Dow 20,000: 10 Reasons Why
The market had been on a severe roller coaster ride the past several weeks. Everyone started to panic and once again all the newspapers started spewing their “the world is over” speeches. Well, the world’s not over and gold is not a religious panacea to solve your problems. The real gold is in the minds of the innovators and inventors who keep on creating, building, and driving forward the economy so that now we are set for the next boom in the market.
It’s not going to happen in a day. Even God took one day to rest. The market every now and then needs a day or two to rest. Maybe even more than a day or two. But over the next 12 to 18 months I expect to see Dow 20,000
Here are some reasons:
1) QE2 has not started. WHAT? You might say? I thought not only has it started last November, it’s about to end? Not true at all. Federal stimulus takes 6 to 18 months before even one dollar hits the U.S. economy in a meaningful way. So expect that $600 billion or more to start hitting toward the end of 2011.
2) Then why is the market going up? One major reason is because we are in the third administration of George W. Bush. The tax cuts got extended. This signaled that Barack Obama was going to pay lip service to his constituents while still keeping an eye on the stock market. The guy wants to get re-elected, after all.
3) Multiplier effect. Once the stimulus hits the economy, it’s not just $600 billion. It’s probably more like $3 trillion. How come? Because when you buy that coffee with $1 at the local deli, what does that deli guy do with it? He buys a newspaper? And then that guy buys a donut. The multiplier effect is up to 10X. To be honest, I’m more worried about a bubble in 2013 then I am worried about a economic slowdown.
4) Nonfinancial companies are at their highest cash levels ever. Almost $2 trillion dollars. They were hoarding the cash just in case bad times were going to happen again. Guess what? They didn’t. But what good is that? Well…
5) They are spending it. Stock buy-backs are at their highest levels in history. Let me tell you the rule of every market on the planet that we learned in Economics 101: Price is ruled by supply and demand. Demand has been down for the past two years. But that’s OK, supply is now going to start going down right when demand picks up. $2 trillion is a lot of supply of shares to scoop up.
6) What about unemployment? Well, according to the Bureau of Labor Statistics, temp workers are at levels not seen since before 2009. Companies hire temp workers first before they hire full-time workers. That happens in every recession in history.
7) Corporate profits are at their highest levels ever. Did you know this is the first recession in history where cash levels in corporate America increased quarter-over-quarter every single quarter of the recession? And now profits are at their highest ever. Analysts expect S&P 500 earnings to come in at $95 next year. What if (as usual) they are too conservative and the number comes in at $100. Slap in a 20x multiple (could happen when the stimulus kicks in), and we have an S&P 500 at 2,000 and a Dow probably at 20,000.
8) Major stocks are dirt cheap. Apple AAPL +1.54% trades for 12 times forward earnings and has $65 billion in cash and no debt in the bank. Microsoft MSFT +1.20% trades for around 10 times forward earnings. Intel INTC +0.15% trades for around 8 times forward earnings. These are high market-cap companies. By the way, all the major indices are market-cap weighted. So if the big guys go up, the indices go up. All of these big guys can easily double or triple.
9) Innovation. Barely a year ago the iPad came out. Now what’s the number of people who have iPads? 20 million? 10 Read 10 Unusual Things I Didn’t Know About Steve Jobs.
10) Major demographic changes are occurring that are going to affect stocks for the next 25 years. What are they? Check my article here next week. Or, perhaps more importantly, follow me on twitter where I engage in ongoing discussions on these things. Follow me!
The fight never stops between the bulls and the bears. Last summer was personally grueling for me. The market was falling on worries of Greece, an economy the size of Rhode Island, and every day it seemed a new blogger was using this as an excuse to write a blog specifically trashing me. It’s usually a bad idea to personally attack someone to get your point across. It’s never really necessary, and it’s lazy and bad writing. And yet, my kids would Google their last name, and there would be post after post insulting me personally for my opinions.
The market is up some 25% since then. My feeling for the next year is similar: BRING IT ON.
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