FYI | Jul 09 2014
By Peter Switzer, Switzer Super Report
The US has passed the economics test in recent weeks, despite that shocking minus 2.9% growth rate for the first quarter, but now the earnings test for the second quarter starts this week. This comes as the Professor of Finance at the Wharton School of the University of Pennsylvania, Jeremy Siegel, thinks the Dow will go to 18,000 by year’s end.
And believe it or not, he doesn’t totally rule out the Dow at 20,000 before New Year’s Day 2015!
The bull story
Now, sure, Siegel is often called a perma-bull but I don’t think an esteemed academic like him would ignore the facts. And if they warned that “bears were on the way”, he would change his view. This is the exact case I argued for myself and my bullish tendencies in Saturday’s report.
If the Yanks can pump the Dow up to 18,000 (that’s a 6% rise) but if it makes 19,000, that will be close to a 12% rise – both economics and earnings would be surprising to the high side or at least matching more bullish forecasts.
This would bring forward calculations of when the Fed starts raising interest rates and the greenback would be tracking higher. Higher interest rates and a solid stock market give a steroid-like boost to the US dollar and that would take the Oz dollar down.
This would help the earnings of the likes of BHP, Rio and other dollar sensitive stocks, like Flight Centre, CSL and Brambles, which in turn would give the S&P/ASX 200 index the turbo-charge boost it needs to attack the 6000 level.
But this rests on the two E’s — earnings and economics — following the two S’s — Siegel’s and Switzer’s script!
This is what Professor Siegel told CNBC: "I think we're going to get to 18 and above. Could it go to 19, 20? It could," he said. "I'm not going to say that's the likely event, but so many people have missed this bull market that they start saying, 'Hey, you know, this is my last chance.'"
And get this, he argues 20-21,000 could be a case of over-valuation but even that he suggests would only be a short-run scenario. This guy is a bull on steroids.
The worries
He says the risks that could undo his nice-to-read tale are:
• inflation
• a wages breakout
• a productivity problem
• gasoline prices spiking.
Now remember, the Yanks got 288,000 jobs in June and 215,000 was the consensus expectation and unemployment was supposed to be unchanged at 6.3% but wound up at 6.1%.
But why isn’t Siegel worried about the potential financial instability and bubbles that can come from so much money slushing around so many economies?
Well, he might agree with the Fed boss, Janet Yellen, who recently told an IMF gathering that she thinks interest rate rises are too blunt a weapon.
Yellen is throwing herself behind macro-prudential regulation instead, which might include bigger deposits for loans and raising capital requirements on lenders or exotic financial product creators.
One day, this will be a huge monetary policy argument, and Yellen could be proven wrong, but one thing is for sure, she won’t raise US interest rates until the economy and confidence is so strong, that she knows the actual rate increase won’t create a huge stock market slump.
The stocks to buy
That will be a gamble but it’s one that creates moneymaking opportunities for anyone long stocks.
What could go wrong in the short-term? Well, ruling out a Syrian, Iraq or Ukraine geopolitical issue, I think if the US reporting season really disappoints then something like a correction could show but I certainly doubt the former. If the latter happens, I suspect it will come from some other left-field event.
That’s my story and I’m sticking to it and I’m looking for stocks that will do well with a lower dollar and that pay OK dividends. I’ll have a few by Saturday and that’s a promise.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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