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July 28, 2005
It's not surprising, given the market's strong performance lately, that some serious optimism about equities is building.
One source, Sheldon Liber, who is an architect and investor in Santa Monica, Calif., sent me his rationale for Dow 11,000 (and maybe 12,000) in 2006.
His points (from July 18):
1) Interest rates will stabilize in the fall.
2) Oil prices will soften in the fall.
3) Real Estate always slows down in the fall and with current high prices on the coasts money will move back into stocks.
4) Billion$$$ are sitting on the sidelines at MSFT, CSCO, ORCL, et all and BRK too.
5) AND THE BIGGETS REASON, THE CHINESE START MOVING MONEY FROM TREASURIES TO EQUITIES. How many zillions of dollars (and counting) in bonds can they hold before they realize that equities in good companies are better than holding debt instruments.
He sent me this "P.S." on 7/22, after the Yuan revaluation:
The change in the Chinese Yuan (not tied to dollar any more) has relieved many foreign governments that envision the floating Yuan reducing their current trade imbalances as the Chinese people can afford more foreign goods. This may be a miscalculation. Although the Chinese currently hold a crazy amount of currency in U.S. Treasuries meaning "Dollars" which lost some value the greater picture for them is more buying power. Example: Their $18.5 billion offer for Unocal which would have been hard to raise has now been raised by yesterday's new found Yuan freedom to float higher against the dollar which translates to at least 2% today. The Yuan buys more dollars so their offer can be raised to $20 to $21 billion but not more Yuan. As the Yuan floats ever higher they have even more ability to go after western companies and hold less dollar positions. This supports my thesis further. Look for China to go on a buying spree for the next three years buying our companies not necessarily our exports.
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One can make an argument against all five of those reasons:
1. We don't know what interest rates are going to do. Sure, we know that the Fed is raising short-term interest rates. They can control those. But the Fed cannot control the ten-year notes that the Chinese are buying. Once China decides that they no longer want our bonds, interest rates will have nowhere to go but up.
2. We are in unchartered territory when it comes to oil. With China and India buying cars and using more oil, demand will most likely remain high. If oil prices do drop, they won't drop much.
3. If housing prices drop from their highs, where will people get the money to buy stocks? If more people are trying to get out of real estate than are trying to get in to real estate, prices will drop. Also, what happens once the interest-only period is over on all these interest-only loans? My guess is that there are a lot of people in houses that they really can't afford.
4. This is a viable argument. However, I don't see it saving the market.
5. See the first answer.
I'm not preaching gloom and doom, but as you can see, there are different ways to look at our present situation. The best advice I have is to have an asset allocation plan in place and stick with it. Don't worry about the short-term.
Posted by: JLP at AllThingsFinancial at July 30, 2005 11:40 PM
It's certainly possible we could see an 11,000 DOW this year. Remember back in March the DOW was over 10,900.
Stocks historically have done better in the second half of the year. I'm hoping for a late year rally or the proverbial "Santa Claus" rally to push us over 11k.
Posted by: Wes at August 9, 2005 04:04 PM