DOW 8000 is a mere number--its the fundamentals silly!
Yesterday market tested 7875 at least on 3 occasions before noon and wanted to test 7850 but effectively rebounded and closed up on the day above 7900. I construed a close above 915 on OEX as a show of strength of market bull; SOXX was fully able to overcome the manipulations to keep it below 380 strike before the contract expired on
Thursday. Friday morning it regained all its losses made as a result of manipulation and closed up 4.68 points. Look at the various stocks which I initiated earlier in the week on DOW -- G was initiated at 82, it closed 88; GE at 65/66 level and closed up to 70 and change; AMAT at 92 and closed up 97;TBR up by a solid $7 from where it was
proposed and TMX also up along with IBM and INTC. These two previous stocks are twin proxies for the market rally. As a first step I would like to see IBM taking out 100, INTC with a lag of 1-2 days 100, and AMAT will follow the psychological barrier of 100. Once these stocks take out this major overhead resistance, I will see SOXX taking
out 392 and S&P start probing my 980 area where the last battle of bulls and bears will be fought and will be lost by the bears...sorry to be so conclusive but that's how I've been trained, either I be in the business of forecasting or pack my bags to go back home (gggggg...)
One point should not be overlooked that DOW is still down 400 points below its previous highs; it still needs to catch up by 2% to pass through the previous highs, but major DOW stocks lik G, MCD and others are still off quite a bit so most of the money, in my opinion, has temporarily deserted DOW and has not left the market but we are in the
process of seeing a bull leg for the next couple of years in the small caps. My comprehensive bird's eye view is that we don't get a bear market in circumstances like this where NASDAQ, Russell 2000 are all making new highs and still a lot of valuations and potential are out there. Even comparing with 1987 similarity of charts should not be
mistakenly taken as similarity of economic fundamentals. I first charted 1987 economic fundamentals and especially the bond performance with special emphasis on smaller caps and inflationary perception of the market, and then, I charted in 1997 with similar parameters - the only thing similar is that the chart patterns show a bull leg. Prices
have doubled from 1995 to 1997 but what fund managers, especially in Europe, failed to appreciate (they certainly deserve a lock-stock-and barrel firing) between 1991 to 1995,when the stock market was stubbornly stuck within the range and 4000 seemed to be a distant goal, the underline earnings nearly doubled. In 1992 S&P aggregate earnings were
$19, it reached to $38 but this doubling of earnings had no reflection in the valuations; there was a lot of unappreciated valuation. People like us who were looking at fundamentals realised that potential and bet the right side of the market. Somebody who was looking DOW 4000 as a number was not being realistic; he failed to appreciate the
fundamental improvement of the economy.
One major example is that, if you research back into '87 events, the average corporate profitability from year to year was 8%. Bond yields were rising. In 1995, when market started this leg of bull run, in '97 it has just CAUGHT UP with that unrealized built up unappreciated valuation. Yes, it has doubled, but it has doubled because underlining valuations were
neglected far too long. Until Wein, Biggs and others don't really start appreciating the way corporate revenues, EBITs and profits have jumped, and specially the '92/'95 which was never translated into a higher DOW, you would not be able to pinpoint why DOW should be trading at these levels within two years.
I'll invite you to print out 5 charts for corporate profits, EBITs and revenues. These 5 charts can be GE, MSFT, INTC, KO and AIG, superimpose all these charts on DOW. Although for 1995, DOW has started taking on the upward trajectory but between 1992 and '95 these 5 stocks would show you a similar upward trajectory but were totally neglected by
the market. There was no reason for GE to be trading at $28 in 1995 or for that matter MSFT and INTC at such low multiples, especially, if you took these multiples in relation to the forward earning growth.
I would consider this market to be excessively valued if my bellweather stocks would not show equivalent upward trajections in revenues, EBITs and corporate profits. Now we are in a situation where if the profit margins, a basic yardstick, continue the way they are and corporate profitability keeps growing between 12-15%, the supports of DOW or
basic crash of 1929 & '87 patterns, become meaningless. For the doomsdayers who have even now added seasonality, they have missed a basic fundamental point that DOW and S&P is a manifestation of US corporates' unique position and domination in the world. Harvard Business Review has an article on software and hardware domination of US corporates.
If DOW has to come 4000 points (I don't say its not possible), it needs to be supported by drop in profit margins and a drop in corporate revenues, profitability and EBITs. For me, DOW 8000 or 10000 is nothing more than a number. What matters to me most is capitalization of total US corporates' profitability at a cap rate of 4% which gives me a
multiple of 25.
Premium assets are traded at premium multiples. GE, MSFT, INTC, G, or IBM are premium assets and should trade at premium multiples. If Asian stocks can trade at a multiple of 15 with no proprietary ownership of any single product and a huge baggage of economic misgovernance and with the contries' dependence on inflow of capital, there is no reason
why US stocks are overvalued at 22 P/E. IBM is not even trading at that, it is lower; MSFT is at 51 but look at its EBIT and revenue growth factor in the P/E with forward growth and you will have some kind of valuation where MSFT becomes cheap at 118/119, so the room of correction is between 130/118, or for GE 65/60, KO at 52, G at 80 and then at these
levels they become ridiculously cheap. There are no free lunches; if you missed the train you better pay the price now. For me, entering US market at 7500 was a golden opportunity for many of these fund managers. Why did it test that level 4 times and bounced up like a spring? Basically, bears are people who understand very little of the market because
if they understood, they wouldn't be bears. Charts dance to the music of fundamentals, unfortunately, I have repeatedly expressed this a couple of times that this new economy phenomena is not a myth. This is a once-in-a-lifetime turning point, like the start of the steam age, it is the start of cyber age, a step beyond the information age, so, for me,
the scope is limitless. People who tend to sacrifice that on the basis of a few charts are myopic; there will be no 1929 or 1987 because fundamentals are quite different. Short of a huge catastrophe, I can only see that we will have a progressively forward going market and any stock which fails to deliver to the expectation of the market will have no
mercy albeit MSFT or INTC, let them not deliver the expected growth of margins and see what the market is going to do to them. Let the market show us the way, let us be scientific in the market, lets find the truth if there is too much hype built. If there has to be a big correction, then the only way I see it is that there is a huge drop in US corporate
revenues and profitability. Lets discuss where such a huge hit or destabilizing monster raises its ugly head.
-Iqbal Latif
(in Kuwait) |
