Happy 2009? You Beta Believe It

There's a better chance of this year turning out better than almost anyone now dares to expect, at least if better is measured in dollars and cents and worst fears that don't come to pass. Be aware though, that my New Year's resolution was to dial up the optimism. One of these years, this is sure to make me look as preternaturally prescient as a hedge fund manager or a Fed economist.

It would seem I'm just not cut out to be a skeptic. My first attempt at calendar-driven prognostication a year ago envisioned a recession, bear market, popular embrace of thrift, the popping of the oil bubble and the ascendance of an underdog outsider to the highest office of the land. And yet I also had stocks erasing most of their losses by the end of the year, even as unemployment approached 6%. How droll. At least I was right about needing a drink by the end of 2008.

Better to play it straight this time. The coming year's major theme for the severely dislocated financial markets and the severely depressed consumers will be reversion to the mean. And seeing how far below the mean we're slumming now, it could well be that we end 2009 if not exactly bathing in champagne then at at least sipping something sparkling.

It's striking that after a disastrous year even most of the optimistic market seers are only willing to anticipate a modest rebound and not a sharp rally of the sort that often follows epic panics. The consensus seems to be that an economic revival won't come until late in 2009 if it comes at all, and that everyone should buy corporate bonds before venturing into the equity minefield.

Risk is a four-letter word and leverage a longer expletive, and hardly anyone on Bubblevision wastes their breath on small caps and emerging markets, which are cheap and historically outperform while everyone is laundering their knickers and printing money. The Russell 2000 small-cap index quietly gained 8% last week as skeptics carped about the low volume, outpacing the 550-point gain on the Dow.

I'm going to go out on the limb and posit that negative interest rates, tax cuts and plain old mean reversion will most benefit neither corporate bonds nor the biggest, safest dividend plays. I believe it's most bullish for the beta trade -- the more volatile names that have crashed hardest. They ought to be the biggest beneficiaries of economic stimulus and the Fed's efforts to revive the appetite for risk. And they're currently the most unpopular asset class, which tends to be the best one for patient money.

The economy, recently shrinking at an alarming rate only seen once in a generation or so, is also overdue for a break, and will get several in the form of tax cuts, government spending, Fed re-leveraging and the diminished likelihood of a financial collapse. Housing remains the wild card, caught between the looming wave of foreclosures driven by pink slips and rate resets and a new administration determined to stop the rot.

I would argue that there hasn't been a better time to take a risk in years, or a worse time to play it safe, whether in government debt offering low yields or in cash doomed to a negative real rate of return. I believe that the popularity of minimally rewarding government IOUs will prove fleeting. I'm newly enamored of the ProShares UltraShort Lehman 20+ Year Treasury ETF (TBT), which aims to return double the daily move in yields on long-term U.S. bonds.

We're in for hard times, but all the recent Depression rehashes and free market obituaries are likely to ring false a year from now. So are suggestions that the American economy will be done in by thrift: not while Messrs. Summers and Jobs are on the job.

It is my hope and suspicion that by the time 2009 is done, '08 will seem like an aberration rather than the start of a painful new era. Imagine how good we'll feel if that turns out to be the case. And if I'm wrong, remind me in the soup line.