14,400 Friday: Finishing Off Another Fabulous Week

 |  Includes: DIA, SPY
by: Philip Davis

Click to enlargeUp, up and away!

Super market is on the march in March after a flatline February, which is now starting to look like some healthy consolidation after a 1,000-point pop in the Dow in January. As I noted yesterday, 14,400 is where we expect to get our next round of resistance but, after that, we've got clear sailing all the way to 15,200.

The Dow is doing so well that the Dow 36,000 boys are getting interviews again. As noted by Jim Glassman:

Currently, for example, the forward P/E ratio (based on estimated earnings for the next 12 months) of the Standard & Poor's 500 Index is about 14. In other words, the earnings yield for a stock investment averages 7 percent (1/14), but the yield on a 10-year Treasury bond is only 1.9 percent - a huge gap. Judging from history, you would have to conclude that bonds are vastly overpriced, that stocks are exceptionally cheap or that investors are scared to death for a good reason. Maybe all three.

One way stocks could jump to 36,000 quickly would be for fears to subside and P/E ratios to rise. Assume that earnings yields fall to 5 percent. That would mean P/E ratios would go to 20, a boost of 50 percent in stock prices, assuming constant earnings.

Click to enlargeWe don't have to agree with 36,000 to see some sense in the premise. Yes, p/e's are low and the assumptions that growth will remain slow may be misplaced - especially when corporations themselves are sitting on over $2Tn in cash and using some of it to buy back their own stock at record levels. That coupled with M&A and privatization (NASDAQ:DELL) is taking more and more shares off the market at the same time as demand for them are growing and corporate profits (/e) are posting new records each quarter.

What if the economy actually improves? What if the US goes back to its historic 3.5% annual growth and Europe stops being a drag and Japan finally stops deflating (printing 100 Trillion Yen seems to be helping so far) and the rest of Asia gets back to their usual 5-8% growth path? That's a lot of ifs but 3.5% compounded for the rest of the decade (7 years) takes the Dow from 14,300 to 18,200 all by itself - kind of makes long-term investing seem like a no-brainer, doesn't it?

Now, what if, over the next decade or two, we improve the efficiency of solar cells and lower our energy costs by 30%? Currently, the US spends $624Bn a year on oil. Saving 30% of that drops $200Bn in consumer's pockets EVERY YEAR and also reverses our balance of trade - where all the negatives are due to oil imports. In fact, if we knocked back 1/3 of our consumption - the US would be a net EXPORTER of oil - assuming other nations weren't also converting to solar at our rate and still needed the oil.

So, rather than worry about peak oil - the reality is more likely that we have already passed over the peak use of oil in the United States and, from here on out, we will need LESS oil each year than the one before it to achieve the same or more economic output - that right there is the formula for the next golden age for the US economy.

Oil prices go down, gas prices go down, transportation prices fall and goods are delivered for lower costs (have you seen the Baltic Dry Index lately?) in ever more-efficient manners and it looks like, within 20 years - we'll have printers that will make our own clothes and many household goods. Is this the basis of a gloomy outlook?

The bears are furious (they'll be furious about this post, in fact) and you can see them growling on TV 24/7 as their positions go up in smoke and the bulls aren't happy easy as the fund managers missed this rally and they want you to get out before the next leg higher so they can get in and not be embarrassed by underperforming the S&P in Q1. I have not heard so many doom and gloom predictions since the Dow was at 7,000 four years ago.

Click to enlarge8:30 Update: Oh, did I mention jobs? 236,000 were added in February. That's despite the hurricane and despite the month's shocking lack of days (10% less than the month before) and despite another 10,000 Government jobs being cut.

Unemployment fell to 7.7%, still miles above the Fed's 6.5% target but still I'm sure da bears will make all they can of that - insisting that this means the Fed will take away the punch bowl but Uncle Ben was, in fact, very clear this month when he said he has no intention of easing up on stimulus until his goals are well-entrenched in the economy so 3-6 months AFTER we're below 6.5% is time to worry about the Fed cutting back, not before.

Yes the stock market is on Fed steroids, but so what? If you know Lance Armstrong is on steroids, do you bet he won't win? If you know Mark McGwire is on steroids, do you bet he won't hit 40 home runs in a season? Don't confuse knowing a thing is "fixed" with betting on the losers. Sure, ultimately, the cheaters may get what's coming to them (we're still waiting for anyone on Wall Street to be prosecuted) but, for now - the smart money needs to bet on who's going to win - not the side that has all the cards stacked against them.

Sure, in 1998 Mark McGwire hit 70 home runs and everyone in the world knew he had to be cheating, but that didn't stop him from hitting 65 home runs the next year, did it? So the Dow rose 7,000 points in 4 years on Federal Stimulus (and maybe a little credit for a recovering economy) but the stimulus IS STILL THERE - why would you bet they'll turn negative all of a sudden?

Not only are the Futures up about half a point this morning but all those new people drawing paychecks has shot the Dollar up a full percent to 82.88 so that's a 1% DRAG on the Futures and they're still up a half a point. As Christopher Robin was fond of saying: Silly old bear...

Have a great weekend,

- Phil

Disclosure: I am long AAPL, GDX, TZA, CIM, GLD, BA, ALU, DBA, GLW, SQQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly even mix of long and short positions - see previous posts for other trade ideas). Commodity positions are very short-term and not tradeable by the time you read this.