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Wall Street, Fall 2009

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At this time next year, I could see the Dow as low as 8,300. That’s more than 40 percent off its October 2007 high of 14,164. On Main Street, that means a further slowdown in consumer spending, as buyers feel poorer, and another hit for 401(k) and college savings accounts. For Wall Street, it means more bank closures and mergers and still more layoffs. The two remaining independent commercial banks–née–investment banks, Goldman Sachs and Morgan Stanley, will have to fight mightily to remain independent. The bet here is that Goldman makes it but Morgan Stanley succumbs to one of the four emerging megabanks—Citigroup, JPMorgan, Bank of America, and Wells Fargo. Even those banks that survive will be letting people go—that’s the only way the economics of these deals work. Those people who left investment banks for hedge funds will now find the doors closed should they seek to return (and with the hedgies getting clobbered, too, they will seek to return). Bonuses will be slashed industry-wide, as banks seek to hang on to capital. And even the megabanks, the big winners in the subprime shakeout, will rein in salaries. Why not? If someone doesn’t like it, there are more than 100,000 out-of work bankers ready to take their place.

In terms of investing between now and next fall, I’d buy the stocks of only companies you can’t not use—Kellogg’s, General Mills, Kraft, P&G. You can’t trust anything to do with financial paper—there’s still too much uncertainty (if a bailout bill does pass, at what price will the toxic bonds be marked?). And commodities have been bid up too high—demand soared as investors sought shelter from stocks—to buy for some time. Oil’s going to $50 on weaker demand; when it gets there, we can revisit the oil stocks.

Main Street will look different too. After years of overexpansion, retail’s going to be in massive retreat, except Wal-Mart, Costco, outlet malls, and a couple of Lowe’s. Amazon will become your de facto store, as it will be providing pretty much everything. By this time next year, Amazon could be rolling out national same-day service, which would be a real bricks-and-mortar killer, the last nail in the retailers’ coffin, not unlike what Google’s done to the media. Without job growth, we will have anemic auto sales, and by this time next year the big automakers will have burned through the subsidies they just received and either come back for more or, yes, declare bankruptcy, something that’s definitely on the table with this ailing group. And even though gasoline will come down, a sense of feeling poorer will still crimp travel and entertainment.

At this time next year, I could see the Dow as low as 8,300. That’s more than 40 percent off its October 2007 high of 14,164.

Here in New York, so many professionals made so much money when things were booming that I believe our economy will be cushioned somewhat, even as Wall Street’s taking it on the chin. That’s why you still see people shopping, despite the headlines. The weak dollar and the foreign investment it attracts will help, too, although that economic engine will also slow somewhat as the world economy cools. If you worked at Bear Stearns or Lehman Brothers or AIG or Washington Mutual, you are no doubt already singing the praises of in-home eating, and most of us will have to accept a lower standard of living. Those of us lucky enough to have socked away savings from the seven fat years before this will work our way through the lean times; we may bargain-hunt at Century 21, but we won’t hang ourselves with the ties we purchase there. Many of those without a nest egg will find themselves in foreclosure, personal bankruptcy, or other dire financial straits. Tax hikes, cuts in government services, soaring budget deficits, or all of the above are in the offing, too. Not even Mike Bloomberg, should his third-term wish come true, can spare us from some significant pain. Although I don’t see a return to the pre-Rudy days, it’s hard to imagine how upticks in the welfare rolls and crime rates aren’t on the horizon. According to the most recent real-estate statistics, released last week, the average price of a Manhattan apartment rose some 10 percent in the third quarter over last year, to about $1.4 million. But for the first time in years, the number of apartments sold dropped sharply. That’s an ominous sign.

If all that seems depressing, take heart. The same sector that got us into this mess—housing—will lead us out of it. The federal government, sub rosa, has determined that we will have a European-style financial system, consisting mainly of the four megabanks I mentioned—Citigroup, JPMorgan, Bank of America, and Wells Fargo. These are the institutions that will be deemed too big to fail and will be protected no matter what. In return for the creation of the jolly oligopoly, these four banks will have to make mortgage money available to all at a reasonable price, something that will help real estate bottom and begin heading upward before this time next year. Of course, it helps that Fannie Mae and Freddie Mac are nationalized and can absorb hundreds of billions in losses to make it so. It will also help that I expect short-term interest rates to decline to 1 percent as the Federal Reserve wakes up to the notion that the battle was, is, and will be deflation, not inflation, so rates have to be as low as possible to stir economic activity and drive unemployment down. Once that happens, and housing rebounds, the rest of the economy will follow.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: jjcletters@thestreet.com. To discuss or read previous columns, go to James J. Cramer’s page at nymag.com/cramer. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.


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