Wikinvest Wire

Dow 5,000 and "permanent capitulation"

Monday, March 09, 2009

Above the story($) on the front page of the Money & Investing section of today's Wall Street Journal about how all the most successful hedge fund managers are now plowing their money into dumb 'ol gold comes this report($) of how, under conditions that are not far-fetched at all, the Dow Jones Industrial Average could drop to 5,000.

That duo of revelations must have caused orange juice to induce a bit more indigestion than usual this morning in hundreds of thousands of investors' bellies.

And the number of comments for these two reports in their online incarnation tells an interesting tale about how investor interest remains squarely with equities rather than dumb 'ol gold despite the failings of the former and the impressive gains of the latter so far in the new century, a period that has not been kind to stocks.

Actually, it was no contest - 104 comments for equities and just 8 for dumb 'ol gold.

We'll get to the comments in a second, but first the story about stocks.

Just how low can stocks go?

Despite Friday's small gain, the Dow Jones Industrial Average marked its fourth consecutive week of losses as it tumbled through the 7000-point mark and spiraled to new 12-year lows. The Standard & Poor's 500-stock index is trading below 700 for the first time since 1996.

As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.
The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.
IMAGE At $64, the S&P is trading at about 11 times earnings. At $40, the index is at about 17 times.

According to Goldman's data, the bottom of the 1974 bear market had a forward P/E of 11.3. At the trough in 1982, it was 8.5. Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500.
There's lots more there, none of which can top the Dow 5,000/S&P500 500 angles, but flipping to the comments in the online version reveals a startling, MarketWatch-like 100+ entries led by these words of wisdom from one Jay Adkisson, apparently a Civil War buff, from whence the second half of the title above was extracted:
There is definitely a lot of *permanent* capitulation going on. A friend of mine who sold his company a few years back and retired finally went to cash completely because he and his wife couldn't risk any more market losses, and they are giving up their vacation home. They will never go back into the market, and since they are probably typical of many retirees and near-retirees, this means that a good-sized segment of those who otherwise would have invested in equities are now permanently out of the market -- meaning that the market will not be making permanent gains for some time.

On the other hand, for the rest of us who saw the bubble bursting and didn't suffer any losses, it will soon be a great market to buy -- maybe not until late Fall or early 2010, but that time will come.

On a sort-of-related note, it must be interesting these days to listen to financial advisors explain to their clients why there wasn't safety in a properly diverse asset-allocated portfolio after all .......................
Yes, that must be interesting.................




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