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December 20, 2003 - Commentary 

The obvious thing is that the stock market is high.  A P/E of 28-30 on the S&P 500, where the norm is 13-17, is evidence enough.  But markets can stay high for long, long periods of time.  The high-fivers will claim that rising earnings could knock that number in half, but neigh-sayers will counter that with the spending from the war on the decline, and the tax rebates behind us that momentum will slow, and that the S&P will only earn $49 next year, which puts the P/E above 50.

It looks to us like Bubble Redux, which also suggests that if the lesson has not been learned, that circumstances will inflict such pain that a generation will not forget it.  Buffett says in his annual report that he figures the hangover will be equal to the binge.

Value Line predicts that in the next 3-5 years, the market will return 40%, which for them is very negative.  But it confirms our thinking that the market capped out in 2000, and that it will be a very long time before it will make significant headway above the numbers attained then.  We're thinking of the 1966-82 period, where the Dow hit 1,000 in 1966 and never made any headway above that until 1982.

So, with a long-term upper limit already attained, then it suggests to us that we are in a shorter term cyclical move up within a longer term secular move sideways and down.  The best work we've seen came from Ned Davis who examined US and Japan stock markets, and he suggests that such a market usually lasts about a year.  He thought the Nasdaq could double, and the Dow reach perhaps 10,700.  In 1929, the stock market crashed, but by 1930, the market had gone back up 50%.  Does this sound familiar?

With all the stimulus that Fed has pumped into the system, we think that this rally, which is already a year old in October, may to able to continue until the election.  But Fed action has Marty Zweig nervous, and in his book Winning on Wall Street, two or three rate cuts was considered extremely bullish, but evidently 12 or 13 rate cuts has him scared to death.  On the Wall Street Week listing, he is 80% cash, and 20% gold.

December 20, 2003

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