Well then, buy, buy, buy!
Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.
Posted on 07/11/2010 3:06:28 PM PDT by blam
Prechter's 'Dow 1000' Prediction: Nonsensical
by: Logical Thought
July 11, 2010
Although I'm quite bearish about the next three to five years, even I think that Prechter's Dow 1000 forecast is nonsensical.
The "nightmare scenario" (which I DON'T think will happen) would be if we returned to the worst four consecutive operating earnings quarters of the current recession (Q4 2008 through Q3 2009), in which case the S&P 500 would earn around $40. If we then put an 8x multiple on that (there's no way it's going to 5x in a ZIRP environment, and if we had enough inflation to eliminate ZIRP we'd also have much higher nominal earnings than $40), we'd have the S&P 500 at 320, which would be around 30% of its current value, and would correspond to around 3100 on the Dow.
A more realistic downside scenario would be to annualize the just-under $14 operating earnings from Q2 of 2009, which was when a lot of the cost-savings "benefit" of having fired a lot of people was built in (don't forget, we're talking "operating" rather than GAAP earnings here) and yet most government stimulus (which is now going away again) WASN'T. This would provide around $55 in S&P operating earnings, and an 8x multiple on that would be 440, which would correspond to roughly Dow 4200.
I'd say there's around a 10% chance of this happening, and that's about as bad as it could get. I would, though, say there's around a 30% chance of achieving those $55 in SPX earnings and having a 10x multiple slapped on them, and this would correspond to SPX 550, which would be around Dow 5200. Anyone who thinks THAT'S impossible (or even "extremely unlikely") would have to be betting on one of the following things:
1. A near-term inflation burst (in what clearly seems to be a near-term deflationary era) will raise nominal prices to artificially higher levels, or
2. The higher taxes and reduced state & local government spending that we're going to have going forward vs. what we had in Q2 of 2009 (when, again, there was around $14 in SPX operating earnings) will be MORE THAN offset by inherent economic growth in the upcoming absence of government stimulus. (If the growth is only enough to exactly offset the upcoming higher taxes and state & local spending reductions then SPX quarterly earnings would theoretically remain at $14), or
3. The kind of earnings shrinkage we're talking about here (to $55) gets a higher multiple than 10x (even though major bear market multiples historically trough at a single-digit number).
Thus, my suggestion is that one be prepared for the very realistic possibility (albeit, not "probability") of Dow 5200/SPX 550, and therefore hold enough cash in reserve so as not to be "all-in long" at levels significantly higher than that.
Disclosure: Author is short SPY and long SH
A Market Forecast That Says ‘Take Cover’ (Robert Prechter: Dow To 1,000)
Current P/E is 22 on the S&P 500. The P/E in a fairly bad recession is about 6. 2700 on the Dow would not be impossible. If the currency falls apart and the country goes bankrupt - 1,000 is NOT impossible.
‘Nonsensical’, in that, long before the index could approach 1000, the economy and the currency would have already collapsed, and therefore any measurement would be arbitrary and meaningless in any real-world sense....
Was that prediction premised on Obama getting reelected?
EW theory is helpful but Prechter is a hack.
I don’t think that a 1000 DOW would indicate economic collapse by itself, if you consider that all it indicates are share prices for 30 corporations. It could also mean:
1) The DOW shares are in a buyers market. Stock owners want to sell, but there are not enough buyers, for whatever reason. Perhaps equities have lost their sparkle by a flood of new taxes on capital gains.
2) A DOW component industry collapse. Say there is a war with Iran. The two oil & gas company shares could tank. But at the same time, congress decides to sorely oppress the pharma industry.
3) The US bites the bullet and renounces the national debt. Very good in the long term, encourages recovery faster in the mid term, but traumatic in the short term.
Well then, buy, buy, buy!
The German stock market index increased many billions of times in
1923. Unfortunately, prices for goods and services increased many
billions of more times. - Henry Hazlitt writing on hyperinflation in
the Wiemar Republic
Measured in nominal currency, a Dow average of 100,000 over the
next three to five years is far more likely than one of 1,000.
Measured in real (i.e. currency adjusted for decreased purchasing
power caused by inflation) terms, a Dow average of 100 over the
next three to five years is far more likely than one of 10,000.
Freepers should never underestimate the damage caused to the
United States by runaway uncontrolled government spending.
"We are big bears - to the point where some people consider us a top candidate for the camp of Robert Prechter of the Elliot Wave, who believes that the Dow will return to 1980 levels of about 1000."
Not impossible if Obama and his communists have their way. WAKE UP!
Reneging on the debt is about the worst thing the US government could do. It would officially announce to the world that the US if a Banana Republic. It does sound like something Urkle would do though.
I’m a FA and amateur trader. We trend follow for our clients and manage risk through active management. I like and use EW theory. Prechter however has made so many miscounts in recent years past that his credibility is suffering. Case in point, the failed head and shoulders pattern last summer. Also, the downturn to trendline from this winter where he called for a downturn that didn’t materialize. Again, I like and use EW but Prechter has not helped further the cause.
Renouncing the debt would only be done with a national and international depression, and would face the reality that until that debt is gone, there cannot be a recovery.
However, it might be the very best thing we could do economically, to speed recovery.
The very first thing that would happen is that international trade would halt. From the US point of view, the biggest immediate impact would be oil. Nationally, we would have to have a crash program to open all available oil production in the US, and to get it into operation in about six months.
With just this alone, would stop the huge hemorrhage of wealth, while at the same time, any part of the oil infrastructure we didn’t have would have to be “insourced”, made in the USA again.
And this would also apply to anything else we wanted. If we didn’t have it, we could no longer just buy it. We would have to build it.
And this is how economic recovery happens.
“If anyone had predicted in March of 2000 that in March of 2010 the Dow would still be at 10,000, what kind of reaction would he have gotten?”
Consider that in 2000 oil was $15 and gold was $300. So from a purchasing power standpoint 10,000 isn’t what it used to be.
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