Posted on 11/03/2006 10:07:13 AM PST by SirLinksalot
This One Goes to Thirteen
Falling oil prices, a halt in interest-rate hikes, and a wave of hedge-fund buying sent the Dow above 12,000. Now they’ll take it higher.
By James J. Cramer
o ahead, dismiss Dow 12,000. Virtually everyone I know on Wall Street will tell you to do so: “Small-time index, relic of another era, not important to signal a change.” To which I say, “Nonsense.” The Dow is not only the most representative snapshot of the American economy, but the venerable, oft-quoted index is still the one that entices people into the market. The broader averages will now follow the Dow higher, perhaps much higher, because after six years in purgatory courtesy of everything from dot-com bombs to cooked books to crooked research to hidden option paydays, Wall Street’s back making people fortunes again. Except this time, it’s not just the bankers. It’s everyone who owns name-brand stocks. The additional cash flowing in, like the first trickles of water seeping through a fissure in a dike, could turn into a torrent now that we’ve taken out that benchmark.
How did we get here? More important, why am I so certain that there’s much more ahead? Because we’ve had an awesome number of things go right in the past year, and the trend—always your friend on Wall Street—points to more of the same in the coming months.
The concoction that lifted us to 12,000 is a mighty, strange brew—a bullish recipe that includes one part lower oil and housing prices and stabilized interest rates; one part higher corporate profits; and one part incredible negativity of big-time money, including many of the hedge funds out there (I’ll explain the role they play in a minute). While some of these factors may eventually reverse themselves, don’t count on any of them going away in the near future.
To understand why this rally has staying power, you need to get beyond the obvious negatives, at least to Wall Street, of a potential Democratic sweep in Congress, a constant worry of terrorism, and a president paralyzed by the morass in Iraq. First, just four months ago, traders were petrified that gasoline at $3.25 would go to $4.25 and that the economy could be crushed by it. Consumers had vanished from stores and restaurants; car sales plummeted. A recession seemed to be just months away. At the same time, the slowdown in housing became an outright stoppage, with home sales plummeting and inventories climbing to levels not seen in fifteen years. With that glut so visible, those still holding on to the belief that property could trump stocks finally gave up the real-estate dream, and the Federal Reserve, determined not to be the cause of a recession, put its relentless increase in interest rates on hold at last.
With the Fed on hold and housing losing all luster as an investment, the unthinkable occurred: Oil dropped almost $20, and gasoline fell by more than a quarter. Consumers flooded everything from Wendy’s and Red Lobster to JCPenney and Nordstrom, and on Wall Street that translated to “upside surprises” against lowered earnings estimates. No one cares about how earnings forecasts get beat—even if they’re reduced by fleeting factors like a cessation in rate hikes or gasoline declines. The better-than-expected earnings quickly fueled higher stock prices. When you consider that of the 30 industrials in the Dow Jones, only one, ExxonMobil, gains from higher oil prices and 29 gain from lower ones, you can see why the move had oomph. And when you consider that almost no Dow stocks get hurt by lower housing sales but all benefit from the declining interest rates that a slowdown in housing causes, you know the oomph’s going to be turbocharged.
All that good news wouldn’t have mattered if stocks were expensive. But we’ve seen years of pretty decent earnings for companies without much of an uptick in stocks. That’s because 29 of the 30 stocks in the Dow have had buybacks, some of them huge (and some ongoing). Only General Motors hasn’t had one (and that’s the only Dow stock that actually needs cash). The rest just throw off scads of the stuff. These buybacks are literally shrinking the supply of stock out there dramatically. When the buyers came in, courtesy of the declines in oil and housing and the flattening of interest rates, there wasn’t enough stock to go around, forcing buyers to move stocks up to get them. The companies that had bought back the most, Hewlett-Packard, Coca-Cola, AT&T, IBM, and Microsoft, have been responsible for much of the gain we’ve had.
It’s questionable, though, whether the upward move would have the velocity it has if it weren’t for another group of buyers: the hedge funds. The managers of these funds pride themselves on betting against, not with, stocks, and the declines since the May 10 peak in the averages were a license for these shorts to print money. But the swift decline in gasoline caught the hedgies with their shorts up and, they, too, had to scramble to buy, lest their negative bets wipe them out. Their purchases squirted acetylene on an ¬already roaring fire.
What makes me so sure that we aren’t done with this rally? First, oil’s still going lower, even as opec tries to stem the decline. Long term, we could head higher again, but right now the world’s awash with oil pumped to take advantage of high prices. But there’s no room to store it, so the price comes down to move it. Second, housing’s still trending down, chilling the Fed even as consumers are feeling flush because of the relative cheapness of gas. Companies are still buying back stock, even post-12,000, as there’s not much else they can do with the cash. We also have more mergers and acquisitions now than ever before, and private-equity firms buying companies at an unbelievable pace. That takes out even more stock. Finally, the hedge funds have just begun their capitulation. We just saw the published short-interest figure numbers (a count of all the shares being shorted), and they remain at all-time highs. There’s more to be bought, and it will be bought higher.
Several key stocks in the Dow now have open-field running, including Altria, which is splitting into three companies; Hewlett-Packard, which is killing Dell; Boeing, which is winning by default because Airbus can’t make the darned A380 superjumbo jet; and AIG, which is now finishing a thorough Spitzer-izing that cleaned out top-level management and is ready to roll. (Not all Dow stocks are poised to rise. I’d steer clear of Alcoa, for instance, because it’s so poorly run. Management has consistently missed its earnings targets, even though the business fundamentals have looked great.) As the market’s gale-force momentum continues to build, the public, which has just started embracing this rally, will be sure to take stock prices even higher. By my count, with just a small continuation of the current trends, I can see the headline this time next year: DOW BREAKS 13,000.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time
He made the call before the bust in 2000.
Not very.
If Jim "The Screamer" Cramer is predicting Dow 13,000 next year, you'd better start thinking about moving into cash.
Generally, this would be my sign to get out. When everyone is a bull, it's time to sell - it means eveyone's money is already in the market! But if this guy has a history of being right, I'll certain defer to him.
But I think he's right that the DOW is going higher.
It all sounds quite reasonable. I wouldn't count on oil remaining low for that long, though. It doesn't take long to "burn through" our inventory.
Thirteen, For those times when you that little extra, Ummmph.
If oil goes up, oil stocks go up and everything else goes down.
If oil goes down, oil stocks go down and everything else goes up.
I use a mixed portfolio, about 1/3 oil stocks, it stays pretty stable.
I think he's a pump and dump scammer. I took his advice on Topps and it took 5 months just to break even. But I bet he made a bundle on it when it popped for about two hours the morning after he recommended it.
If it was 100 years ago, he'd be selling snake oil.
So listen to him and read between the lines...but don't take his advice on individual stocks.
Cramer is right more often than he's not. He freely admits his mistakes and doesn't try to cover for them.
I think it'll climb towards 13,000. Back in 2000, the average P/E (Price/Earnings ratio) was very high (about 40) and pundits were saying that a P/E of 40 will now be the norm. Well that didn't work out so well for them. However now, the average P/E is back to about 20.
P/E essentially comprises of the company's risk and it's expected profit growth.
If Cramer is vastly excited about some stocks taking off, I would say that they have just peaked. The trick is to figure out what he will be excited about a month from now, buy now and sell when his excitement peaks.
I bought into a bank. They always have money.
He can't trade for several days after he mentions a stock on air. It's his rule.
Up another 1000 points on the Dow is only 8.3% Hell, money markets are paying 4.75% right this minute.
Plus the yield curve is still inverted; and that inversion has been a superb predictor of recessions since the end of WW2.
On the other hand, if I'm that worried, it may be a great time to buy stock! :)
With real estate collapsing, the dollars go into the stock market. At least that is how it was explained to me by an investor several years ago.
While I hate his show, I think he's right about the general market having legs. Our economy is and has been pointed in the right way for a while and I think the markets are STILL a little undervalued. Corporate profits are higher than they've been for almost a generation. That's with our current, UNDER stated profits (due to Sarbanes-Oxley).
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