Dow & Nasdaq - future projections

  1. 420 Posts.
    In the current market maelstrom, certainty & optimism are no longer valid platforms on which to rely upon. "She'll be right, mate!" is fine for ostriches but not for canny market speculators. The global market economy is in a real mess - what this means is that investors have to be more careful than ever before of the choices they make.

    Informed traders thus need to know what possibilities exist on the horizon. To this end, recommended is an extremely interesting article I read recently, found at

    Excerpts from it include the following.

    "In January 1971 the Dow was at 760, in July of 2002 the index was at approximately 8,000, having peaked at over 11,000 in 1999. The rise of the Dow from ’71 to ’99 was over 1200% - while GDP over the same period rose 150%, Industrial Production rose approximately 150% and the monetary supply rose approximately 600%. Clearly the rise of the market had more to do with loose monetary policy and “irrational exuberance” than the overall increase in production of the nation!

    Eventually the DOW will return to somewhere close to the red line (see below) – its natural level given the real state of the US economy. We are starting to see now that there is no “new economic miracle”, just a huge bubble in equity and asset values. The bubble was inflated deliberately through pumping up the monetary supply (making “money/debt” cheap – as has been done many times in the past) and then priming the pump of the corporate controlled media with the story of an economic miracle which in turn got the people spending feely and raising their debt levels rapidly.

    By giving Americans the feeling that they were truly enjoying a new-found wealth (even though overall economic performance did not prove this out) the market manipulators have been able to suck an unprecedented amount of our savings in to the markets and therefore at risk for the first time. Collectively we have leveraged ourselves way beyond what we know is prudent. Our propensity to “follow the experts” wherever they lead us is about to cost us a large part of our retirement funds, college funds, and for many pensioners their day-to-day income. This is a travesty, it is the biggest financial fraud of all time and its roots grow long and deep under the foundation of the privately owned and controlled Federal Reserve system and its major shareholding banks.

    “An infectious greed seemed to grip much of our business community."
    Alan Greenspan July 2002

    The above chart helps to depict the unusually long and high rise of the Dow over the last two decades. Unfortunately we are about to see an adjustment that will show a significant downturn towards historical valuations during recessions. Typically over the 200-year history of US equities markets the P/E ratio through a recession has been between 5 and 10 – currently the P/E is still around 40! Expect to see something akin to the drop in the NASDAQ (which isn’t over yet) happening to the DOW soon.

    Bob Chapman, of International Forecaster fame, recently had this to say regarding the DOW, “When the DOW cracks 8200 the average investor will finally recognize that we have just had a bear market rally and that there is no recovery. We expect that break will mark the beginning of capitulation, which will last for some time.”Its current level is around 7700.

    It turns out that you’d better have the “DOW Religion” if you want to hang on for the long haul. The road ahead looks a little more than bumpy, it’s more like cratered with the implosions of WorldCom’s, Kmart’s, Enron’s, Global Crossing’s, et al. Attempts by the Fed to remedy this situation are for naught. You can’t cut interest rates much lower than they are already. As I write this, the DOW closed around 8000 and is heading south daily – with some wild up ticks occasionally just to keep the herd guessing!

    The smell of panic is starting to fill my nostrils as I see that there are the first signs of even the mainstream media starting to speak out about the potential of there not being a “recovery.” More and more articles are being written regarding the appalling state of affairs, and some even dare to mention that we may be heading towards a deeper recession or even a depression. Of course the powers that be need to get all of their upside out of harms way before the real panic starts – so the corporate owned financial media is not about to start showing historical evidence that a crash is imminent quite yet – but the inevitable march of the markets back towards something resembling real value is now underway and is unstoppable.

    Just take a look at the rise of the S&P since the early nineties immediately below, of course this was attributed to the “new economy” and a commensurate increase in GDP and Industrial Production, which clearly were not commensurate with this markets rise, and far lag the markets in terms of real increases. As you can see there is some way for the S&P to fall before it reaches its real value, and gets back in line with where it should be historically. No amount of manipulation, whether it be inflating earnings, receiving generous tax kickbacks by the government, or falsifying business deals with offshore entities, is going to make a difference at this point. The dye is cast, the market will return to its natural place – and potentially will go lower than it should as an adverse reaction to all of the fraud drives most of us to never want to invest in another public company again!

    Once you’ve consumed the rise of the S&P 500 in real terms, then take a look at the rise of the S&P P/E ratio below, and the enormous spike in the most recent years as earnings have fallen off dramatically. The P/E has topped at around 45. Historically, as you can see from the chart that shows the recessions of the 70’s, 80’s and 90’s, the market has traded in the 5-10 P/E range through “official” recessions. This evidence makes the current advice we all receive from the financial media and financial “experts” to be a huge anomaly. How can these journeyman experts not see what is so apparent – the S&P is massively overvalued based on any metric you care to measure! Simply put, what on earth can justify this current situation?

    Either Earnings have to rebound at record levels or the Price of the stock has to come down to reflect the lack of earnings.

    Which do you think it will be?

    On February 8, 1971, the Nasdaq began trading for the very first time. As you can see (below) the market trudged along at a reasonable clip, staying slightly ahead of inflation and providing a pretty good annualized return on investment to the more tech-inclined investor. Then the early nineties happened and things got out of control! Never before in the history of financial markets has there ever been a bull so strong or a crash so deep as has been seen with the Nasdaq through the course of the last decade or so.

    At its peak in early 2000, the Nasdaq had a market cap of more than $6 trillion. Today, its value has crashed to less than $2 trillion, and that is still $1 trillion too much! Surely with the resources of the free worlds central banks the public could have been informed of the likelihood that they were witnessing one of the biggest bubbles of all time and that a crash was inevitable? Instead what we were Fed (so to speak) was “irrational exuberance” – a diversion from the real reason - incredibly loose monetary management by the Fed that led the people to believe they could all be rich by throwing everything they had at the Nasdaq. Now, we all know that ignorance is no defense in the eyes of the law, so the people have to take their lumps for being manipulated. But what about the manipulators? What price should they pay for destroying the wealth of a nation, and pocketing billions for themselves in the process?

    And what are we going to do to return this nation, and the world, back to a sound monetary system? That dear reader is the $150 Trillion question ($150 Trillion is the current size of the Derivative Monster that I will address later in the essay). The Nasdaq lesson is evidence for all doubters that we have already lived through a massive crash, now if you doubt that lesson take another look at the fundamentals and you will see that the DOW and S&P are analogous to the Nasdaq and will ultimately (and soon I believe) suffer the same fate – if they aren’t already."

    "Forewarned is forearmed...."

    Ancient accepted wisdom

    How many more skeletons & unwanted surprises are lurking still in this house of disenchantment & shattered dreams?

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.