Dave & Noiserider: OK, I've done the required Slate and Wharton reading. My comment: I consider EVERYONE wrong, especially Glassman/Hasset, but also Crook and Siegel.
The problem with the whole lot of them is that they don't understand the relationship between the stock market and the real economy, and how they interact. They all seem to think that there are two separate things: 1) There are businesses out there that are growing at certain rates, paying dividends that are growing over time, showing certain fluctuations in their growth rates, etc. 2) Then, totally independent, in a big glass bubble (ignore the pun) overlooking this real world of real companies, are the millions of investors who value the companies, based on varying formulas.
The unstated assumption is that the actions of the observers (people playing the market) have no impact on the businesses themselves. Both the DJIA 36,000 guys and the so called skeptics appear to agree on that assumption. Then they spend the rest of the time arguing over what is the correct way to value stocks: What should the risk premium for equities be? How much do dividends and earnings grow over time? What discount rate for future earning is appropriate? What is a reasonable price for stocks based on the answers to those questions?
This is total tripe. If your assumptions are wrong, your conclusions will be wrong. We're not talking art history here, where some professors can argue whether paintings by Cimebue should be "valued" as highly as those by Tintoretto. No matter what their conclusion, the paintings just sit there, looking the same, just as if there were no professors. There is no interaction between the physical thing and the theoretical value.
But the exact opposite is the case with the stock market. Price levels have a major impact on the real economy, on profits, on growth rates, and every other component of anyone's valuation formulas.
The more the stock market goes up, the easier it is for businesses to raise capital. They take that capital and expand. The more businesses expand, the more demand they create from their own spending and that of their employees, true, but the more competitive supply they add to the industry in which they are expanding. The more capacity there is in a field relative to demand, the more the competitors have to slash prices and margins to hold on to market share.
To put it another way, wildly oversimplified, is that if the Dow actually got to 36,000 , corporate profits would probably have gone to zero or below, because EVERY industry would look like the internet does now, with almost every company losing money because there are way too many competitors relative to demand. As their stocks rose on the road to 36,000 more companies would float offerings, their employees would quit and set up new companies that would also round up plenty of cash, etc.
So even if based on Glassman's magic formula the DJIA ought to be selling at 36,000 , before it got there the very process of getting there would destroy the profits that justified the 36,000 level. The higher the market goes, excessive competition caused by too much investment in too much capacity would destroy the earnings, cash flow, and dividend levels that Glassman or anyone needs to justify the higher prices.
That is the fundamental flaw in the DJIA 36,000 argument, not quibbles over valuation formulas. |
