A "Bubble Boom"

01/06/2006 12:00 am EST

Focus:

Harry Dent

Author, The Demographic Cliff

"We are forecasting a major move into August 2006 with the Dow targeted for as high as 14,000 to 15,000," says Harry Dent, who recognizes that his bullish outlook is considered by many to be extreme. Here, he justifies his bullishness for the year ahead.

"Our forecast for a rise to Dow 14,000-15,000 in the coming year is very similar to our forecast for a 50% move in 2003 that most people thought was too bullish. This is how the market moves out of a major crash and into the next bubble. It falls until everyone panics out, then it moves upwards suddenly to leave everyone behind in the first major recovery rally. Then it moves sideways for as much as two years to wear everyone out again, then launches suddenly again leaving most investors behind.

"The markets have continued to follow the bubble scenarios of the 1920s and the 1990s very closely with the next move being an approximate 50% advance from the recent buy signal in October 2005. We also just saw the weakest fifth year in the Decennial Cycle for the last 100 years with a flat Dow and only minor gains in other major indices, which makes us overdue for a strong rally in 2006.

"We are still waiting for the markets to break conclusively out of the now 22-month trading range which began in November. Is this another fake break out? It could be...but we think not. We need to see a clear close above 10,950 on the Dow and then a strong advance to follow to confirm a final breakout. We think this is most likely to happen in January. If we don't see a continuation of the strong advance in the January-April season, then we will be the first to question our bubble forecasts for 2006 and into 2010.

"The major news in the markets is around the flat to slightly inverted yield curve in interest rates and how high the Fed will raise short-term interest rates. The truth is that such an inversion typically leads to a strong slowdown or recession. But that typically occurs when the Fed is raising interest rates to slow down a strong booming economy and/or rising inflation rates from such a boom. In this bubble boom since 1994, similar to 1914 to 1929, the process tends to be very different. When there is a recovery process the Fed tends to raise interest rates back to neutral to slow the advance after lowering rates to stimulate out of a slowdown or recessionand that does not tend to lead to a recession just a brief slowing before the economy moves into its next strong boom and bubble cycle.

"We also have been forecasting that real estate would see a dramatic slowing while stocks simultaneously accelerated. That scenario continues to play out thus far with home prices flattening since September and new home sales down 11.3% in November. The truth is that home price appreciation has suddenly declined to near zero in the last year just as has occurred in international markets like Australia and Great Britain as we forecast. Hence, we should see a continued flattening of prices overall in 2006 and some substantial declines in South Florida, California, and the Northeast. Sellers are in the denial stage of holding on to past prices as sales slow and inventories rise. We think that they will have to start reducing prices over the next year or two, especially for speculators.

"Overall, we are expecting a major advance in the stock markets into 2006 which has seemingly already begun with the rise from mid October into November as we forecast. We continue to get strong resistance to our bold forecasts as high as 14,000 to 15,000 on the Dow in 2006 and as high as 32,000 to 40,000 in 2010 but that is the way bubbles occur. People thought our forecasts for 10,000 on the Dow in the late 1980s and early 1990s were crazy. Most didn't believe the Dow and S&P 500 would advance 50% in 2003.

"We expect the strong upmove in 2006 to be interrupted by a sharp correction that is most likely to set in between August and October of 2006. Hence, 15,000 is likely as high as we will see the markets go next year. Then the bubble boom would continue to accelerate into 2007 and into 2010. In terms of allocations, we are rotating away from small caps in favor of mid-cap securities. Small caps have lagged some as the broader markets inched up recently, and our technical indicators suggest this might continue. We are continuing with our aggressive stance, being fully invested with a bent toward growth.

Our current allocations for Aggressive Investors:

30% Technology
15% Large Healthcare
15% Financial Services
10% Biotech
10% Pacific Rim (ex. Japan)
20% Mid-Cap Growth

Our current allocations for Growth Investors:

25% Technology
20% Multi-Nationals
15% Large Healthcare
15% Mid-Cap Growth
15% Financial Services
5% Pacific Rim (ex. Japan)
5% Biotech

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