As 2009 fades away, it’s time to step up to the plate and make my predictions for 2010. While my predictions for 2009 had a few misses, like the one that had the US dollar reaching parity with the Euro, some of my calls were actually spot on. My call on where the S&P 500 would close is within 1% of where it is!

Okay, enough backpatting, let’s get to the predictions:

1- Faced with unprecedented low popularity due to their reckless spending and softness on national defense, the Democrats lose control of congress, as a new Republican revolution sweeps the US.

2- The S&P 500 has another volatile year, but ends up registering a gain to close at 1291

3- The Planet continues to cool

4-After announcing that he will stay in school, University of Washington QB sensation Jake Locker has a great season and wins the Heisman Trophy.

5- A small scale sub-prime crisis hits Israeli real estate. As interest rates move up, and linked mortgages are reset, many recent buyers are unable to make monthly payments and are forced to sell their homes for 10-15% lower than they were purchased for.

6- Speaking of interest rates, the US government 20 year bond hits a 5.1% yield.

7- Zack Miller’s investing book, ” Tradestream Your Way to Profits” (coming out in the spring)becomes a business best seller.

8- The traditional secular stance of the Turkish army is lost as the country moves towards fundamentalism. This creates even more chaos in the Middle East, and Israel and India become very close allies.

9- Gold euphoria ends as common sense enters the market,  sending the price down to $750 an ounce.

10- Prez. Obama actually calls an Islamic terrorist, an Islamic terrorist. Well maybe that should be for 2011!

Happy New Year,

Aaron

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By Aaron Katsman

We are always complaining that prices that we pay for goods and services are always going up. Listen to the news and you will hear that the price of bread is going up, as is the price of gasoline. In addition, in order to escape the economic slowdown that has gripped the world, the US and almost every other country, is printing money 24 hours a day, 7 days a week to meet the trillions in new government spending.

We hear the term “Inflation” thrown around but what is it and how does it impact our investments?

Definition

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can’t buy the same goods it could beforehand.

Inflation and Investment

With little in the way of economic growth in sight, the threat of inflation seems mild. Many analysts say that it could take months before we need to worry about inflation. With all due respect to those analysts, we have actual data that shows the economy is inflating. Data just released in the US showed higher consumer prices, and in Israel, we have had 4 consecutive increases in the CPI (Madad).

If it appears that we are going to enter a period of high inflation, and what we said above is true that inflation erodes the purchasing power of your money, the question for investors is how to protect your portfolio against a spike in inflation?

There are 3 traditional inflation hedges that investors use to protect their portfolios. The general principal is to buy something now and sell it later, after inflation has increased the price of the product.

The most popular hedge against inflation is to buy gold. According to Blanchard Economic Research, “Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since the end of World War II, the 5 years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those 5 years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.”

In recent times the use of commodities aside from gold has gained in popularity. Corn and wheat are just some of other base commodities that increase in price during inflationary periods.

The problem with gold and other commodities is that they are not very liquid. For those investors who require a high level of liquidity, government bonds linked to the inflation rate may be the way to go. In the US these bonds are called TIPS (Treasury Inflation Protected Securities). TIPS come with the same guarantee as other US government bonds, and investors will see an increase in interest paid if inflation increases. While in the US, CPI-linked bonds are rather new, in Israel (where we have seen hyperinflation) inflation linked bonds are very popular.

Don’t wait for inflation to arrive to start thinking about protecting your portfolio, because by then it may be too late. Get a head start now and protect the value and purchasing power of your money.

Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, NFA, SIFMA. For more information, call (02) 624-0995 or email aaron@lighthousecapital.co.il.

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Barclays Capital came out predicting a quick end to the shallow Israeli recession, and a return to decent growth of 2.9%  by next year.  Keep in mind that the Israeli economy was late to the ‘recession game’ and looks to be an early ‘exiter’ from economic turmoil as well.

With all this great news Barclays said that they expect an Israeli Shekel/USD exchange rate of 3.65 buy the end of the year. That’s a big move from the 3.93 area that the currency is trading at now.

According to Globes: “Barclays sees a less severe recession in Israel, and relatively quick growth recovery. The investment house bases its optimism on the fact that about 75% of Israeli exports are high-tech goods, and Barclays says that a rise in the Tech-Pulse Index - showing a US high-tech recovery - points to stronger Israeli exports. The Tech-Pulse Index, measured by the San Francisco branch of the US Federal Reserve, tracks the US information technology sector.”

It looks like we have started to see this happen. As Tech has led the stock market turnaround in the US, Israeli stocks that trade in the US have been flying, up over 33% this year. Keep in mind that, like it or no, President Obama’s push for alternative energy sources will be huge for Israel, as Israel is one of the big global players in cleantech and water technology. If this trend of a ‘tech led recovery’ continues, look for the Israeli hi-tech scene, from small and mid-cap tech plays on the NASDAQ to M&A to Israeli VC, to have a very strong 2nd half of ‘09, and lights out for 2010.

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It’s been a good 22 years since I took French classes, and I was trying to remember the French word that best described the word’ Chutzpah’. Then I heard the news and the word became clear. The word is  Sarkozy.

Who does this guy think he is? According to a Ynet article: “Channel 2 reported Monday that during Netanyahu’s meeting with Sarkozy in Paris the latter said the prime minister should appoint Opposition chairwoman Tzipi Livni in Lieberman’s place. “With her and (Defense Minister Ehud) Barak you can make history”, he was quoted as saying. “I have always accepted Israeli foreign ministers, and I loved to have Tzipi Livni here at the Elysee, but with (Lieberman) I can’t,” he was reported as saying with a wave of his hand.”

Pardoner Mois! We don’t tell you how to run your foreign affairs so what gives you the right to tell Israel how to conduct domestic politics?

The reporting of this despicable act was met with a brilliant response from PM Avigdor Lieberman.  ” Speaking to Ynet, the official said “France has meddled in another democracy’s affairs. This is intolerable. We don’t plan on asking for clarifications from Paris, but rather intend to ignore the matter entirely. I am certain that if you ask Israel’s citizens who they want in charge of appointing their foreign minister, the answer will not be the French.”

Amen.

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