Disclosure:   This newsletter is not a means to solicit any of the securities mentioned nor does it recommend it for any person before they speak with a licensed professional investment advisor for their own suitability.  Investing in Equities bears risk of capital loss.  This newsletter is strictly the opinion of Jason Tillberg, President and founder of Tillberg Capital Management, Inc. and shall not be held responsible for investment loss from this newsletter.
1st Quarter 2009 Market Update
According to my research, 2010 could be the year of another depression, with real unemployment reaching 20% +, a slumping stock market, and numerous bankruptcies.  If we are lucky not to face a depression, then we may face a very long and painful recession. 

The stock market peaked in October 2007, earlier than I had anticipated.  I had believed that stocks in emerging markets and hard assets, like oil and metals, would rally until the Fall of 2008 or even as late as 2010.  Unfortunately, due to the sudden and rapid global credit meltdown, which also fueled investor fears, we experienced the worst ever stock market and real estate crash.  As a result, some of our investments suffered. 

We have entered a period of extreme volatility, characterized by great fear and uncertainty.  These emotions have created a very risk adverse environment.  Investing is now more difficult than ever, albiet, with great potential opportunity. 

I encourage you to review your investment objectives and notify me of any life changes and/or investment goals.  I recommend that you have at least six months or even a full year of savings in cash.  You should only invest money with which you are willing to take risks.  Investing will feel like a rough roller coaster ride, with lots of ups and downs, and you may feel “bumps and bruises” along the way.

I will continue to do my best and, as always, to act in accordance with my investing philosophy.  My philosophy has always been to invest in stocks that are undervalued and provide returns that attempt to beat the rate of inflation.  This kind of investing may face wild swings in value.  Also, keep in mind that there may be simple misjudgment in my own market assessment, which may result in unforeseen losses. 

These uncertain times have led me to my most aggressive campaign of research.  I share some of my findings below.  Much of my research has pointed to more downside and headwinds for the economy and stock markets.

Housing

The housing market peaked around July 2006 and prices have been falling since. 

There are about 75 million homeowners in America (110 million households and 68% owner occupied). Twenty four million of the 75 million don’t have a mortgage and own their home free and clear. Of those 51 million homeowners with a mortgage, approximately 15 million are currently under water, their house is worth less than their mortgage.  Judging by the chart below, based on a study done by Economist Robert Shiller, prices are on track to fall in value.  Anyone predicting a recovery by the end of 2009 is overly optimistic.

The chart below demonstrates that house prices are still historically overvalued.  Prices will have to fall another 21% before reaching pre-bubble levels.  This could leave another 10 million of the 51 million homeowners with a mortgage under water.  This will cause ever more strain in the banking sector of the U.S. and the world.  As we now know, the world is very well connected.
But please be aware that the Fed and U.S. government seem to be doing all they can to prevent further declines.  They are using very aggressive efforts, such as further lowering interest rates to near zero and monetizing agency debt.  This may cause prices to stop falling before they fully deflate, only to delay the inevitable. 
Below are some samples of other bubbles and what their fates became:

A. 1636 to 1637: The Tulip Bubble that took place in Holland.
B. 1719 to 1722: Stock price bubble of the South Sea Company.  One of its victims was Sir Isaac Newton.
C: Last example is the Japanese Nikkei which peaked in 1989 and continues to fall.
These charts illustrate the point that assets are in deflationary mode and it’s causing the entire economy to slow as consumers cut back on spending to pay down debt or just save. 

Oil

Aside from the peak in spending and the 90% market saturation in cell phones and internet and a deflating house bubble there is another peak that may be happening now: Oil Production.  This peak could have the biggest impact on both our standards of living and our way of life.  The chart below illustrates oil production past and projected future. 
Source: Association of the Study of Peak Oil and Gas

http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter99_200903.pdf

It is possible that world oil production had peaked in July of 2008 at 86,848 million barrels per day.  Source for production: http://www.eia.doe.gov/emeu/ipsr/t14.xls 

The consequences of declining oil production could be very problematic.  World population continues to grow and developing countries continue to create greater demand.  Oil is the largest source of energy on earth; it contributes to 38% of our energy needs.  Energy is needed to grow food.  If there is a decline in oil production, we may face declines in food production.  As of now, alternative sources of energy are not yet large enough to have meaningful impact to reduce the need for oil as a source of energy. 

Currently, much of the world is awash in debt, which can only be repaid by productivity.  A decline in oil production leads to decreased oil supply, which in turn depresses production.  With the world being less productive, debt would be harder to repay and debt service would be harder for everyone to make.  This could provide a catalyst for massive debt writedowns, with dire consequences on the banking system.

I will be paying close attention to these developments as we move forward.

   So now, how are we to invest in a world of declining oil production and a world that similtaneously awash in debt?
 
1. Own underleveraged assets: gold or silver, and shares of companies with little debt and high earning visibility. 

2.          Own shares in oil related assets.

3.Own shares in precious metals related assets.

4.Own shares in commodity related assets.

5.Own shares in promising alternative energy stocks.

6.Own shares in businesses that operate in countries that are not awash in debt, like China.

7.          For speculation, we may short shares of businesses that are overleveraged and have poor earnings prospects.  The commercial real estate sector is a good candidate.  (Please note: 1) retirement accounts may not short shares; and 2)you can only short stocks in accounts with margin. This is because when you short shares of stock, your losses could become unlimited.  This is highly risky.)  Contact me if you have any questions.

The themes of the housing bubble deflation and a potential oil supply decrease will be present in your portfolio allocations.  I look forward to speaking to you soon. 

Jason Tillberg
President

Written April 1st, 2009