The market every now and then needs a day or two to rest. Maybe even more than a day or two. But over the next 12 to 18 months I expect to see Dow 20,000.
~ James Altucher
I haven't done a Friday Food for Thought article since the beginning of March. For those who are new here, that's when I highlight an article I've read recently that I think you might find interesting – especially if I heartily agree or disagree with the thesis. Since I wrote about the prospect of the S&P 500 falling 70% on Monday, perhaps it's only fitting that I give equal time to the bulls today.
Today's food for thought comes from James Altucher, who thinks we could see the Dow Jones Industrial Average rise to 20,000 over the next 18 months or so. That's a rise of roughly 65% from where it's trading as I write this. Yikes. It looks like somebody's going to be wrong (or right) in a big way. Will it be the bulls or the bears? Let's take a look at Mr. Altucher's arguments and you can decide on your vote.
10 Reasons the Dow Will Hit 20,000
If you're not familiar with James Altucher, he's well-known for (among other things) predicting the recent market rise off the lows. He was much derided by some for the call, but the tape up until now says he was right. Judging by some of the comments on this article, he's taking some heat for this call as well. But he's not just long and hoping for the best, he's actually got some pretty good reasoning behind his thesis:
- The effects of stimulus usually lag by 6 to 18 months. Therefore, QE2 won't help the economy until the end of 2011.
- The market has been supported by the extension of the Bush tax cuts, and Mr. Obama is using the boost in the stock market to help him get re-elected.
- The multiplier effect of the stimulus could be up to 10 times the original $600 billion as its positive effects spread throughout the economy.
- Non-financial companies are cash rich thanks to their fear of a double dip and they can put that money to work if it never comes.
- Companies are already starting to buy back their stocks and when supply goes down, price goes up.
- Unemployment numbers may not look very good right now, but temp worker trends are pointing to an improvement.
- If S&P profits come in just a little higher than the current consensus of $95 and you put a 20x multiple on that, you get an S&P target of 2000, which likely equates to Dow 20,000.
- Many of the large cap stocks are trading at very conservative multiples.
- The financial crisis didn't kill innovation – at least not for Apple.
- Major demographic changes will affect the markets over the next 25 years.
That last point is basically a teaser for Mr. Altucher's next article. He doesn't tell us what the positive demographic changes are, but I will likely tune in to find out because most of what I read says that demographics will have a negative effect on the markets over the next couple of decades.
Bulls, Bears & Dogs
It's a dog-eat-dog investment world out there. Bulls and bears are constantly jousting over who will be correct and over what time frame. It looked like James Altucher was wrong last summer. He took some pretty heavy – and not always civil – criticism for his bullish views back then. He regrets the fact that his children had to read about people insulting their Dad personally when they googled their last name.
But from the end of August onward, even his harshest critics would have to admit he was right. Markets are wavering again right now. Mr. Altucher thinks it will pass. Will he be right again?
We have some pretty smart people who think the markets will fall more than 50%. We have others who think it will rise more than 50%. I tend to side with the bears. I have too many concerns over debt, derivatives and the ridiculous size of the financial sector to take a ragingly bullish view. Having said that, I don't know when all of that will come home to roost, so it's possible that Mr. Altucher could be right again.
I thought James was wrong the last time he made a bullish call. It turns out I was wrong. That's why I love to read about views that diverge from my own. Why others find opposing points of view a personal affront – or worse, an invitation to ignore the rules of civil discourse – I have yet to comprehend. While I'm skeptical of Mr. Altucher's market call, I do agree with him on this:
“It’s usually a bad idea to personally attack someone to get your point across. It’s never really necessary, and it’s lazy and bad writing.”
What do you think of this call for Dow 20,000?