-->FEARLESS SHORT-TERM MARKET FORECAST: Fueling The Engines of
Economic Growth-- By Tobin Smith
Today's clean break above the resistance targets of Dow 8,850, S&P
500 980 and Nasdaq 1,580, shows where the bigger tier of technical
resistance lies overhead for the major averages.
But the bigger technical news is that we have broken the magic S&P
950 line. This is the level that represented the Mason-Dixon line
for many bears between a fade-the-bear-market, false-start rally and
a cyclical Baby Bull market move a la 1934-35, 1974-75 and 1982-83
in previous bear markets.
Many are calling for a rest at these levels, something that would be
great for those of you who have missed this train. Many are still
dogmatically calling for a return to the bottom of the Nasdaq
downtrend line at 1,250 after this rally gives up the ghost this
summer. (Like my"Bulls & Bears" compatriot, the"Chartman.")
But don't be surprised if this rest is just a wee bit of a breather
before the train rolls on to Dow 9,000, S&P 500 1,000 and Nasdaq
1,600 -- and then on to Dow 10,000 and Nasdaq 2,000 before early
2004. Here's why.
We have a transformed market, one with a completely new set of
future unambiguously positive aspects that we have not had for three
years. The signs of this transformation are sometimes crystal clear,
sometimes metaphorical and sometimes hidden from the untrained eye.
First, if you don't trust this rally, PLEASE go to our Web site and
re-read my columns since we called for a Dow 7,500 bottom and 8,500
top to the bear market rally. Then read my April columns where I
said this time it WAS different and updated our market forecast.
Next, ask yourself the following questions:
* What are investors' expectations of the near-term (six- to
nine-month) economic future?
* How realistic are investors' expectations?
* How much are these expectations priced into today's stock prices?
I COULD'VE HAD A V-12
Perhaps before you answer those questions, you need to recognize
that there is a new, powerful"V-12" engine driving future economic
demand. This is important especially in the context that our economy
has been running on a two-cylinder engine for the last three years.
(That's the feel of an economy where future demand"drivers" were
completely overwhelmed by future demand"restrictors.")
Why is this V-12 engine of future economic recovery and growth now
primed and ready to rumble, you ask?
* Cylinder 1: Significantly LOWER trade-weighted dollar valuation.
(This stimulates exports, and increases foreign and domestic pricing
power for capital goods.)
* Cylinder 2: Significantly LOWER corporate bond yields. (This
lowers interest rate expenses via refinancing of existing debt at
lower rates.)
* Cylinder 3: Significantly HIGHER bond underwriting. (This cuts
blended borrowing costs 50-150 basis points for corporations.)
* Cylinder 4: Significantly HIGHER mortgage rate refinancing. (This
cuts household debt costs, liquefies home equity appreciation,
raises home valuations and reduces the overall interest costs of
home buying.)
* Cylinder 5: Rising stock prices. (This mends corporate pension
plan deficiencies, improves consumer confidence and encourages
capital formation by issuance of new stock/stock-based buyouts.)
* Cylinder 6: Significantly HIGHER consumer confidence about the
future. (This stimulates consumer spending.)
* Cylinder 7: Significantly HIGHER corporate profits -- the rise
over last year's first quarter will extend into Q2 and grow as
demand improves and costs stay low. (This creates investment capital
within corporations.)
* Cylinder 8: Significantly HIGHER bank lending levels. (This
creates capital and lowers overall borrowing costs for
corporations.)
* Cylinder 9: Significant investment tax rate reduction. (This
rewards higher rates of risk taking by investors.)
* Cylinder 10: Long-term Fed interest rate guidance. (This should
keep short-term interest rates low throughout 2004 and creates
demand for interest rate-sensitive goods like houses and cars.)
* Cylinder 11: Inventory replacement -- with inventories at historic
lows and unfilled order backlogs for non-defense goods rising for
the last three months, a return to baseline normal rates of
sales-to-inventory adds 1.2% to GDP demand.
* Cylinder 12: Loose money supply. Cash in the monetary system is
still growing at 7%-8% annual rates, which is enough liquidity to
fuel expansion.
The real answer to the question,"Is this just another bear market
rally false start or the real Baby Bull within a secular bear
market?" requires a little more context than"yes" or"no."
We will not know for sure if the new V-12 engine of economic growth
is actually working till the first quarter of 2004. If the historic,
demand-driving power of all 12 cylinders of economic stimulus do not
bring about 3%+ growth to our economy by late 2003-early 2004, the
economy is BROKEN and all bets on economically sensitive growth
stocks are off -- and they should be sold and then shorted.
And yes, betting against (i.e. shorting) economically sensitive
stocks while the old two-cylinder engine of economic growth held
court was a great way to make money in the post-bubble bear market.
But that was then -- this is now. And betting against a V-12
economic demand engine that has MORE than enough horsepower to drive
a normal business cycle recovery is a very poor wager. That is what
the market is saying here, in my humble opinion.
Betting on (i.e. being long) economically sensitive stocks BEFORE
the business cycle begins to expand (and conversely being short them
as the business cycle peaks and begins to contract) is one of the
key ways we at ChangeWave Investing to keep our money growing
through expanding and contracting economies.
Betting on economically sensitive, smaller-cap growth stocks at the
onset of sustainable economic expansion is a great way to make LOADS
of money in the stock market -- as the returns we've registered
making this bet on stocks since early this year most emphatically
proves.
We may very well bail on stocks in early 2004 if our proprietary
economic demand research shows the growth we expect did not arrive.
But until then, this remains VERY MUCH a buy the dip market, as we
saw the Monday before Memorial Day.
Toby
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