The Dow Reaches 12K And Stays!
Thursday, October 19, 2006SUSIE GHARIB: A new record high and a new milestone for the Dow today. The blue chip average closed above the 12,000 level for the first time. The Dow edged up 19 points to 12,011.
PAUL KANGAS: Ironically, the Dow record was achieved on the anniversary of the stock market crash of 1987, one of the darkest days in Wall Street history.
GHARIB: Joining us now for more analysis about Dow 12,000, Phil Dow, director of equity strategy at RBC Dain Rauscher. Hi Phil.
PHIL DOW, DIRECTOR OF EQUITY STRATEGY, RBC DAIN RAUSCHER: Hi, Susie. Glad to be with you.
GHARIB: Glad to have you with us. What is the outlook from here? As you know, it took seven years to make it from 11,000 to 12,000. Is it going to take another seven years to get to 13,000?
DOW: Probably not. We're probably going to make it quicker than that. But this could be a pretty good sign that the psychology of the market is changing Susie. In the last year, larger companies have done better than smaller ones in the marketplace with the Dow really kind off outperforming in the last month or so. My guess is that it's an indication that people perceive value there. So I think you could see an important psychology change for people begin to think that the risk is less in larger company stocks. That is a first now in seven years.
KANGAS: Well, Phil, do you believe that they are right about that, that we're going to see continuing weakness, for instance, in some of the major high tech stocks and more and more money is going to come into the blue chips?
DOW: Well, my guess is blue chips are going to be a beneficiary. Paul, one thing going on is everybody believes that the economy is slowing down. But one important point is that earnings are not slowing down as dramatically as the economy. Earnings have averaged about 7 percent growth historically. They're probably going to be high single digits next year and double digits this year and that means that the profit outlook is reasonably robust. The place where profits are most stable, balance sheets are most stable and business plans are stable is the large cap area and those stocks haven't done much for years. So I think it bodes well for continued market highs in the Dow. It will be spotty from time to time, but I think we can go higher.
GHARIB: But Phil, analysts are saying that the earnings have peaked. This is as good as it is going to get and as you said, the economy is slowing. So is there a disconnect between the enthusiasm in the markets and economic reality?
DOW: You know, I don't think so, Susie. We still have yet to see the big deceleration in economic growth. It is likely to happen. But my guess is that profit growth is going to be stronger and more robust with the large capitalization companies. And if you look at the analysts' estimates right now Susie, the amazing thing is corporate profits have doubled in the last five years, but the valuation on the market, if you look at P/E ratios, the relationship to earnings, cash flow is down 30, 40 percent. So to investors, the risk is lower right now. The opportunity is greater. So I think within a historical perspective, earnings growth rates are still pretty robust going into next year.
KANGAS: Phil, where do you think the big buying is coming from? Is it from the individual investors, institutions, hedge funds? What do you think?
DOW: My guess so far is the big buying has been people short that have been short the market, getting more to a neutral position. I don't think this tape tells me that it is a get me in at all costs kind of rally. I think you could see institutions begin to play a larger role. The public, which is who I deal with, is still kind of skeptical of this rally. To the extent they've been investing, it has been foreign stocks. My guess is a year from now, Paul, U.S. stocks will be much more popular for the U.S. investors. GHARIB: So for investors who now have some money and are maybe thinking of getting into the market, where should they be putting their money? I know you can't name specific stocks, but what industry groups are attractive to you right now?
DOW: Well, right now, I'd be looking at market leaders in healthcare and in the industrial side of things and in some financials, like insurance companies. These companies have robust balance sheets, business plans that I think are going to deliver reasonable earnings growth, and most importantly Susie, great dividend policy. You can buy companies that have 2 to 3 percent current dividends, that I think will double in the next few years. Dividend policies are enlightened now, so I think it is a great time for investors to buy quality, Susie.
KANGAS: Phil, a couple of the laggards in the Dow which were just put in in 1999, Intel and Microsoft. Do you think that the big move in the average overall is going to help those two high tech stocks?
DOW: You know, hindsight is perfect on this and my guess is that the business plans of Microsoft -- the business plan of Microsoft is going to be enhanced by the Vista introduction next year. Who knows. I guess it is a reasonable holding. And then with Intel, with their size and scale, it is likely that they're going to always be the dominant player in semis. So it's a question of when they get popular. I think technology in general is reasonably priced right now and attractive for the longer term, Paul.
KANGAS: Uh-huh.
GHARIB: Phil, thank you so much for coming on the program. I hope next time you come on, we have another record to talk about.
DOW: It would be fun. Thanks, Susie, thanks Paul.
GHARIB: We've been speaking with Phil Dow, director of equity strategy at RBC Dain Rauscher.
