As the world faces an increasing onslaught of new threats from biological and chemical weapons, viru...
Dow 14,000 Is in the Bag
09/17/2009 1:00 pm EST
Jon Markman, contributor to MSN Money, tells why the venerable index may move up far more than many cautious analysts think it will.
Dow 14,000? Maybe not next week. But in three years? Not a problem.
The signs are abundant, if you know where to look: in the corporate credit markets, in employment trends, in consumer credit trends, in government statements, and in corporate revenue trends.
First, sentiment is still really lousy. The majority of the world's largest hedge funds are still bearish and believe stocks are set for a big fall.
And if those guys are as wrong now as they were in being bullish last year, then when they capitulate in the face of a steadily rising market, you will witness one of the largest short squeezes in history. Trust me on this: Big money does not mean smart money.
Second, [at a recent] meeting in London of the finance ministers and central bankers, the G-20 policymakers said they remain united in their commitment to the application of fiscal stimuli, loan guarantees, and low interest rates until business is back to normal.
This was a historic moment. The bill for governments' efforts to rebuild the global financial system so far is nearly $10 trillion, and yet none is backing away. In past decades, all of these countries have fought like cats and dogs for the right to pursue their own independent approaches.
It's clear that bankers will not raise rates for at least another year and possibly not until well into 2011. [So,] a regime of near-zero interest rates in the developed world won't be a short-term blip, but instead will persist until the job of righting the global economy is complete.
Low rates combined with loan guarantees and continued government spending are just what the doctor ordered. Deployed prudently over time, they should usher in the sort of business confidence that will lead to a strong expansion of credit to consumers and companies, growth in employment, and the repair of family and corporate balance sheets.
The loose money will certainly create dangerous asset-price bubbles down the road, but that is something to worry about another day. For now, governments are ensuring companies have the credit they need to get people back to work so they can rev up the ol' borrowing-and-spending machine again. If it works, we could have a real boom on our hands.
Lastly, and perhaps most importantly, pay attention to all the merger proposals that have been announced lately. They have pushed up the target companies' prices, as well as those of their peers. Buyout premiums are just another way stocks rise. With confidence in the recovery rising, the spigots for debt issuance [also] have been thrown wide open.
And what do you think they are doing with that money? They are buying back stock, which is a tricky way of boosting earnings per share without actually selling more stuff. Combine buyouts with buybacks and new hiring, and once again you have the recipe for an extraordinary boom in asset prices.
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