Dow 15,000 Will Be Here Sooner Than You Think

I know. I write stuff like this and I get accused of (yes, rampant) drug use. Ironically, I am one of the few people I know who can honestly say that I’ve never indulged.

So right after I pen some craziness, I always say the same thing: Hear me out.

A recent Merrill Lynch (MER) report is calling for a 15% drop in housing prices in the coming year. The Fed cut twice in the last several weeks. What does all this mean? Simply, that real estate, bonds, and interest bearing accounts will be lousy investments this coming year.

There is a theory (one I subscribe to) that the stock market would have been much higher over the last few years except that housing and commodities were too hot of an investment… so housing and commodities was where the money flows went.

With cooling (not freezing, cooling) housing, cooling jobs, both housing and commodities are beginning to move downward. Certainly, there will not be big returns to be had in either in 2008. So money will be moving to where money can be made: stocks.

Stock valuations are still historically low. We could easily move to 15,000 and still have reasonable market P/E, and stock-price-to-corporate cash valuations that are well within historical ranges. Further, valuations combined with lower interest rates will continue to drive M&A.

So the Dow will easily get to 15,000 by year’s end.

“But what about the economy?” What about it? The stock market and the economy are not the same thing, sometimes they move in lock step, and sometimes they don’t. Remember in 03 and 04 when we had our ‘jobless recovery’? Markets did great and the economy did only pretty good. Look for that again this year.

So what to buy? Right now: Money Center Banks and Brokerages. For two reasons: First, they have been crushed, and the worst is over. These stocks will move up in anticipation of improving valuations, and once valuations improve (think 3Q) the stocks will go up some more. Second, it’s volatile times like these that drive scared, stressed, confused investors into the waiting arms of their broker. Expect record earnings from that part of the business.

Speaking of housing, one pet peeve: Falling housing prices are the headline of the day, and every person I talk to is concerned about it. And I always say the same thing: Are you selling your house this year? No? Then what the hell do you care? This doesn’t affect you.” Stay diversified, even if it’s just a 401k. There will be money to be made in stocks this year and money will be made in housing another year. Over time, everything goes up in value, so relax… and unless you just want to be depressed, turn off the 24 hour depression machine known as cable news.

PS. There will be a ton of volatility in the market between now and election day. Then a 10% move up if a Republican is elected and a smaller, muted move if a Democrat is elected (markets like gridlock and the Dems will continue to hold both chambers of Congress).

Disclosure: As of publication, I am long MER, though positions are subject to change at any moment.

Comments

[Will Rahal]

I don't know about 15,000 . I have been a bear for a while, but I called for a ST bottom for Jan 22 on my site dated Jan 18, and believe the market is setting up for a nice rally.
The Fed has cut a whopping 225 basis points!
Technically Pessimism reigns and there are some positive breadth divergences .

[NutritionFacts]

"Remember in 03 and 04 when we had our ‘jobless recovery’? Markets did great and the economy did only pretty good. Look for that again this year."

Erm, markets did great in 03, yes, in percentage terms, from low to high, but that said they only recovered up to early 02's high after having cratered by 30+% throughout 02, and indeed in 04 they did nothing but go sideways. But, in any case, are we at the same stage in the cycle now as we were then (i.e. in early 03)? Have the markets dropped by 30% (yet)? Are the issues being faced the same as they were back then? Er, it looks to me like it's no, no and no. So, maybe you're right, but maybe, you're wrong.

[RichShinnick]

Why do you care if your house price is not going up? It is the wealth effect and housing ATM thing, that is why you care. People can't watch their only major assett drop in valuee by 30% and feel good, sorry, the consumer is 70% of the economy. If you think stocks are going their merry way without coonsumer spending, think again. Also, money will surely be moving, but to assume it will be moving to U.S. equities assumes too much. There is some logic to your article, but you miss quite a bit and assume quite a bit more.

[optiondragon]

Ah, Mr. Mann I have been on that thesis for a long time but have been just as scorned as you. There is this huge supply of money that HAS to go somewhere, before people would just flip houses like candy with that easy money, not anymore. The question is where will it all go? The answer is it will go to the smartest money managers and institutions that know what to do with the money in order to find a reasonable rate or superior rate of return. Doubters think that investors with the new money won't daytrade with the money and they won't....but they will give the money to the smartest people in finace to help the find those returns and that means hedge funds, mutual funds and institutions and they will dictate where the money will go. The money faucet has been opened, it HAS to find a home the only question is where and the only logical explanation for it would be selective stocks and equities across the world across economies (not necessarily all in the US).

[E.D. Hart]

I respectfully disagree with most everything this writer has penned. Not only will we not see 15,000 soon, we may not see 15,000 for another ten years. See US market history over the last 100 years.

Barron's has correctly pointed out that valuations are only compelling if you assume that margins stay at their historical highs, which is highly unlikely.

A possible scenario to consider: Inflation finally becomes anchored this year, and interest rates are effectively prevented from falling further; (maybe another cut before the election, to be undone after the election) consumers cut spending as unemployment ticks up, and home values drop, thus depriving the US economy of its great horsepower; the combination of higher interest rates in 18 months, and lower growth results in a stagflation lite; companies p/e compress as growth expectations are dimmed; historically high margins come down from their peaks to a reverted mean; under this scenario--currently the DOW is overvalued by 25%-33%.

My prediction is DOW 9,000 by 2010. If I was wagering $100 as to which was more likely by 2010--DOW 15,000 or 9000, I would inclined to take the DOW 9,000 bet .

Money indeed will go where return are greatest, but failure to take into account eroding earnings, rising interest rates (after the election), and rising inflation will not result in a good risk adjusted trade.

[optiondragon]

LOL, Eric who ever said the Fed Faucet Money would only go to the US. Its globalization at its finest point now. Back in the 2000 internet craze the US was the only game in town. Now money moves fluidy through the world markets and seeks the greatest returns in fast growing economies which make our economy look like a little brother. Why are there new stocks hitting new 52 weeks highs as we speak? Can you answer that my friend? The reason is US companies who are the best run in the world (the smartest management echelon) catering to the customers and consumers of the world. Think Globally, think out of the box we've been playing in. I'll take your bet, but I want it in Euros. :)

[optiondragon]

Follow the whales, listen to their sirens.

[Kunst]

"So money will be moving to where money can be made: stocks."

The problem is that the money that went into housing is either locked up or gone.

On the other hand, there is another money source that could do exactly what you suggest. All those dollars we ship overseas, $60+ billion a month. They are kind of piling up, don't you think? They can shuffle around overseas (e.g., China buys oil from Iran -- oh, Iran doesn't want dollars -- well, you understand) but eventually they have to come back here.

What are all those trade-deficit dollars going to buy? US treasuries? Yes, to some degree, but that deficit is significantly smaller (so far) than the trade deficit. American products? Like what, exactly? There's a quantity limit there, and a lot of those products are actually "made" in the far east. European and Canadian shoppers in New York? Where are those goods they buy actually made? Maybe US property -- some good deals in Florida real estate these days. Still a drop in the bucket.

The one place those trade deficit (ultimately oil) dollars ultimately have to roost is US stocks. Add possible inflation (plain old, super, or hyper) and continuing dollar devaluation (plain old, super, or hyper) and it would make a lot of sense for the Asians and Arabs to turn all those dollars we bought toys and oil with into equity ownership of quality US companies, don't you think?

I have some very high very long call options on the DJIX for just this scenario. Probably won't happen, but then again....