Before we get started, let me remind you why the Dow is going to hit 6000. The true value of stocks are reflective of how much money a company will make over the next 7 to 10 years--no more and no less. The price per share is reflected in the Price to Earnings ratio (P/E).
The rational P/E ratio of a mature company (growth is relatively stable) is 7:1 because an investment of capital in this environment gives a sustainable return on investment over 7 years. Lower ratios would indicate the earnings were expected to decrease. Higher ratios would indicate earnings were expected to increase.
Over the last 30 years, P/E ratios became inflated (from 30-100:1) for several reasons. First, the "potential" of these companies was great indicating high levels of growth was expected. Second, with more money in the stock market, supply and demand issues affected stock prices. Some people call this the speculative component of the market. Finally, more people looked at stocks as an investment in their portfolios versus investments in a company. In other words, shareholders were no longer owners of a company, just holders of a piece of paper. As long as there were people willing to buy the piece of paper, it didn't matter how much income the underlying company was actually generating.
Today, this has all changed. If you look at P/E ratios, companies are trading for 7-10 times earnings. This is a positive thing. But why would stocks head for 6000?
Conservative share price valuations are based on earnings and future earnings.
Earnings forecasts have a hard time placing a P/E ratio on companies that are losing money and are structurally incapable of making money in the future. Today, the many industries in crisis, from banks and autos, to airlines and housing, are all in a structural free fall. The amount of debt and obligations they incurred over the last several years eliminate the ability to make a profit in the future. Until the tens of trillions of dollars of losses filter through the economy, we are going to be saddled with bad news.
The economic crisis we are in shows no way to get out for many years to come.
1. Unemployment is expected to rise to 8%. Consumer debt and bankruptcies will skyrocket.
2. The Federal Government deficit is expected to reach $1 trillion per year and rising.
3. State and City Government deficits are expected to reach $300 - $1 trillion.
4. Entire industries are bracing for structural failure. These include: Automobile, Airline, Financial, Housing, (Anything related to consumer credit such as credit cards, consumer electronics such as big screen tv's, home improvements such as hot tubs).
5. Government spending on corporate, state and municipal bailouts will continue to rise.
6. Government spending on individuals affected by the economy will skyrocket
7. Manufacturers will continue to fail because American labor costs 10 to 100 times foreign labor.
8. Democrats control Congress and the Presidency, increasing the likelihood of increased government payments to individuals.
9. The value of the dollar will be affected on what it can buy (inflation).
These 9 problems are simply dealing with the bad economy. We have a structural problem with government, without the increased deficit spending...
1. Half of the health care dollars is spent by the Federal and State Governments on Medicare and Medicaid. Health Care costs are increasing at 9% or more per year.
2. Social Security will be insolvent in 2017, regardless of the Al Gore Lock Box filled with IOU's from the Federal Government.
3. The Clinton welfare reform bill has never been tested by a recession. The chances of that being repealed will be nearly 100%, costing billions.
4. The war on terror is one attack away from shutting down the entire Western world. Meanwhile, we are spending nearly $1 trillion per year in national defense and the wars in Iraq and Afghanistan.
5. Iran with a nuclear capacity may well entice Israel into a war of attrition.
The stock market will be able shrug off some bad news right now, but prolonged bad news, like a prolonged war, will destroy the confidence in the market for many years to come. It is for this reason I predict a Dow 6000.
I was, however, writing about the amazing economic opportunity ahead for our country, so here it goes.
We have a remarkable opportunity to get back to investing that makes sense. Gone are the days of making 30% return on your investment, at least for a while. This leaves billions of dollars of investment money looking for larger returns on their investment. They will look at "growth markets" overseas in third world countries, but this comes with great risk. Cheap consumer goods fueled the growth of the last 30 years. The new economy will be growth associated with energy independence.
The better investment for people with money is to invest in industries that are structurally broken. These industries are energy, health care and transportation. Reliance on foreign sources of oil has turned the world into a powder keg, and has turned our economy into a firestorm. Money-rich Islamic Terrorists and a Western Governments reliance on foreign oil will encourage investment in the following areas.
1. Coal
2. Nuclear
3. Geothermal
4. Electric Smart Grids
5. Wind
6. Solar
7. Battery Technology
These technologies will alter the direction of the transportation industry, such as public transit, personal transportation and airline industries.
Further investment in these areas will allow America to lead the world in these technologies, creating markets world wide.
The next bubble will be companies that are investing in these technologies. Be careful, because with any bubble, billions of dollars will be made, and billions of dollars will be lost, as business models fail.
Welcome to the turbulent times of free market capitalism. Businesses must be allowed to fail before new businesses will be created.
So even though I see the glass fully empty, I do think that the glass still has the potential of holding water...I just don't know how billions of dollars of investment will be able to returned. But that is why we get up in the morning...
We will see...
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