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Editor's Choice

Jon Markman

Market Dispatches9/14/2009 12:01 AM ET

Will Dow return to 14,000? Bet on it

For all the talk of another big drop coming, the pieces are in place for 3 years of 15% annual increases for the giants of the blue-chip index.

By Jon Markman
MSN Money

It's been exactly a year since the government kicked a smoldering financial crisis into a roaring blaze by letting Lehman Brothers (LEHMQ, news, msgs) collapse. Observers this week are memorializing the mistake, but investors need to look forward -- and what they should see is that the government's later reaction to its error may have actually laid the groundwork for the greatest bull market of the decade.

What are the 30 companies of the Dow?

What are the 30 companies of the Dow?

For while it seems unlikely and irrational in the context of all the lousy economic news you see right now, stocks are well on their way to recovering from the Lehman jolt and ambling with all deliberate speed toward all-time highs. And they don't really care if you believe it or not.

Dow 14,000? Maybe not next week. But in three years? Not a problem.

The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements and in corporate revenue trends. You don't need to be a statistician or an insider to see them, but you do need to keep an open mind to see why the 30 goliaths of the Dow Jones Industrial Average ($INDU), companies such as Caterpillar (CAT, news, msgs), Intel (INTC, news, msgs), Bank of America (BAC, news, msgs) and Boeing (BA, news, msgs), could see their stocks rise 15% a year for three years.

Here's what I'm seeing just in the news of the past three weeks and what I think needs to happen next.

Good news, but big money's still bearish

First, sentiment -- a big determinant of what an investor is willing to pay for a company's earnings power -- is still really lousy. Forget all the yadda, yadda, yadda about the number of bullish private investors hitting the highest level in bovine history. Those mom-and-pop surveys are useless because the respondents have little money at stake. The fact is that the majority of the world's largest hedge funds are still bearish and believe stocks are set for a big fall. And if those guys are as wrong now as they were in being bullish last year, as I believe they are, then when they capitulate in the face of a steadily rising market you will witness one of the largest short squeezes in history. Trust me on this: Big money does not mean smart money.

Here's how I know they're negative: Goldman Sachs Group (GS, news, msgs) hosted a dinner Wednesday at the swanky restaurant Aquavit in New York for the heads of 15 large hedge funds to exchange ideas on strategy. I was told by a source that all but one declared stocks very overvalued after their recent 50% sprint. And the key reason expressed was that corporate revenue trends were weak and would undermine the surprising earnings gains reported in the second quarter due to head-count reductions.

Markman on video: Still too many market skeptics

Someone should buy those guys subscriptions to The Wall Street Journal, because company after company these days is announcing upside to its revenue and earnings forecast. Intel and Dell (DELL, news, msgs) shocked pessimists last week. And on the same day as the Aquavit meeting, Texas Instruments (TXN, news, msgs) raised its third-quarter earnings outlook to as much as 41 cents per share on revenue of as much as $2.87 billion, versus its previous forecasts of 39 cents and $2.5 billion. Then on Thursday, ASML (ASML, news, msgs), a big Dutch semiconductor equipment maker, lifted its sales forecast for the third and fourth quarters by more than 50 million euros because its second-half outlook for consumer goods has shot higher. "Expectations are turning positive," said a spokesman.

This is a big contrast to the news that started the ball rolling downhill for technology and the stock market nine years ago. On Sept. 22, 2000, Intel shocked investors by warning that its third-quarter revenue would fail to meet expectations because of weaker demand for its chips in Europe. Shares fell 20% the next day from their perch at an all-time high near $70; tech stocks have not been the same since. After falling for nine years on bad news that shriveled its price-to-earnings multiple, why can't Intel now rise for nine years as its price-to-earnings multiple expands on good news?

Continued: Biggest economies unanimous on stimulus

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StockScouter data provided by Gradient Analytics, Inc.
Quotes supplied by Interactive Data.
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Saturday, September 12, 2009 3:38:26 PM

Markman may be a good trader but he is a terrible economist, social observer and policy strategist.

 

His assumptions are based on the notion that because the bond market has returned to a degree of "normalcy" that stock prices will return to their previous highs. The reality is that what existed before the failure of Lehman was NOT normal - it was a bubble in leverage. The aftermaths of bubbles never result in the recovery to the bubble highs. This has long-term implications for corporate earnings/investment, personal income/spending and the job market.

 

The nation is searching for the "next big thing". I can guarantee you that it will NOT be in finance or real estate. There will be some who will ride off the bottom (and declare their "genius" loudly afterwards) but that does not mean that the nation as a whole will do so too.

 

Genius would be to put the nation on a new course to sustainable growth. Things that are worth doing are never easy and often require effort and time. Are there any Americans left that understand that?

 

Saturday, September 12, 2009 8:36:29 PM
Maybe Jon Markman himself is a contrarian indicator.  When things were going bad, Jon would come up all the theories or evidence and said things would get much worst.  Now the stock market is rallying and Jon is saying things will get even better.  
Sunday, September 13, 2009 2:51:37 AM

Excellent article yet again, Mr Markman; you are one of the very best market journalists / investment analysts around, and I am one of your biggest fans.

 

Thank you too for referring readers a few years ago to an article in The Independent newspaper describing the diabolical practices associated with the mining of a technically important mineral in central Africa (sorry I have mislaid the reference) - a reminder to us all that there is more to life than merely getting an edge up on our investments.

Monday, September 14, 2009 2:48:40 AM
I'll begin to believe Markman when American companies start hiring again in large numbers and bring back those laid off, particularly in industries where something tangible is PRODUCED! I'll begin to believe Markman when Arkansas and other states quit shafting those out of their rightfully earned unemployment benefits. I'll begin to believe Markman when media stocks are once again priced higher than a pack of smokes. I'll begin to believe Markman when the $1.14 QUADRILLION of garbage OTC derivatives are cleared. For now, I see this as no more than a SUCKERS RALLY and if it goes up high enough and I don't see any of the aforementioned change, it'll be a beauty to short.
Monday, September 14, 2009 4:13:43 AM
Sorry Bubba, workers don't earn unemployment benefits.  It is state required insurance paid for by employers.
Monday, September 14, 2009 5:23:37 AM
I'm not betting on the US Economy, and neither is China as they bought billions of IMF notes instead of dollars!  For every 1% the dollar falls the Markey has to earn 100 points!  Inflation and bad fundamentals make the US economy and risky bet!  I'm sticking with commodities like copper, gold, silver, and oil. 
Monday, September 14, 2009 6:03:55 AM

This guy is basing his predictions on the fact the wall street guys could not predict the crash so they can't predict the recovery either? Nice. we need fresh thinking and ideas once in a while. Just to have a posative outlook!!

 To fix unemployment government should buy out workers to get them to retire. Offer people ages  50-55 1mill or 1/2 mil to retire and never be on a payroll again. Make them buy a new American car with there money and payoff a mortgage for someone. This would fix unemployment over night.

Monday, September 14, 2009 6:05:34 AM
Not with this Bozo in the white house.  There will never be enough public confidence in his agenda.
Monday, September 14, 2009 6:10:41 AM

The new normal for the economy and the markets tells me we need to be happy with 5-6% real returns over the next few years.  And that's OK.  I have loaded up on the shares of companies which make goods and services we need and use no matter what happens.  The 4.2% avg dividend of my 26 stocks, from ADP to XOM, will see me through, even if Markham is off by 5-6 years for the bumpy ride back to 14,000. 

 

I like the contrarian comment! 

Monday, September 14, 2009 6:26:26 AM
I love this Jon ........ THANK YOU for being bold enough with all the doom and gloom usually printed here to say: 
 "But I also know that Americans always find ways to prove the pessimists wrong."
Perhaps Mr. Worldfromtheinside should read your article again, and understand it this time. 
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