that regard for 2009. Of the many stocks that plunged severely last year, some plunged for good reason, while others sank in sympathy with the market, or were sold simply because mutual funds and hedge funds had to sell something in order to raise cash to meet their record level of redemptions.

I believe that has quite a number of stocks on the bargain table, which is a lot different than when 2008 began.

One I mentioned to you in my December 26 column was Zimmer Holdings, symbol ZMH. Zimmer is about as far away from the troubled financial, housing, and retail sectors as you can get. To remind you of what I said in December, the company designs and manufactures orthopedic implants, including joint, dental, and spinal replacements. I believe its 54% stock plunge last year was overdone, and recommended its purchase. It’s up about 2% since that Dec. 26 column. The encouraging thing about that is how well it held up even as the S&P 500 plunged back down 10% over the last two weeks.

In my newsletter this week we featured another individual stock, which may have appeal to those looking for income as well as those seeking potential capital gains.

It is Cedar Fair, symbol FUN. Cedar Fair operates popular regional theme parks, and water parks, in 13 states in the U.S. and one province of Canada.

The parks include Cedar Point in Ohio; Knott’s Berry Farm and Soak City USA in California; Dorney Park/Wildwater Kingdom in Pennsylvania; Valleyfair in Minnesota; Worlds of Fun in Kansas, Michigan’s Adventure Park: Canada’s Wonderland in Toronto; Kings Dominion in Virginia; and Carowinds in North Carolina.

Cedar Fair is noted for exciting rides. Its Cedar Point Park in Ohio offers 65 rides and 16 roller coasters, including Top Thrill Dragster, one of the world’s tallest and fastest coasters.

In addition to thrill rides for the brave, the parks are family oriented with water slides and wave action pools, as well as attractions for smaller children themed around the ‘Peanuts’ comic strip characters.

While the recession is having an effect on attendance at theme parks, Cedar Fair’s regional attractions, each only a few hours from large population centers, are faring much better than the destination-vacation type theme parks. The company just reported a couple of days ago that attendance in its 4th quarter was 8% higher than the same quarter a year ago, and estimated average daily spending per guest declined only 1%.

The company’s aggressive annual expenditures for new rides and attractions have always been key to keeping visitors returning, and Cedar Fair has announced expenditures of $62 million for 2009 additions, including a huge new coaster at its King’s Island Park in Cincinnati. Company president Dick Kinzel says, “It is likely that many of the difficult market conditions we faced in 2008 will be present in 2009, and we will continue to focus on adding value to the guest experience through new shows, thrill rides, family attractions and special events. I believe we have an excellent overall entertainment package lined up for 2009 that will appeal to today’s budget-conscious consumers.”

Revenues have increased in each of the last ten years. Going forward the worsening recession will probably have a greater negative effect on attendance (and the bottom line). But I believe that with the stock having plunged 57% along with the rest of the market, the potential negatives have been pretty much already factored into the share price.

Cedar Fair may also have appeal for those looking for income. A limited partnership, Cedar Fair must pay out most of its earnings to investors in the form of dividends. The partnership has increased the dividend for 21 straight years. At the current depressed stock price the dividend yield is a robust 15.5%. Even if the company had to cut its dividend for the first time, the yield would probably remain at a high payout.

Meanwhile, according to FirstCall/Thompson Financial, of seven analysts surveyed, three had a ‘strong buy’, three a ‘buy’, and one a ‘hold’ rating on the stock.

As always this is my opinion and there are no guarantees in investing, but I believe Cedar Fair is a good choice for 2009, for both income and potential capital gains.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding the Bear – How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

Sy Harding

4 thoughts on “Picking Stocks for 2009. January 16, 2009
  1. Is Great INFLATION coming ?? 2008/2009?The so-called "credit crisis" is gaining momentum. Investors increasingly question the solidity of the banking system, as evidenced by banks’ tumbling stock prices and rising funding costs. With bank credit supply expected to tighten, the profit outlook for the corporate sector, which has benefited greatly from "easy credit" conditions, deteriorates, pushing firms’ market valuations lower. In fact, peoples’ optimism has given way to fears of job losses and recession on a global scale.

    Free market advocates, however, should not get carried away by the price action in the market place. In a free market, there is nothing wrong with individuals reassessing hitherto held expectations, entailing changes in relative prices. A free market is a discovery process, based on trial and error. Usually the effects of errors made by some are compensated for by the gains of successful decisions taken by others, and the economy expands.

    Sometimes, however, the effects of errors dominate, and the economy experiences what people call a crisis: income growth is (feared to be) lower than what people think it should, and could, be. In that sense a crisis is a correction of bad decisions. It is an indispensable part of the free market. It pushes those producers out of business who do not satisfy the needs of their clients, and it rewards those who serve their customers well.

    A crisis must be feared, however, if it has been caused by government action, and if the obvious signs of the crisis provoke ever greater doses of government intervention. In this case, the market would be prevented from doing its job properly. Bad decisions would be perpetuated, and the ultimate crisis may become nasty.

    Diagnosing the Causes of the Crisis

    It is against this background that one may wish to review the US central bank’s series of rate cuts, the latest being a big 75-basis-points rate slash on January 22, 2008, which brought the official Fed Funds Target Rate to 3.5%.[1] While the Fed’s moves were mostly hailed in public as appropriate measures to help the economy avoid recession, Austrian economists hold a completely different view.

    According to the Austrian Monetary Theory of the Trade Cycle it is the government-run money-supply monopoly that has not only caused the crisis; the theory also diagnoses that rate cuts will not solve the crisis, but will make it even worse.

    Central banks, the government agents holding the power over the printing press, pursue a monetary policy of "interest rate steering" or, in other words, pushing the interest rate down as much as possible by relentlessly increasing credit and money supply. It is this inflationary monetary policy that causes trouble.

    Ludwig von Mises pointed out that

    today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion.[2]

    Initially, the artificial lowering of the interest rate creates an illusion of richness and affluence. The increase in the money stock via bank credit expansion erroneously suggests that the supply of savings increases. Investment picks up, and the economy expands. The illusion of plentiful resources leads to malinvestment, and sooner or later the boom turns into a bust. While the money-fueled expansion is a manifestation of the crisis, it is actually the slump — the correction of malinvestment — that people complain about.

    The alleged fight against the crisis

    Once a crisis unfolds, central banks are called upon to lower interest rates — in ignorance of the fact that a monetary policy of pushing down the interest rate has caused the misery in the first place. Cheaper borrowing costs, it is believed, would revive the economy by stimulating investment and consumption, thereby adding to output and employment. Lower interest rates would raise the prices of stocks, bonds, and housing, translating into "wealth effects" which in turn strengthen demand.

    The obsession with a policy of lowering the interest rate is rooted in a deep-seated ideological aversion against the interest rate. It is a destructive ideology, in particular if the government is in charge of the money supply. Because then the government central bank will lower the interest rate to whatever is deemed appropriate from the viewpoint of the government, pressure groups, and vested interest.

    However, the interest rate is a reflection of peoples’ "time preference": because of scarcity, people value goods and services available today ("present goods") more highly than goods and services available at a later point in time ("future goods").[3] This is why present goods trade at a premium over future goods. That premium is the interest rate, or the "time preference rate." The interest rate is a free-market phenomenon.

    A policy of suppressing the market interest rate through a government-sponsored credit expansion, Mises noted, is a policy against the free market:

    Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.[4]

    Causing Inflation

    A monetary policy of lowering the interest rate via expanding credit and money corresponds to the widely held view that "some inflation" is a requisite for economic expansion. In fact, the "inflation bias" has become so widespread that nowadays inflation (the rise in the money supply) is much less feared than deflation (the decline in the money supply).

    Mises was aware of what happens once the inevitable crisis caused by a manipulation of the interest rate unfolds: "In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils inflation and credit expansion have brought about."[5]

    The current credit crisis is a sad case in point: with monetary policy having caused inflation and malinvestment, it is now called upon to pursue a policy that leads to even more inflation and malinvestment.

    Could monetary policy become "ineffective," that is, could it fail to create inflation? For instance, the Bank of Japan’s rate cuts around the beginning of the 1990s — as a reaction to falling asset prices and a growing volume of bad loans in banks’ portfolio — did not succeed in bringing credit and money growth rates back to precrisis levels. Even with official rates at virtually zero, the economy remained in stagnation and the Japanese stock market continued to decline.

    Against the backdrop of the Japanese experience it should be noted that there is no limit to central-bank money printing. Central banks can, at any one time, buy any assets from banks and nonbanks such as bonds, real estate, foreign currencies, etc. If a central bank buys, say, debt from the corporate sector, it increases the money stock in the hands of nonbanks directly; the commercial banking sector is not needed for increasing the money supply.

    Central banks’ unlimited power over the money supply has been made pretty clear by the chairman of the US Federal Reserve, Ben S. Bernanke, in November 2002:

    [T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.[6]

    So if the government is determined to create inflation, there should be hardly any doubt that there will be inflation. The Fed’s series of rate cuts suggests that the bank tries to create additional credit and money via lowering the interest rate on base money. But if such action fails to yield inflation, it does not take much to expect that the central bank may take recourse to less "regular" operations, if and when such an inflation policy is deemed necessary to solve the credit crisis.

    So far, at least, US bank credit and money supply growth has remained at a very high level. In December 2007, banks’ commercial and industrial loans grew at 10.9% y/y, and total bank loans and leases were up 10.8% y/y. Real estate loans — most likely as a consequence of the defaults in the subprime markets — slowed down somewhat, but were still running at 6.3% y/y. Against this background the Fed rate cuts should actually accelerate the erosion of the exchange value of money further.

    Threatening Freedom

    Inflation is a societal evil. It redistributes real wealth from creditors to debtors. It impairs the role of money as a means of exchange. The efficiency of the market’s price mechanism is greatly reduced, encouraging bad decisions, which in turn harm peoples’ economic well-being. At the end of the day, inflation is a serious threat to freedom. The majority of the people, suffering badly from inflation, would most likely blame the free market for their plight, rather than blame the central bank for the debasing of the currency.

    Print $17
    Audio $25
    Mises noted:

    Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.[7]

    From the Austrian viewpoint, the current credit crisis appears to be a precursor of great inflation. If a deliberate policy of great inflation is chosen in the United States, a monetary policy of debasing the currency would most likely also take hold in other currency areas of the world. The credit crisis has become a threat to the free societal order: as people become dispirited with the free market order, the door would be pushed open for anti–free market policies.


    Thorsten Polleit is Honorary Professor at the Frankfurt School of Finance & Management. Send him mail. See his archive. Comment on the blog.


    [1] The FOMC rate cut was made "in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households." US Federal Reserve, Press Release, 22 January 2008.

    [2] Mises, L. v. (1996), Human Action, p. 794.

    [3] For the explanation of the Austrian theory of the interest rate, see Rothbard, M.N. (1993), Man, Economy, and State: A Treatise on Economic Principles, pp. 31
    1 day ago – 2 days left to answer.

  2. Huh? I forgot what the question was.

    Seriously, though, we have experienced at least 5 years of inflation. We may continue to see some more for another year or two at the most. But that won’t make much a a difference for the USA as the credit ratings of the majority of middle income earners is pretty will shot for the next 5 to 7 years. That means less consumer spending which will lead to layoffs and closures of businesses.

    In other words, I wouldn’t worry about inflation. Worry about the inevitable depression.References :

  3. No, I did not agree with one word of that. If that is your analyses of what to expect then I could have saved you the trouble of writing that.
    The credit crunch is biting and there may be more pain, but wrong about everything else. Excuse me for not answering every point, I don’t want you to feel bored reading it.References :

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