December 16, 2008 - It is the best of times. It is the worst of times. I'm paraphrasing a little from Mr. Dickens, but his sage words still apply. How could this be the best of times? We'll come back to that. First, let's look at the worst scenario for next year.

The Worst:
More mortgages default. With Option Arms and Alt-A loans and NINJA loans (No Income, No Job or Assets), there are going to be more defaults coming in 2009. That's unavoidable. As loans that were made with teaser rates (rates lower than currently charged so some borrowers could qualify) move up from teaser levels, some borrowers won't be able to make payments because they've lost their jobs or their income isn't sufficient. Expect more credit problems, both in residential and commercial mortgages. Credit card defaults will grow.

Housing won't rebound for a while, maybe not until 2010. That's because there are too many homes for sale, whether occupied or bank owned. Foreclosures will stay high as more people lose their jobs. Prices will continue to slide until supply and demand equalize. For the next few months, demand won't be good.

Autos will continue to stack up on lots. Again, with unemployment high, buying a car isn't a priority. The auto makers will get loans to keep them going but with plenty of government oversight. Government may take control of one or more manufacturers. If you like the post office, you'll love a government run auto company.

Even with very low interest rates, borrowing will be limited for two reasons. First, banks will only lend to the most highly qualified borrowers and only on certain types of assets (mostly houses or other real property). Second, consumers are shell-shocked at the moment, worried about their jobs, their mortgages, their futures. The psychology of borrowing too much has been broken. While interest rates will be low, getting people to borrow money will be harder.

The Best
A new president takes office with a different approach from the last one. Whether he'll be right or wrong will take time to judge. One thing is already great: the American way of electing a leader works just fine, and there's a renewed hope in the American spirit that's been lacking for many years.

The new WPA (Works Project Administration from the 30's) will absorb some of the jobless. The new administration is talking about building up the U.S. infrastructure. That means more highways and bridges or repairing old ones. Depending on the scope of the commitment, there could be 2.5 million jobs involved.

Paul Volcker is chairing the Economic Recovery Program. The brilliant ex-head of the Federal Reserve was one of the main reasons inflation was broken in the 70's. Now he's returned to help the country bounce back from a protracted recession.

Interest rates will stay low. With weak demand for housing and autos, credit will be cheap, for those who qualify. Qualifying will be the hard part, but loans will carry very low interest rates. Don't expect rates to rise significantly until a more "normal" economy is evident. When they start to go higher, they won't stop for some time. But for at least the first 6 months of next year, interest rates won't stop any buyers who can get a loan.

Housing will stay cheap. With too much inventory, too much unemployment, too many foreclosures, and too many restrictions on borrowing, homes will stay at bargain levels. Until the foreclosed properties are absorbed, anyone looking to buy a home (and can qualify for a mortgage) will get a great bargain.

The stock market should start to move higher early in the year, in anticipation of a better economy in the second half of 2009. As the market tends to move 6 to 9 months ahead of actual events, it should show good price appreciation most of the year. Look for financials to lead the way as banks quantify their losses and have the capital to absorb them.

The second half of 2009 will be much better than the first half. Housing inventory will be lower, and prices will stabilize, maybe start to head higher. Prices of most goods and services will stay low as demand won't accelerate but will improve. More jobs will appear as consumers get back into a buying mode, albeit cautiously. All of the federal programs will have been implemented, and more money will be in the system to help stimulate the economy.

As always, I could be wrong, hopefully on the worst part, not the best. But given where we are today, these predictions seem reasonable. The key to survival for investors right now is to simply be patient. The worst for the stock market may be over as investors look ahead to better days under a new administration and new programs to stimulate the economy. Look for the collective will of the American people to revive this country and take it to better times. It has in the past, and I have every faith that it will again.

 Ted Allrich