Summary:

Investment Recommendations:
Value Stocks
Convertible Bonds
Investment Grade Bonds (ie. LQD)
Junk Bonds
Emerging Market Stocks and bonds (bonds denominated in local currency – a play on falling dollar)
TIPS
“Anything But Treasuries”

“This is not a time to shy away from taking risks. The markets are priced right now to reward risk-bearing more than any time in many, many years.”

Treasuries – which had a strong 2008 – are the worst place to put money in 2009.
The market has created great investment opportunities, including value stocks and convertible bonds.

“I was a bear coming into this credit crunch – some called me a perma-bear – yet this contagion effect went a lot further than I predicted.”

“Some markets have been hit beyond any rational valuation of the risks associated with those assets.

What’s an example of a promising area hit hard?
Emerging Market Stocks and bonds
TIPS

“This is the richest environment of low-hanging fruit I’ve seen in my career. You’d have to go back to 1973-4 or even, in some markets, the Great Depression, to find markets priced as attractive as now. It’s tempting in a bear market to focus on the glass being half-empty and on how much has been lost. But the glass being half-full is largely ignored.

Inflation/Deflation debate
We will have inflation.
If you have very little debt and you have a depression, it is likely to be deflationary. If you have very high debt (like US today), and you have a depression it is likely to be massively infationary. Not suggesting a risk of hyper-inflation, but people are not pricing in the risk of inflation.

Expects Value stocks to outperform Growth Stocks.

Realistic target for future stock returns is 8% (comes from 3.5% dividend yield, plus 4.5% earnings growth). “There are segments of the bond market where we can almost assuredly do better.”

“The problem I have with stocks – is that while nicely priced, they aren’t attractively priced relative to their own bonds. The savagery of Sept. – Nov. was more drastic for bonds than stocks. The market actually widened opportunities on the bond side even more than the stock side…..Investment grade corporate bonds are a vivid example of that.”
Also below-investment grade bonds (i.e. ‘High-Yield’ bonds). which yield nearly 20% above Treasuries. “Suppose 40% of [Junk} bonds go bust next year. And suppose you get 50 cents on the dollar back on the bonds that go bust. Only at that point will you have lost your spread on the 20%. But such a scenario has to happen every year until the [junk] bonds mature, in order to merely match Treasury returns. A 40% default rate every year for several years would be truly without precedent.”

Has the market bottomed out?
“There is slightly better than 50-50 chance we see another leg down in the stock market. That’s because the deleveraging in the economy is only partly underway, and there is a lot more of it to come. The mass liquidation of hedge funds is not done. As for economy, expect 2009 to be a bit worse than people expect. ”
Housing market turns up 2010/2011, not next year.
Would surprise if ‘Risky’ bonds (ie. corporate/junk) take another significant leg down