FT Short View: Dow 6,500

Discussion in 'Economics' started by just21, Aug 17, 2005.

  1. just21


    By Stephen Schurr, Financial Times
    Published: August 17 2005 20:30 | Last updated: August 17 2005 20:30

    Sid Klein has built a career on calling the turning points in the US and Japanese markets. He proclaimed in late 1989 that the world should short Japan.

    In January 2000 he said the US bull market was over and stock prices would halve. In October 2002, he called the US market's bottom almost to the day.

    Now, the investment adviser and publisher of the Japan Asia Investments newsletter says he is "pounding the table" once again, and investors in the US and Japan should prick up their ears.

    Mr Klein tells the Financial Times that the Dow Jones Industrial Average "has the potential for 6,500 in 2006", nearly 40 per cent below current levels.

    Based on this, he suggests the easiest way to hedge or profit is to buy 18-month puts on the Dow, a bearish options trade similar to the call he made on Japan in 1989. Even more interesting is his recommendation as the port in the storm for investors: Japan. Or, more specifically, Japanese value stocks that are focused on the domestic economy.

    To back up his bearish call, Mr Klein points to many of the same signs he relied on in 1989.

    The principal one is valuation. The US stock market, Mr Klein maintains, sports a price-to- earnings multiple that has become unmoored from the underlying earnings growth.

    He says a p/e of 18 makes no sense in the post new-paradigm era of declining interest rates. If stocks stopped trading at a premium to the forecast growth rate, the Dow would easily fall to between 7,000 and 8,000.

    Valuation rarely serves as a catalyst for a major downturn, but Mr Klein sees other candidates. The price of oil is one. Since this spring, he notes, US equities have not followed their usual pattern of moving in the opposite direction to oil.

    Unless crude prices suddenly collapse, a correction should be forthcoming. Another possible trigger is slowing growth in China, which could translate into more muted purchases of Treasuries; this could spell higher interest rates and a slowing economy in the US.

    (Speaking of China, Mr Klein construes Beijing's tip to its citizens to buy gold as another ominous sign.)

    Mr Klein says investors should be less concerned with identifying the trigger than with positioning themselves for the correction.
  2. Thanks for the post. I have also been the "meinung" that the DOW will visit 7K in the next year or two.

    As for oil and the stock markets. I believe that a bull market in oil accompanied by a bull market in equities only ends with cheap oil and dear equities.

    The strength of EU markets can not be ignored. So far I don't think things will next nasty until October or November.

    One question. If interest rates actually go higher as the author predicts here in the US, could that mean the Dollar will strengthen against the Euro ? Even in a declining equity market, can the dollar rally?

  3. capmac


    DOW 7K will never happen, the 'powers that be' won't let it, plain and simple. We will be in a trading range (with a lower bias) for years and years, grind it lower type action, but no 'crash'.

    It would take some sort of unexpected catastrophic event to take this market down suddenly. Example, if a nuclear bomb was unleashed on US soil, that would trigger a crash scenario.
  4. Exactly.

    I mean, how long does one have to be trading stock/indices to realise that there is ZERO price discovery or anything resembling funnymentals driving these markets?
  5. Another example could be, let me see, what could it be........

    a real estate bubble bursting ?

    Check a monthly chart on the 10yr T-note Interest Rate(CBOE). Rates have been trading sideways since 2002.

    When we break that TL, % rates will shoot up and nobody will be able to do anythng about it including Mr. Greenie.

    DOW 7K it's written in the walls......you'll see.

  6. no, it would be looked as a "can't get any worse" type of scenario and people will buy the dip like crazeeee
  7. For once I agree with EqtTrdr.
    At dow 7000, I buy the world & say:
    "100% room up to go go go go make $$$!"

    But doesn't value investing right now feel better than growth? I know it does for me... Scaling in Slooowly to any longer term equity positions, personally, which is an unusual strategy for me, but this whole silly thing don't make sense.
  8. just21


    Maybe the Saudis are buying US stocks with their oil money!
  9. or the Chinese with their "cheap stuff" money...:D
  10. The key here is Greenspan and his successor.

    For major changes in valuation of US equities, probably nothing else matters. :confused:
    #10     Aug 17, 2005