Last week a round of good economic data set the positive tone for the market: the largest job gain in three years, a six-year high ISM manufacturing diffusion index, rosy consumer confidence and unremarkable housing data. How high could the Dow Jones Industrial Average (DJIA) go?
The following metrics are scenario analysis, which list the potential Dow Jones value based on different P/E and EPS. DJIA = P/E x 30 Dow Component Companies’ Total EPS / 0.1323.
EPS Est (cur yr)
EPS Est (next yr)
The inverse of 13x earnings is a 7.7% yield, which is around twice the U.S.10 Year Treasury yield. Based on next year’s estimated EPS and P/E of 13, I will not be surprised to see the Dow go as high as 11,826.
JPMorgan Chase (JPM) just closed a public debt offering of $1.5 billion which is due in 2040. The interest rate is 6.7%. It might imply that a more reasonable P/E should be 15.
Flush With Cash
Following are the top 10 non-financial Dow companies’ cash positions. They have a total $190 billion cash in hand. As the economy continues to recover, these companies need a way to spend it, which might spike M&A activities.
Cisco Systems (CSCO)
Pfizer, Inc. (PFE)
Johnson & Johnson (JNJ)
Intel Corporation (INTC)
Exxon Mobil (XOM)
Merck & Company (MRK)
Coca-Cola Company (KO)
Johnson & Johnson (JNJ) has been paying consistent dividends for more than 60 years. It has increased dividends at an average rate of 10% over the last five years.
Boeing (BA) just received an order for 50 Boeing 737-800 aircraft from Australian airline Virgin Blue, with options for 55 more. This is the largest order for Boeing in the past 18 months. On the other hand, it is increasingly difficult for telecom carriers such as Verizon (VZ) and AT&T (T) to find new subscribers.
10 Main Large-Cap ETFs (by Net Assets)
The stock market is counterintuitive. ETFs might be a way to go. Below are the main ETFs for large cap stocks:
Fund Name (Ticker)
iShares S&P 500 Index (IVV)
Vanguard Total Stock Market ETF (VTI)
iShares Russell 1000 Value Index (IWD)
DIAMONDS Trust Series 1 (DIA)
iShares Russell 1000 Index (IWB)
iShares S&P 500 Value Index (IVE)
iShares Dow Jones Select Dividend (DVY)
Vanguard Value ETF (VTV)
iShares Russell 3000 Index (IWV)
If you want to short the market, you might use UltraShort S&P500 ProShares (SDS) or UltraShort Dow30 ProShares (DXD).
According to Frank Partnoy, author of The Match King, the best investors make money not because they understand abstruse mathematical models, but because they have a deep intuition about the timing and machinations of financial markets. Markets have been complex for a long time, and their ebbs and flows always have depended, not only on intricate disclosures about assets and liabilities, but also on human psychology.
March's employment number might be just the first sign that hiring is on the upswing and will continue. However, the unemployment rate remains at 9.7% for the third straight month and the pace of private jobs creation won't be enough to restore the economy to good health quickly. Also, when the interest rate is high enough, it might drive investors out of risky equity and into the safety of bonds, pushing stock prices lower.
Buying stocks during a correction is risky because you are trying to catch the falling knife. On the other hand, buying stocks during recovery might be end up with “buy high, sell low”. For the average investor, it is better to stick to your pre-defined equity/bond allocation ratio and adjust accordingly.
Data are from Google and Yahoo Finance and valid as of April 2, 2010.
Disclosure: Long JNJ and SPY