Rob Schaap rws at comserver.canberra.edu.au
Sun Aug 29 21:13:17 PDT 1999

Either these guys are wall-biting lunatics, or there's a new mode of competition at work in the publishing industry (if you can't compete on price or quality, compete on the grand impossibility of your book names) - I opt for (c) both of the above. Anyway, here's a little something to pop in the attic with an eye to getting a sn-word out of the grandkiddies one day.

Cheers, Rob.

Bulls roar for Dow to break 100,000


The Australian 30aug99

WHEN a week on Wall Street manages to combine an interest rate rise and a record high for the Dow Jones industrial average, it's probably a good time to listen to a few of the biggest bulls on the block.

The question: are investors irrationally exuberant, as Alan Greenspan famously put it, or "rationally exuberant", as James Glassman and Kevin Hassett believe.

Glassman and Hassett have received a lot of advance publicity for their book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market, in which they argue the old rules for pricing stocks are old hat.

The American Enterprise for Public Policy Research scholars say stocks are just as safe as bonds over the long term, yet provide a higher return. On this basis, stocks should sell at a valuation that provides the same return as bonds, which on their calculations is about 100 times.

That's right, a price-earnings ratio of 100 - about four times the present average for the stocks that make up the Dow. Yes, Glassman and Hassett believe the Dow is worth 36,000 or 40,000 right now, not at some point in the future.

"Dire warnings from professionals have accompanied nearly every step of the Dow's rise from 777 on August 12, 1982," they write in an article; stock prices are still far too low, on the AEI Web site.

"Could it be the model Wall Street has been using to assess whether stocks are overvalued - based largely on historic price/earnings ratios - is deeply flawed? We think so.

"Investors are ignoring the old shibboleths and pricing companies like Microsoft at a PE of 66. This reflects not their nuttiness but their sanity."

Dow 36,000, published by Random House, is scheduled for release on October 1. However, investors with a taste for really big numbers don't have to wait that long, thanks to Wall Street money manager Charles Kadlec, who has just published - wait for it - Dow 100,000 Fact or Fiction.

Fact, according to Kadlec, managing director of 135-year-old investment firm J&W Seligman & Co. He predicts the Dow will top 20,000 by 2005, 50,000 by 2014 and 100,000 by 2020.

To reach 100,000, the Dow would have to gain an average of 11.1 per cent a year over the next two decades, which is modest compared to its spectacular performance of recent years.

However, it means the Dow, which has already increased tenfold over the past 17 years, would have to sustain a virtually uninterrupted bull run for 40 years.

Unlike Glassman and Hassett, Kadlec does not think the old rules are out the window. Describing himself as a fundamental investor, he is comfortable with PEs in the 40s.

"Is that high? Yes. Is it unrealistic? I don't think so, given 20 years of prosperity."

While Kadlec allows for a few corrections along the way, his "road to Dow 100,000" would be severely potholed by a genuine crash or sustained bear market. Kadlec is not blind to such risks, and deals with them in detail in his book. However, he believes we have entered an era of "great prosperity", underwritten by a historic coalescence of economic and social factors.

Briefly, these are: lower tax rates; stable prices; trade liberalisation; global competition; an end to war; the spread of freedom; the ageing of the baby boomers; and the technological revolution.

"Few times in our history have the prospects for a great prosperity been as great as today," Kadlec says during an interview in his New York offices.

"The real risk people face is not seeing this possibility, not taking a longer term view when putting together their business or investment strategies." To underscore this point, Kadlec produces a graphic which shows $US10,000 invested in the S&P 500 in 1982 would have turned to $US255,836 by 1988. Take out the 10 best days during that period, and the investment is worth only $US129,893. Take out the 30 best days and you're left with $US45,488.

Kadlec compares the latest technological developments with the construction of the transcontinental railway linking the east and west coasts of the US in 1869.

"For the next 30 years the US economy grew by 4.1 per cent a year in real terms. That was a phenomenal increase in wealth," he says.

Historically, whenever technology has entered that phase, it has been followed by a huge increase in prosperity.

"The Internet is far more than an information highway. It is going to be the biggest commercial thoroughfare in the history of mankind."

Not surprisingly, Kadlec believes technology stocks will lead the market higher. He points out that the most innovative companies of the 1920s, such as General Electric and General Motors, retain a dominant place on the stock market.

There are plenty of sceptics ready to take on the Dow boosters, but some feel as if they are whistling into the wind.

Morgan Stanley Dean Witter global strategist Barton Biggs recalls a recent debate with Glassman of the Dow 36,000 team: "I got slaughtered. The crowd embraced Glassman and his theory."

Yet Biggs remains undaunted. "It absolutely overwhelms my imagination that the new world can be so different that fair value for stocks would be 100 times earnings when, for a century of fantastic progress and growth, it has averaged 14 times," he says.

"The human emotions of fear and greed that drive the stock market to excesses have not changed over the course of human history and are just as valid today as in the past. Booms are still booms and bubbles always burst."

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