Sunday, January 03, 2010

BAGAKOAA Dec 3, 2010 The Year Ahead.


 Dec 3, 2010 The Year Ahead.

As some of you know by February first, I usually prognosticate how the DOW will end the year. In 2010, there will be no prognostication about the Dow for 2010. On February, 14th, 2009 to be exact I figured the DOW would finish 2009 at 9420. The market was at 7800 and a few folk thought that was ridiculous. In looking at the DOW, it is not a good litmus for what might be going on next year.

There are ONLY 30 stocks in the DJIA. You know probably all of them. There are some great companies on the list and there are some real dogs. Alcoa is basically a one commodity pony with a ton of debt. Recently they have changed strategy to be more of a miner and refiner than selling product, but it comes way too late (BHO and Rio Tinto are eating their lunch). Their cash flow is lower than, well lower than any records I could find. AX is on the DOW. There is a stock that will need job growth and a shift back to frivolous spending. I don’t see that happening in 2010. B of A is on the list this week (See if that changes this year). Yeah they paid back their TARP money and they might have found a new CEO, but they have so many preferred shares, no one knows the dilution of the 15 dollar stock. 2010 is not going to be a great year for B of A because of probable regulation and devaluation by at least 30% of their balance sheet for residential and commercial real estate. I Like Boeing Cat and Chevron, but they all need top line growth. (CVX will get it with further devaluation of the dollar and demand for gas and improved nat gas pricing.) Farther down the list you got GE. Who knows what GE is really worth. Buffet has 5 billion in preferred and a sheik in Abu Dahabi has another 8 Billion. The recent spike in the stock could be coming from a break up value calculation. I like IBM. Merck will be muddled by health care reform and an apparent lack of new drugs. MCD, will continue to “channel” between 52-64 as it has since 2007. MSFT will take another year to figure out how to make money with Yahoo. (Ironically this week’s Baron has a great article about cloud computing. Gate’s book The Road Ahead circa 1995 described cloud computing. Balmer should have read the book. Someone at GOOG did.) PFE has similar issues to MRK with a better apparent list of new drugs. Coke should do Ok with emerging markets blooming again. HD will do well if and when the housing market recovers. VZ I like and will like it more WHEN they get the iPhone. WMT will continue to suck the life out of their vendors, have predatory pricing, but the wild card will be what the health care bill will do to their labor costs?

So in 2010 the index to watch will be the S & P 500. Since my Feb 2009 prognostication the DOW went up 33% and the S & P 500 went up 26%. There are 500 stocks in the S & P 500 and many have revenue growth as well as cost cutting strategies. The S & P 500’s forward looking PE ratio is about 16. With the year end close of 1113, I am looking for a year end S & P 500 of 1335, almost a 20% increase. This will take two critical elements that must happen. Consumer need to start spending be it frivolous or value purchases. And we need to see a bottom in real estate. If both happen by mid year, the 19 % improvement in the S & P 500 is real. If not it will be difficult if not impossible. You could extrapolate a DOW around 12, 500 based upon that guess, but I wouldn’t bet me life on it.

Salve Lurcum


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