Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Moomin Valley (formerly Troll-free Zone) -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (281)	11/25/2001 10:32:24 PM
From: Moominoid	Read Replies (1) \| Respond to of 2852

From Ed Yardeni: Sunday evening, November 25, 2001 COMMENT: I hope you enjoyed your Thanksgiving. What a wonderful holiday. All you have to do is give thanks and eat. We have much to be thankful for. The war on terrorism is progressing better than had been widely expected. US authorities are acting to foil new terrorist strikes at home. The intelligence agencies of nations around the world are cooperating more in the effort to attack the global network of terrorists. The new airline security legislation should revive public confidence in flying again over the next six to 12 months. US relations with Russia have improved greatly. Freer trade is increasingly viewed as one of the best responses to anti-globilization. China has joined the World Trade Organization. Russia could be next. There is ample financial liquidity. Energy costs are low. Interest rates are low too, and 0% financing has boosted auto sales. The economic recession is likely to remain shallow and should end by next spring. The profits recovery during the second half of 2002 should be robust. The bond market seems to share this assessment. Two weeks ago, I wrote "the flood of liquidity is likely to revive the economy next year. This suggests that the bond rally may be coming to an end. This is why I am raising my stocks/bonds ratio." Since then, the 10-year bond yield is up an extraordinary 80 basis points. Over this same two-week period, the Dow Jones Industrials Average rose closer to 10000. In 1995, when the Dow crossed 5000, I predicted it would cross 10000 by 2000. It did so on March 29, 1999. I didn't expect it would rise above 10000 two times again as it has since then. Odds are the Dow will soon (this week) rise above 10000 yet again for the fourth time How much longer will the Dow remain flat around this level? It could be a long time. After all, it did rise ten-fold from 1000 to 10000 from 1982 through 1999, following two decades of meandering in a flat trend between 500 and 1000. A long period of consolidation after the extraordinary gains of the 1980s and 1990s is possible. The Dow's 200-day moving average has been relatively flat between 10000 and 11000 since late 1999. The week following the September 11 terrorist attacks, the Dow bottomed at 8235, which was 2214 points, or 21%, below its 200-day moving average. That was probably "the bottom." Bottoms are often made by panic selling during major crises. The Dow was oversold and it quickly bounced back. It is hard to see the Dow moving much higher soon since it is already discounting a solid rebound in earnings next year with a reasonable valuation of those earnings expectations. Since 1999, the 52-week consensus expected forward earnings per share has hovered around $500 per share and the forward P/E has hovered around 20. If both continue to do so through the first half of 2002, as I expect, the Dow Jones Industrials will continue to hover around 10000. By the end of next year, however, the Dow could retest the record high set in early 2000 of about 11500. That would be a 15% return from current levels. The major risk is that consumer spending might weaken significantly in early 2002. Auto sales are bound to tumble as the stimulative impact of 0% financing wears off. While the pace of layoffs may be slowing, it is becoming harder to find a job because many firms have imposed hiring freezes. Also, the coming bonus season will probably be the worst since the early 1990s. Many job losers are losing high incomes and are unlikely to find comparable-paying jobs soon. The good news for many of them is that they are receiving large severance pay packages. This development may partly explain the surprising resilience of consumer spending, as well as some of the amazing surge in liquidity this year. MZM--which includes M1, savings deposits, and money market mutual funds--is up $930 billion over the past 52 weeks, a record rate. GOODWILL: The November 9 issue of EARNINGS WEEK examines the likely impact on earnings of the elimination of goodwill amortization expense next year. We come up with a $5 per share boost. Will the market treat the accounting rule change as a technical adjustment with no impact on stock prices? In other words, will a lower P/E offset the higher E? My hunch is that there will be some bullish impact even though nothing real changes. (What does reality have to do with stock valuation? Reality probably matters in the long run., but perceptions certainly matter in the short run.) www.yardeni.com