Alan: historically the DOW has never moved to a lower
plateau. It has periods of growth,
From the first peak of 1000 in the Dow in 1966, the dow traded in a range bound by about 582 to 1000 between 1966 to 1983. This is a very long time. We could easily go into a broad trading range of 5000 to 10,000 on the dow for 10 years. Until very recently, I believed that Japan will step away from the abyss and thus will not plunge the growth engine of the world (Asia) in a deep recession and possibly a depression, I no longer think this is the case. Under a scenario of continuous growth in the consumer society, yes high valuations are possible (S&P selling at 27 times earning) if interest rates are low, because of competing returns and the assumption that stock's returns grow while bond return stay constant. Now, there is a possibility that corporate earnings will actually decline and thus you could see PE trending to the lower part of the range (I am guessing 10 to 13 times earning) at through in the market. It is all a question of confidence, the break of 5.5% in the long bond indicates to me that confidence in equities is declining and thus a lot of money is going into the bond.
Of course, once the interest rate on the long bond becomes very low, rallies will occur to readjust the relative rates of return. But one thing must be taken into account, once the momentum going for stock has been broken, the justification for extremely optimistic valuation of stocks disappear. What the market seems to be saying is that we have an actual recession in our future (within a year). Note that the transportation average has broken the January lows and are within 100 points of the low set last October, this while oil is a good 40% lower than what it was at those October lows. That is typically a sign that investor believe that the transportation's earning are going to come down despite the much lower costs, namely, less goods and people moving, a recession. A recession means lower earnings and failures of some weak companies. In other words, a real bear market. My current target is 7200 on the Dow, for technical reasons, and this would be a "mild" bear market. The reason for only a "mild" bear market is the fact that interest rates are low, if interest rates were now going to go up with a potential decline in earning, I would have had my sights on 5000 on the Dow. Mind you, a decline of 25% on the Dow would mean that some high fliers like YHOO and AMZN might (and I say might) end up at 1/5 of their current prices.
As for VECO, it could go down to 1 to 1.5 times book and 10 times earnings.
Zeev |
