Safety is the name of the game for 2009

Economically, 2009 has been handed some horrible numbers: It inherited the steepest contraction in manufacturing activity since 1980.

The Institute for Supply Management’s (ISM) factory index tumbled from 36.2 in November to just 32.4 in December, the lowest level since June of 1980. The all-time low for this data series, which began in 1948, was 29.4 in May 1980.

In addition:

• The ISM’s new order index dropped to the lowest level since it began keeping records in 1948.

• The employment index fell to a pathetically low 29.9 from 34.2 in November.

• The gauge of prices paid fell to 18, the lowest level since 1949.

That’s why the head of the ISM said,

“We’ve seen a tremendous amount of demand destruction. There is a significant inventory correction taking place.”

Export demand just hit a 20-year low signaling a spreading, worldwide recession.

The fact that caught my attention the most was the news that export demand dropped to the weakest levels since 1988. That tells me that our recession is rapidly spreading around the globe.

In fact, the manufacturing numbers across Asia look pretty darn discouraging. Take a look at these four weak links …

Weak Link #1:
Japan

The Japanese Manufacturing Purchasing Managers’ Index has been below 50 for 10 straight months. For December, the headline index dropped to its lowest level in history to 30.8, down sharply from 36.7 in November.

Weak Link #2:
South Korea

South Korea’s National Statistical Office reported that industrial production dropped by 14.1% year-over-year in November, after falling 2.3% in October. That, too, is the biggest decline ever recorded.

Weak Link #3:
Singapore

The Economic Development Board of Singapore said manufacturing output fell 7.5% in November from the previous year and warned that it expects the recession to last for several quarters into 2009.

Weak Link #4:
China

The China Federation of Logistics and Purchasing reported that its Purchasing Managers Index has remained below 50 for the third month in December while export demand continues to fall.

• The index of new export orders stood at 30.7, showing a severe contraction, and …

• Exports fell in November for the first time in seven years.

The key thing to keep in mind about China is that manufacturing represents about 40% of the Chinese economy. So this manufacturing slowdown hurts them proportionately more than it does our consumer-based economy.

And here’s what worries me most:

Manufacturers are usually humming along through the holiday season. Not so in 2008.

Manufacturers are generally busier than hornets up to the holiday season. So if business was horrible before Christmas, you can bet your boots that things are going to get even worse as we roll into 2009.

This is why I say …

Safety Is the Name
of the Game for 2009

If you want to survive with your portfolio intact, you have to focus on preserving rather than growing your portfolio. The name of the game for 2009 is going to be avoiding losses.

And although the numbers in Asia aren’t looking great, I believe the U.S. is still the most dangerous stock market right now. Why? Because the rest of the world doesn’t have to deal with popping real estate and credit bubbles like we do.

So I suggest using rallies to raise cash. What should you do with that cash?

First, consider stashing it in very short-term, ultra-liquid savings vehicles like treasury-only money market funds. A Treasury-only money fund gives you immediate availability of your money. You can have your funds wired to your local bank overnight. And you can even write checks against it, much as you’d write checks against any bank checking account.

A few to consider:

Second, take a look at non-dollar denominated stocks and/or bonds. I expect international stocks and international bonds to dramatically outperform U.S. financial assets in 2009. Consider the Prudent Global Income Fund (PSAFX) or the T.Rowe Price New Asia Fund (PRASX).

Third, for your speculative money consider vehicles like mutual funds or exchange traded funds that can profit from (a) rising interest rates, (b) a falling U.S. dollar, and (c) rising energy and commodity prices.

Consider funds such as the Rydex Juno (RYJUX), the ProFunds Falling U.S. Dollar (FDPIX), or the PowerShares DB Commodity Index (DBC).

Now, other than the Treasury-only money fund, I’m not suggesting you rush out and buy any of these other funds tomorrow morning.

What I am suggesting, though, is that you take a critical view of your portfolio and ask yourself how well (or how poorly) it is positioned to survive the rapidly slowing global economy.

Best wishes,

Tony

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