June 2, 2011

Dow 20,000: 10 Reasons Why Market Will Soar in 12 Months

MarketWatch gadfly James Altucher makes his case for his wild prognostication

“One of my colleagues at the American Enterprise Institute told me never to tie the Dow to a specific date,” former Washington Postcolumnist James Glassman told us in February. “I wish I had gotten the advice sooner.”

He was speaking about his much-derided "Dow 36,000," published in the go-go years of 6,000 sq. ft. McMansions, no income and something called CDO “tranches.”

We all know how that worked out, but we now have another prognosticator willing to go on record with wildly optimistic predictions of near-term market returns. MarketWatch columnist James Altucher is making a case for the Dow to hit 20,000 in the next 12 to 18 months. We’re sure Glassman and Harry Dent (and so many others) wish him luck.

“The market fell like a brick on Wednesday,” Altucher writes. “People can’t handle any piece of bad news without saying ‘this is the big one.’ We have visceral memories of May through July 2010, just a year ago. We have visceral memories of 2008, when it seemed like no end was in sight. Nobody wants to be caught trying to catch that knife with their mouths like in a circus act. You get cut up that way, and the blood isn’t pretty.”

But it’s not going to happen, he writes, noting with grandeur that “Even God took one day to rest.”  It’s a simple pullback on the road to riches, he argues, riches that will continue for some time.

Here are Altucher's reasons why:

1) QE2 has not started. "What?" You might say, "I thought not only [did] it start last November, it’s about to end." Not true at all. Federal stimulus takes six to 18 months before even one dollar hits the U.S. economy in a meaningful way. So expect that $600 billion or more to start hitting toward the end of 2011.

2) Then why is the market going up? One major reason is because we are in the third administration of George W. Bush. The tax cuts got extended. This signaled that Barack Obama was going to pay lip service to his constituents while still keeping an eye on the stock market. The guy wants to get re-elected, after all.

3) Multiplier effect [editor’s note: Ugh].Once the stimulus hits the economy, it’s not just $600 billion. It’s probably more like $3 trillion. How come? Because when you buy that coffee with $1 at the local deli, what does that deli guy do with it? He buys a newspaper. And then that guy buys a doughnut. The multiplier effect is up to 10. To be honest, I’m more worried about a bubble in 2013 then I am worried about a economic slowdown.

4) Nonfinancial companies are at their highest cash levels ever. Almost $2 trillion dollars. They were hoarding the cash just in case bad times were going to happen again. Guess what? They didn’t. But what good is that? Well…

5) They are spending it. Stock buy-backs are at their highest levels in history. Let me tell you the rule of every market on the planet that we learned in Economics 101: Price is ruled by supply and demand. Demand has been down for the past two years.

But that’s OK, supply is now going to start going down right when demand picks up. $2 trillion is a lot of supply of shares to scoop up.

6) What about unemployment? Well, according to the Bureau of Labor Statistics, temp workers are at levels not seen since before 2009. Companies hire temp workers before they hire full-time workers. That happens in every recession in history.

7) Corporate profits are at their highest levels ever. Did you know this is the first recession in history where cash levels in corporate America increased quarter over quarter every single quarter of the recession? And now profits are at their highest ever. Analysts expect S&P 500 earnings to come in at $95 next year. What if (as usual) they are too conservative and the number comes in at $100? Slap in a 20x multiple (could happen when the stimulus kicks in), and we have an S&P 500 at 2,000 and a Dow probably at 20,000.

8) Major stocks are dirt cheap. Apple trades for 12 times forward earnings and has $65 billion in cash and no debt in the bank. Microsoft trades for around 10 times forward earnings. Intel trades for around eight times forward earnings. These are high market-cap companies. By the way, all the major indices are market-cap weighted. So if the big guys go up, the indices go up. All of these big guys can easily double or triple.

9) Innovation. Barely a year ago, the iPad came out. Now what’s the number of people who have iPads ...20 million?

10) Major demographic changes are occurring that are going to affect stocks for the next 25 years. What are they? [Editor's note: He advises readers to check back next week, or to follow him on Twitter].

“The fight never stops between the bulls and the bears,” he concludeds. “Last summer was personally grueling for me. The market was falling on worries of Greece, an economy the size of Rhode Island, and every day it seemed a new blogger was using this as an excuse to write a blog specifically trashing me. It’s usually a bad idea to personally attack someone to get your point across. It’s never really necessary, and it’s lazy and bad writing. And yet, my kids would Google their last name, and there would be post after post insulting me personally for my opinions. The market is up some 25% since then. My feeling for the next year is similar: BRING IT ON.”

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