The fundamentals do not support higher stock markets in the US now or into the near future. Unless there is an explosion of earnings, ever higher ratings cannot be justified so at best the markets will mark time around current levels. Tech stocks are already priced for supersonic earnings growth and have little or no yields to talk about so you can discount them on the upside. One minor transaction that recently took place in the sector was the purchase of an IBM subsidiary by a Chinese entity, whilst it might not have grabbed too many headlines, it should start alarm bells ringing. The Chinese can now manufacture their own computers and are no longer reliant on imports (ouch), this means less sales for the likes of Hewlett Packard and Dell.
The telcos are under severe threat from voice over the internet which leads to erosion of margins, falling revenues, redundancies and lower profits. Witness the moves made by Hutchinson in the UK; selling or giving away state of the art phones in order to attract new subscribers.
Who are the latest targets of Elliott Spitzer? The Music industry. They will pay the price like others before them for breaking laws and fleecing the public. Do people ever stop to ask who the losers are in these cases? Shareholders. The drug sector seem to be beset with massive problems, it is like roaches coming out of the woodwork and each week brings another one.
Just as the bulls thought it could not get any worse and Fannie Mae comes along to wreak havoc in the financial sectors. This has the potential of making the woes of the drug sector look like a minor headache and shake the banks' very foundations, at worst, it could lead to a crisis.
How long can the markets ignore the twin deficits; falling dollar; rising commodity prices and the rising number of companies filing for Chapter 11? For those that have been around long enough, it is time to dust off those magazines and books and revisit the 1980s. The Japanese claimed that they could defy gravity and Western style stock valuations did not apply to them, their stock markets were the largest in the world. A few years later, stocks tanked and have continued downwards ever since, they are still over 72% down from their peak. Every now and then, we hear that Japan has turned the corner and it is a new era; new gullible investors get sucked for 6-18 months before finding out that they have ended up with dreadful investments. That cannot and will not happen to us, I hear you say; think again, the Japanese uttered the same words. They tried all the tricks in the book to avoid it but they ultimately failed.
Back to the original question - Where goes the DOW in 2005.
Answer:
Down a black hole. A fall to 6500 would be appropriate and provide fair value (I do not need psychiatric help). Rising interest rates do not bode well for stockmarkets and it is very difficult for shares to rise when bonds are falling.
These are my personal views and you act on them at your peril.
MERRY CHRISTMAS.
