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The S&P 500 may be headed downward right now, but here are seven reasons to believe it will go up. Way up.
One: International Paper and Georgia Pacific just raised prices on containerboard. Forget about all government data for a second. Why would the two companies involved in every shipment made around the world increase prices? Because demand is there.
Two: Consensus among analysts for S&P earnings for 2011 is $94. With the S&P near 1050 that puts us barely above a multiple of 11 times earnings with the historical average somewhere near 15.
Three: We are still in the middle of an inventory rebuild after the Great Liquidation that wiped out all inventories in 2009. And corporate profits are still near all-time highs, in part due to the enormously slack labor market created by 10% unemployment. In fact, corporate profits at their highest levels ever:
Four: Consumer spending won’t slow, even with 10% unemployment. We’ve added jobs to the work force for the past 5 months in a row. And even though last month’s job increase was only 41,000 (not including the almost 400,000 in census hiring), average pay was up enough so that it was the equivalent of an extra 315,000 jobs if pay had stayed flat. This is more than enough to keep personal consumption expenditure at an all-time high, where it currently is. And wages are starting to return before jobs:
-Five: With Fed rates at zero, it’s hard to find another place to put money. You don’t have to buy the market blindly but there are stocks on the market that pay significant yields that are going to continue to do so: Diamond Offshore Drilling (DO): pays 10%. (The stock has been hit hard by the drilling moratorium but will most likely sore once the moratorium is lifted or the BP well finishes its spill.) Altria (MO) pays 10%. Verizon (VZ) pays 6.8% and will most likely go up as Apple (AAPL) allows iPhone users to use the VZ network.
-Six: Cash in the bank. S&P 500 stocks have $973 billion cash in the bank and will probably hit over $1 trillion in the next year. They will use that cash to do acquisitions, make business investment, pay dividends and do sharebuybacks. Each one of those things is incentive for people to buy into the market. Private equity firms have over $500 billion cash in the bank. Typically, a private equity firm uses on average three-to-one leverage when they put that cash to work. Thats $1.5 trillion cash in the bank with the sole purpose to buy companies. Many of those companies could be public S&P 500 companies. Reduce the supply of shares outstanding (the only way to replace those shares is with IPOs, which are dead right now) on the S&P 500 while keeping demand the same equals only one thing: stocks go up.
- Seven: You don’t have to buy the market, but some of the highest market cap companies in the S&P 500 (and the S&P 500 is market cap weighted) are very low P/E stocks: XOM, the largest stock in the index, has a forward P/E of just 4. Microsoft (MSFT) has a forward P/E of just 10. GE has a forward P/E of just 10 and IBM has a forward P/E of just 10.
Right now investors are scared of the stock market. If comfort levels rise and these stocks go back to their historical average P/E of 15, the market can easily go to 1500. Another possibility: Earnings can go up, as they’ve been doing since the market lows. Or both things could happen, catapulting us to 1500 or maybe even higher.
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Right and I’m Mary Poppins. They need to start doing saliva tests for all these pointy headed guys and their cute little charts. Wasn’t it a computer glitch that caused the big market meltdown a few weeks ago. Another CNBC barker type progaganda memo to help people lose money. Fool me once, you know the drill. Madame Guillotine and I would like to invite this author to dinner. Bury this P.T. Barnum style drivel real fast. Wall Street is getting real desperate to put out this kind of schlock through their lackey minions. Is this the best they’ve got? Why not trot out Herr Oberfuhrer Geithner to spin tails of the AIG nights. Good grief Charlie Brown.
In point #5 there may be a “typo”- Regarding Diamond Offshore Drilling, did you mean to say the stock will ?sore? soar? or sour?
sore or soar?
DO is paying close to 10%. Go look at there dividend history on their website. Yahoo, CNBC, etc. don’t take into account special dividends, even if they occur on a regular basis.
1. paper prices higher due to constrained supply, no interest in expanding capacity or workers in this environment, companies squeezing the margins right now 2. agreed earnings are doing well, complete disconnect form the overall economy and workers’ pocketbooks 3. working capital concerns kept inventories lean, think JIT financing 4. workforce growth will be slower than expected, all of those manuf. jobs that the middle class needs for work are now in China, not coming back anytime soon unless Chinese workers continue to strike and grow their pay, narrowing the differential 5. Fed rates low due to foreign investment and govt. subsidized support of FNM & FRE, the US is not the best investment, we are just the best of the worst….for now. Personally corporate bonds and foreign equities have a better risk profile until Obama leaves The White House. 6. Corps. flush with cash and will not expand hiring or expand operations materially until growth returns or Obama is out of office 7. Focus on dividends stocks, those companies with strong brands, and again go intl.
Financial Adviser covers important issues affecting financial advisers, brokers, wealth managers and their clients. Featuring lead editors Brian Cronk and Kevin Noblet and the reporting team of Dow Jones Adviser, along with contributions from leading industry voices, Financial Adviser provides insight into issues including taxes and estates, philanthropy, investing, practice management and financial planning. Write to us at wealthmanagerinquiries@dowjones.com. For more information on Dow Jones products for financial advisers, go to http://solutions.dowjones.com/wmblog.
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