For all the talk of another big drop coming, the pieces are in place for 3 years of 15% annual increases for the giants of the blue-chip index.
It's been exactly a year since the government kicked a smoldering financial crisis into a roaring blaze by letting Lehman Brothers (LEHMQ, news, msgs) collapse. Observers this week are memorializing the mistake, but investors need to look forward -- and what they should see is that the government's later reaction to its error may have actually laid the groundwork for the greatest bull market of the decade.
What are the 30 companies of the Dow?
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.
Here's what I'm seeing just in the news of the past three weeks and what I think needs to happen next.Good news, but big money's still bearish First, sentiment -- a big determinant of what an investor is willing to pay for a company's earnings power -- is still really lousy. Forget all the yadda, yadda, yadda about the number of bullish private investors hitting the highest level in bovine history. Those mom-and-pop surveys are useless because the respondents have little money at stake. More from MSN MoneyThe real lesson of Lehman's demiseU-turn is the path to recovery profitsThe recovery puzzle's missing pieceThe US-China Ponzi schemePlot a path to post-crisis profitsThe fact is that the majority of the world's largest hedge funds are still bearish and believe stocks are set for a big fall. And if those guys are as wrong now as they were in being bullish last year, as I believe they are, then when they capitulate in the face of a steadily rising market you will witness one of the largest short squeezes in history. Trust me on this: Big money does not mean smart money.
Here's how I know they're negative: Goldman Sachs Group (GS, news, msgs) hosted a dinner Wednesday at the swanky restaurant Aquavit in New York for the heads of 15 large hedge funds to exchange ideas on strategy. I was told by a source that all but one declared stocks very overvalued after their recent 50% sprint. And the key reason expressed was that corporate revenue trends were weak and would undermine the surprising earnings gains reported in the second quarter due to head-count reductions.
Markman on video: Still too many market skeptics
Someone should buy those guys subscriptions to The Wall Street Journal, because company after company these days is announcing upside to its revenue and earnings forecast. Intel and Dell (DELL, news, msgs) shocked pessimists last week. And on the same day as the Aquavit meeting, Texas Instruments (TXN, news, msgs) raised its third-quarter earnings outlook to as much as 41 cents per share on revenue of as much as $2.87 billion, versus its previous forecasts of 39 cents and $2.5 billion. Then on Thursday, ASML (ASML, news, msgs), a big Dutch semiconductor equipment maker, lifted its sales forecast for the third and fourth quarters by more than 50 million euros because its second-half outlook for consumer goods has shot higher. "Expectations are turning positive," said a spokesman.
This is a big contrast to the news that started the ball rolling downhill for technology and the stock market nine years ago. On Sept. 22, 2000, Intel shocked investors by warning that its third-quarter revenue would fail to meet expectations because of weaker demand for its chips in Europe. Shares fell 20% the next day from their perch at an all-time high near $70; tech stocks have not been the same since. After falling for nine years on bad news that shriveled its price-to-earnings multiple, why can't Intel now rise for nine years as its price-to-earnings multiple expands on good news?
Continued: Biggest economies unanimous on stimulus
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Markman may be a good trader but he is a terrible economist, social observer and policy strategist.
His assumptions are based on the notion that because the bond market has returned to a degree of "normalcy" that stock prices will return to their previous highs. The reality is that what existed before the failure of Lehman was NOT normal - it was a bubble in leverage. The aftermaths of bubbles never result in the recovery to the bubble highs. This has long-term implications for corporate earnings/investment, personal income/spending and the job market.
The nation is searching for the "next big thing". I can guarantee you that it will NOT be in finance or real estate. There will be some who will ride off the bottom (and declare their "genius" loudly afterwards) but that does not mean that the nation as a whole will do so too.
Genius would be to put the nation on a new course to sustainable growth. Things that are worth doing are never easy and often require effort and time. Are there any Americans left that understand that?
Excellent article yet again, Mr Markman; you are one of the very best market journalists / investment analysts around, and I am one of your biggest fans.
Thank you too for referring readers a few years ago to an article in The Independent newspaper describing the diabolical practices associated with the mining of a technically important mineral in central Africa (sorry I have mislaid the reference) - a reminder to us all that there is more to life than merely getting an edge up on our investments.
This guy is basing his predictions on the fact the wall street guys could not predict the crash so they can't predict the recovery either? Nice. we need fresh thinking and ideas once in a while. Just to have a posative outlook!!
To fix unemployment government should buy out workers to get them to retire. Offer people ages 50-55 1mill or 1/2 mil to retire and never be on a payroll again. Make them buy a new American car with there money and payoff a mortgage for someone. This would fix unemployment over night.
The new normal for the economy and the markets tells me we need to be happy with 5-6% real returns over the next few years. And that's OK. I have loaded up on the shares of companies which make goods and services we need and use no matter what happens. The 4.2% avg dividend of my 26 stocks, from ADP to XOM, will see me through, even if Markham is off by 5-6 years for the bumpy ride back to 14,000.
I like the contrarian comment!
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