Six Roadblocks on the Way to Dow 10,000
By James J. Cramer
08/08/2003 08:59 AM EDT
For years I've spent a tremendous amount of my time trying to figure out what could go right. I do that because when I got in the business, the Dow was at 700 and there was no Nasdaq. Subsequently the Dow went to 11,000 and the Nazz went from whatever to 5000. My "what could work out right" viewpoint served me incredibly well. But I have never been averse to the short side, and I am not someone who thinks everything always works out right in the end, even if that may have been the case between the time I started running money professionally to when I quit.
With that understanding, I want to recap the problems here, six things that could go wrong, and obliterate the Dow 10,000 road map for good. First, the bonds. Not enough people remember when bad "bid to cover" determined whether to launch a fusillade of S&P stock futures because you knew rates were going up. There are enough revisionists who don't even believe the government could "crowd out" or "move up" rates with its own borrowing, and there are enough people who weren't trading before Bob Rubin's plan to break that linkage that we have grown complacent. The action you saw ahead of this bond auction -- vicious, violent and horrid action that could make you lose a third of your gains in three days -- well, let's just say you'd better get used to it because we have dozens of bad auctions ahead as the government comes back to raise the money it needs.
Did you think there was a free lunch with the tax cuts? Maybe, just maybe, the economy will take off and we can restore some of the revenue lost to the government, but maybe the government doesn't even want that to happen because there are folks within the government who want the government to return to the pre-FDR days. Worse, there are people in the government who want both the FDR days and the pre-FDR days and a standing army and free drugs, and those people are making rates go higher.
Of course, some of the rate rise was because of a Federal Reserve chairman who has lost all credibility in the markets. Some of it was because of economic expansion. But I'm afraid most of it is because the government has to borrow a ton more money than is available at these low rates. That's an ongoing problem that deeply affects the long-term performance of the averages. Two, oil is way too high and shows no signs of coming down. Nor is anybody able to do anything about it. We now are waking up to the fact that Iraq was pumping a ton of oil, much more than we thought, before the war, and now is pumping a fraction of what it pumped because of sabotage. The sabotage should keep up for some time simply because, like so many of the bad things happening in the Middle East, that's exactly what nihilist bad guys who believe in nothing and wish only to destroy should be doing. I can't think of a more destructive thing to do than to blow up the oil works. It's brilliant in its evil simplicity.
Meanwhile, the other oil producers are thrilled, and no one's doing anything to break up OPEC so we aren't going down anytime soon. Of course, we could go higher, and that would kick the legs out from under the darned cyclical rally that we all are counting on. Fuel matters.
Third, the earnings in some segments of the economy truly are getting better. But the earnings in the segment of the economy that has been bid up furiously, the Nazz, really haven't. Oh sure, things are better in semiconductor land, and they are improving in networking land, but given the price appreciation, "improving" isn't good enough.
Fourth, the terrific dividend underpinnings of the post-exquisite moment rally are waylaid by the spike in rates, and will be waylaid further when the Fed realizes it can't keep its vow of low short rates and be credible. Right now the Fed is just ignoring the market entirely. That's stupid.
Fifth, the stocks that led us, the Net, are hopelessly overvalued on any metric and are strictly a function of the old Janus type of mindset, which tells me there is no reform in mutual fund land. My sources who've been at Janus recently told me that those old tricksters are furiously dumping the four horsemen to lock something in.
But given that the Janus Twenty is only up 10%, I figure they'll start buying those stocks and moving them up again. That these people are still considered professionals astounds me, but then again, big ad budgets buy lots of credibility in the world that I sometimes straddle.
Sixth, while we have a decent Treasury team in, no one on Wall Street gets the warm and fuzzies from this crowd. The man with the most credibility, Steve Friedman, simply has gone undercover. Without him, we are stuck with this conundrum that might just un-elect Bush if the Democrats don't anoint a PeaceNow candidate. I think Schwarzenegger would beat Bush right now. But then again, he's a Republican.
08/10/03 07:30 ET
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