Could the Dow Sink Another 50% by 2012?

This past Friday, the Dow closed at 8017, its fourth consecutive week gain. Since the Dow set a 6,447 low on March 9th, it has rallied over 24% with heavy volume. Over the last 20 trading days since March 9, average daily volume was 7.2 billion, 16% higher than the average volume from January 1, 2009 until March 8, 2009 (Source: Yahoo Finance). Life is good. The general consensus is that the worst is over and we're seeing the start of a brand new bull market. But is it really?

As Harry Dent, New York Times bestselling author of The Roaring 2000s and The Next Great Bubble Boom, pointed out in his new book The Great Depression Ahead, the year 2009 will be the beginning of the next long-term depression and the initial end of prosperity in almost every market. He forecasted that the three massive bubbles that have been booming for the last few decades – stocks, real estate, and commodities – have all reached their peak and are deflating simultaneously. It is the perfect storm: the peak of Baby Boomer spending cycle collides with the oil and commodity in last 2009 – 2010. This coming depression will come not from this crash or even from the bursting of the commodity bubble, but from natural demographic and technology cycles that occurs every 80 years. He predicted that the Dow could hit as low as 3,800 in mid-2012. In other words, it could be down more than 50% from today’s level. If you use its all time high of 14,164, set on October 9, 2007, as a base, then the number could be 73%.

Other than natural demographic and technology cycles, I can think of another four reasons that could potentially sink Dow in the short term:

1. Mass Unemployment Numbers

The US Labor Department on Friday reported that employers eliminated a net total of 663,000 jobs last month as the national unemployment rate jumped to 8.5 percent -- the highest level in more than a quarter-century. Net loss of 5.1 million jobs since December 2007, almost two-thirds of them in just the past five months, is more than 3-million potential job creation proposed by Obama.

Worst yet, an index of services activity shrank for the sixth straight month in March, according to the Institute for Supply Management (ISM), and at a faster pace than expected, as job losses mount. About three quarters of Americans work in service-providing industries such as hotels, retail, education and health care.

2. Potential Commercial Real Estate Problem

As unemployment goes, so goes commercial real estate. This Friday, the Wall Street Journal reported that U.S. office vacancy rate nationwide rose to 15.2% from 14.5% in the previous quarter, and will likely surpass 19.3% over the next year.

Companies struggling to cut costs dumped a near-record 25 million square feet of office space in the first quarter, driving vacancies up and rents down. Just like homeowners, those real estate companies who owe more on their mortgages than their properties will go under. And worse yet, it is really difficult to get financing these days.

3. Credit Still Tide

Even though the Financial Accounting Standards Board (FASB) relaxed accounting rules for banks on assets this week, which gives them immediate balance sheet relief, banks still need to improve their capital ratios. The spread between high quality corporate bonds and Treasuries is still way over 5%, and in the double digits for high yield bonds. Smart money knows that economic mess will generate record downgrades and defaults which might last quite a while.

4. Potential Credit Default from East/Central Europe

Remember Latin America, Mexico, Russia and Asia's financial/credit crises before? Eastern and Central Europe needs to roll over $400 billion in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue program from the IMF and the European institutions, according to Telegraph.co.uk. Foreign creditors quickly withdrew from the region because of mounting fears of a debt crisis. A second wave of countries might need to be rescued after earlier bailouts of Latvia, Hungary, Ukraine, and Belarus -- as well as Iceland and Pakistan.

The recovery shape could be V, W, U or even L. After almost 20 years since Japan's Nikkei 225 set all time high at 38,915 on December 29, 1989, this Friday it was 8,750, still 77% off. The most recent and closer to home example is the NASDAQ.

Nobody knows what could happen tomorrow. However, everyone can certainly construct a well-diversified core portfolio with a few low cost ETFs. From a total of 829 ETFs, I compiled a list of the biggest and most liquid 30 ETFs below: First I selected ETFs with net assets over $1 billion, then picked the top 20 by assets, then pick top 20 by volume, then de-dupe and came up following list (click to enlarge):

Source: Yahoo Finance

If you think emerging markets are the future, iShares MSCI Emerging Markets Index (EEM) or a much less expensive alternative Vanguard Emerging Markets Stock ETF (VWO) is the way to go. For bond and inflation protection, iShares Barclays TIPS Bond (TIP) is my choice. If you think China will save the world, then iShares FTSE/Xinhua China 25 Index (FXI) should be on your watch list. If you truly believe a long depression is ahead, you can profit from it by owning UltraShort S&P500 ProShares ETF (SDS) from time to time.

Disclosure: I have long positions in EEM, EFA, QQQQ, SPY, TIP

Comments

[dpz:]

I don't trust a guy selling a doomsday book. Think for a minute. Even if he thought things were becoming more positive, would he state it publicly and contradict his own book? No ...

Apr 07 02:19 AM

[godcanhelp:]

too many uncertaincy (dollar,policy change,war,)or maybe goverment put money support the market,or they controll the gold market,you never know what kind stuff happen between them.we are just zilch.its sad.are we still in usa

Apr 07 04:07 AM

[wes mantooth:]

And if asked when the Dow was at 14000 where gold would be at 7000 you would say "OMG it will easily be triple what it is now". If the Dow were to drop by another 50% it would mean deflation is still king and gold would most likely be lower too.


On Apr 05 11:28 AM Mutual Fund Wealth wrote:

> Personally I don't see the Dow going down at all and certainly not
> 50%
> If the market sunk to anywhere near the 3800 mark I can't imagine
> how high the price of Gold would go...
> Doug T
> www.mutualfundwealth.com/

Apr 07 07:02 AM

[EdG:]

I think most people, especially the professionals have their portfolios biased to the positive or increasing stock market. It is instructive that the stock market is still only fair value and this is at last reported (high) earnings. Most companies (and people) still have too much leverage. It makes sense to me that the de-levering cycle will result in stocks being cheap at last reported earnings so I conclude that there is still a large decrease on the way.

Apr 07 08:38 AM

[stonedinvestor:]

No doubt with near total economic collapse comes the worlds biggest wall of worry for stocks to climb. It is not until we truly feel " wow, it did work, all this stimulus has staved off a depression!" that stocks will go down again. Until then earnings will be viewed one of two ways; oh my god they have swung from a total profit to a total loss! Or, well that wasn't as bad as some said it will be. For this earnings cycle, I am fully in the Not That Bad Camp. What will get interesting is the number of companies that refuse to give guidance- will this lead to less speculation and a leveling out of returns? Or greater suspicion by the public- and a generation that moves on without the stock market? The bigger questions for 2012 is just who will be investing? Will this become an ever smaller club? Or can buy and hold work again? For every person who confidently comes on tv and says the obvious- buy and hold has not worked for the last ten years, there is an investor at home faced with a singled digit stock that used to be worth much more. If you gobbled up Ford at $1-$2 and you held to 2012 I wonder how you would come down on that argument? Perahps up 30- Times! It would seem now more than ever buy and hold SHOULD work, but no one is saying that- not a one, that's why I'm starting to think that way.~stoney

Apr 07 09:18 AM

[Jason Tillberg:]

I'm with Dent and now Soros, also Ron Paul as we are in for a slowdown of at least 10 - 15 years.

No one mentioned peak oil in this forecast either.

1340's all over again?

Apr 07 12:45 PM

[Conan the B...:]

Sure, it could double from here, lose 50% and we could wind up here.

Apr 07 01:39 PM

[aarc:]

So many factors that will contribute to the downside.

How about this?

Most companies have suffered during the tech meltdown of 2000 to 2003. Likewise, the rally from 2003 to 2007 was hesitant and very frustrating to many investors. Hence, when the next round of bubble bursting such as the housing bubble and consumer spending bubble; investors did what they have to do - sell, sell, and sell. The lessons of 2000 to 2003 tech bubble burst is simple too fresh a would to be ignored. Likewise, corporations did what they have done before, they layed off as much employees as they can, this time much more than what they previously did - perhaps much more than what they should have done.

There is a saying: "fool me once, shame on you; fool me twice, shame on me". Investors have learned their lessons and would do anything to prevent being "victims" again of the market bubble bursting.

Now, there is one major thing that has been left behind.

During the 2000 to 2003 meltdown which resulted in Dow Jones plunging by 50%, the SnP by more than 60%, and Nasdaq a little over 80% - corporations have learned a lot on how to survive such a massive downturn.

Except for the banking, finance, insurance, and real state sectors who took too much risk during the housing bubble; most corporations have already been "forged in the test of fire" during the 2000 to 2003 period. They already have the knowledge, the experience, and many of them have already instituted conservative balance sheet practices that has prepared them for this market downturn.

Meaning - most corporations have already prepared themselves for this downturn using their experience of 2000 to 2003 markets meltdown and used the opportunity of 2003 to 2007 rally to beef up their balance sheets just in case another market meltdown of equal or greater magnitude than that of 2000-2003 happens again - which it did and as we have witnessed and are experiencing right now.

And most likely, they did most of their actions during the Oct-Dec 2008 meltdown in EXCESS. Once burned, they become overly reactive to this current meltdown.

Consumers, likewise, who did not react negatively to the 2000-2003 market meltdown, are now reacting massively negatively to this current market meltdown. Some of which are now buying guns and ammo and stocking provisions, others are even predicting WWIII.

Meaning - this 18 months of panic selling is already over-done!

In 1929 to 1932 which resulted in a massive 89% haircut for Dow Jones and corporations going bankcrupt left and right; most companies were not ready and has never experienced such a radical change in the economy. Thus the Dow Jones took more than 10 years to recovery. Consumers, likewise, suffered the shock of their lives.

This time around; we have already experienced the 2000-2004 downturn and most of us have already prepared for another downturn specially Warren Buffett whom we know very well did not participate during the "bear rally" of 2003 to 2007. Ever wonder how many "Warren Buffetts" did not participate either - no wonder the rally from 2003-2007 was so anemic.

All of us also knows what happened during the 1929 to 1932 Great Depression. This alone prepres us mentally for the tasks ahead.

Unlike 1929 to 1932; it is not so far fetch that any further sell-offs for the stock markets in the near future have already been priced-in and well expected by most market participants and thus they will be able to act rationally rather than go into panic mode if and when the next major sell-off happens again.

This prolonged preparedness by many investors to catch the next sell-off, in itself, can prevent the market from going lower than the last low of March 2009.

Likewise, the recovery from this "Mini-Depression" is going to be fast and furious if we can avoid a wholesale corporate bankcrupcies equal to or greater than that of the Great Depression.

You can't get up fast when you get hurt and got crippled during the fall.

However, when you have already anticipated the fall and have already prepared yourself for the fall - you don't get hurt so badly and thus be able to rise and run again relatively quickly.

I intentionally took the round-around repetitive process in order to be able to drive the points home.

Apr 07 03:37 PM

[Mad Hedge F...:]

Not likely. Today I spoke to my old Morgan Stanley boss , Barton Biggs, who is so bullish that he believes we are only one third to one half of the way through the current stock market rally. Barton, voted best international strategist for seven years, and one of the founding fathers of investment in emerging markets (with some pushing from me), now runs Traxis Partners, a major global macro hedge fund. This earnings season will be a disaster, with forecast S&P 500 earnings at $40-$55 or lower. But hedge funds are still net sellers of assets, according to well placed prime brokers, and most still expect a retest of the lows at 666 in the S&P, or new lows in the 400’s. The capacity for the industry to take on new risk is therefore huge. Also encouraging is three consecutive monthly improvements in the Purchasing Managers Index (PMI). He sees this year as a replay of 1938, when a huge rally ensued after a long bear market, with 1938 valuations to boot.

Apr 07 05:36 PM

[aa44aa:]

Harry Dent is an idiot, reading his books is enen more idiotic

Apr 07 07:58 PM

[Marianthi:]

While I think that we are not done with the downside yet, I don't trust this Harry Dent guy. I keep hearing radio commercials mentioning his name that talk about preparing for the next great depression, and suggest handing over one's assets...Justified pessimism aside, I just don't like or trust fearmongering...Also, ultra ETFs should be used with caution for short term trades NOT long term investments.

Apr 07 09:17 PM

[Marianthi:]

While I think that we are not done with the downside yet, I don't trust this Harry Dent guy. I keep hearing radio commercials mentioning his name that talk about preparing for the next great depression, and suggest handing over one's assets...Justified pessimism aside, I just don't like or trust fearmongering...Also, ultra ETFs should be used with caution for short term trades NOT long term investments.

Apr 07 09:17 PM

[RG2009:]

Since some of you mentioned gold versus the price of the DOW, i'll chip in my opinion. DOW at 3800 = Gold aroud 4000. I'm uncertain whether DOW will actually make it to 3800, i would assume more like 5000. Whichever the case, since i am a believer of hyperinflation, i feel gold will reach 3500 by the end of 2011.

Apr 08 08:01 AM

[buoy:]

Harry Dent needs a chill pill.

Apr 08 08:14 AM

[Sonia:]

There has been so much negatism that I'd guess we've seen the bottom, but there are steps we can take to protect ourselves. My son, whose house is half paid for and had a 5.25% mortgage on 15 years, has refinanced at 4.8 for 30 years to reduce his payments in the event that he loses his job. With the much lower payments he could deliver pizzas and not lose his home. Make a game of "how fast can I pay off the credit cards?" Buy quality stocks in essential industries that pay stable dividends, and reinvest the dividends. When you walk a middle course between gloom and euphoria, life is good!

Apr 08 12:13 PM

[bricki:]

Harry Dent is clearly pandering to the current market sentiment with his books. Not a bad strategy; he seems to have found a way to make money in both good and bad markets.

Since he was woefully wrong the first time I'd surely avoid taking his current book as the only source of information this time around.

I'm not saying we will go up in a straight line from here or anything like that. My feeling is that we are going to be in a secular bear market for the next decade and anyone looking to make money had better be damn nimble.

Apr 09 02:00 PM

[lrd:]

Guys-

Who are you kidding? Pick your heads up from out of the holes!

There's a 50% chance the DOW will crash this year!

There's a 25% chance the Government, ,yes the US Gov't, will collapse in the next 12 months.

Listen to the news and read the papers. Cities and states are going to start falling like dominos soon. And shortly after that, well you guess.

Apr 09 04:30 PM

[User 392712:]

HS Dent called for a Depression to start in 2008, he made that prediction in a book he wrote in 1993. The books called "The Great Boom Ahead" p.g. 188. I thinks that's a good 15 years ahead of time!


On Apr 05 10:58 AM antiquary wrote:

> "As Harry Dent...pointed out"?
>
> One cannot "point out" an opinion. Pointing out something is reserved
> for facts, and facts only. Fifty years ago it may be possible to
> say that Mr. Dent pointed out these things, assuming they come true,
> but certainly not today. You have two strikes against you in my
> mind when you can't use language correctly.
>
> Mr. Dent's conclusion is suspect, as well, and smacks of the Rush
> Limbaugh effect-- of taking extreme positions for the sake of getting
> attention. (The fact that his books have sold many copies says very
> little in his favor; should we give Danielle Steele the Pulitzer
> prize for literature on that basis?) This kind of book comes out
> every so often, and tends to smack of the predictions of the arrival
> of the Rapture in A.D. 1000, A.D. 2000 and in many other years.
> "Surviving the Great Depression of 1990", anyone? The fact that
> Mr. Dent's previous books have come out more or less as these things
> were occurring, not several years before like Daniel Arnold's "The
> Great Bust Ahead" (2002), makes Dent rather like someone offering
> to sell you the winning lottery ticket number the day after it has
> been drawn.
>
> The truth is, even if someone's worldview successfully encompasses
> the astounding complexity of the economy, it is an example of the
> best use of the metaphor inherent in the Heisenberg Uncertainty Principle.
> The position of electrons cannot be discovered by shining light at
> them because the photons affect the electrons and skew the results.
> Similarly, the market can't be well predicted in an era of keyword-triggered
> automatic trading because commentary itself skews what it is describing.
>
>
> For myself, I plan to ignore the rending of garments and gnashing
> of teeth, and simply get on with the business of life.

Apr 10 12:58 PM

[Paulharris:]

There's an essay about why Elliott Theory is about as good as astrology. Go to orvinfive.blogspot.com. You will probably like it.


On Apr 05 04:29 PM PROXIMO wrote:

> I will be absolutely astonished if the Dow isn't down at LEAST 50%
> from today's levels in this calendar year. Ditto the other averages.
> Also, please don't mistake me for some Elliott Wave or Dow Theory
> dupe, as I'm not too big on astrology or voodoo.

May 08 01:47 PM

[sickofthehype:]

Dent is a perma bear and you've obviously lost some credibility since you wrote this stupid article. Wake up and get ready for inflated EVERYTHING.

May 08 08:15 PM