Mr. Peter Richardson CFA

[fh1951]

Thank you for posting Mr. Richardson's sensible observations. I found his comment that since he no longer manages other people's money he is exercising greater flexibility in his own market participation interesting. His observation that demographics hold sway over the longer term outlook for the US stock market sounds like a page out of Harry Dent's book. Dow theory doesn't seem to have much influence on his outlook.

[pete richardson]

Here are some thoughts as a follow-up:

Demographics are crucial to an analysis of any economy
and its capital markets.

Who is Harry Dent?

Prima facie, a new upwave is starting in K-wave world.
Interest rates and inflation have likely bottomed.

I believe we are still in a long term bull market. The
lagging Dow and S&P 500 reflect strong rotation
away from big cap / blue chips.

The smaller and medium sized caps are getting
progressively more expensive relative to the
S&P 500.

Later, as this economic expansion matures, I expect
a rotation back into the bigger names. It could be
spectacular if the Fed loosens up a lot, but I doubt
that is in the cards.

Post 2010, discretionary spending and upscaling in
the U.S. will slow and could even weaken for a couple of
years. Same as well for housing.

Asia will have to make up that slack by opening economies
to the U.S. I believe they will because they will be overdue
to balance consumption with high rates of investment.
If they continue their mercantilism, they will destroy each
other and the world will have a mess.

Net, net, this will not be a super period for corporate
profits. The market has priced in 8% growth. We will
be lucky to do 6%. That means dividend yields will have
to rise to 4% to attract risk capital. This implies a bear
market. It could take 12-14 months or it could take
12-14 years to make the adjustment. Who knows?

There will be sectors to play and highly focused, non
diversified portfolios will do well.

Best to all,

PR

[HenryTo]

One major component of the Dow Theory is the concept of the valuation cycle - where stocks start from a base of undervaluation to overvaluation and then back again. The Dow Theorists label this the concept of a primary trend - and that a primary trend can only end when it exhausts itself - such as euphoria at the end of a bull market and capitulation at the end of a bear market.

So what does Pete's analysis have to do with the Dow Theory? Pete said that he is looking for a MODEST new all-time high in the S&P 500 sometime in the 2008 to 2010 timeframe. One can argue otherwise but this is a characteristic of the modern (govt and Fed-managed) bear market. For example, during the 1966 to 1974 bear market, the S&P 500 had made a MODEST new all-time high in each of the cyclical bull market within that bear market:

2/9/1966: 94.06

11/29/1968: 108.37

1/5/1973: 119.87

And yet the 1966 to 1974 bear market was definitely one of the worst bear markets in modern financial history. The fact that the S&P 500 hasn't gone anywhere (ignoring the NASDAQ for now) in the last five years is characteristic of a modern secular bear market, and the fact that Peter is only expecting a MODEST all-time high in the S&P 500 in the 2008 to 2010 timeframe tells me he is not expecting a new secular bull either (Pete, please let me know I have misunderstood). This is consistent with the Dow Theory - especially when applied to modern (post WWII) markets.

[nodoodahs]

I have to add, I did enjoy your column today, Pete. Very nicely done. I think we have more areas of agreement in the investing arena than in the political one and I'd love to exchange predictive S&P500 models with you sometime!
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[earthscaper]

I appreciated Mr. Richardson's guest column, and would like to read his views on the longer term (post 2010), as hinted at in the end of his column.

I agree with the previous poster that he does not seem to subscribe to the Dow Theory. If he does, how? Perhaps the rapid earnings growth he speaks of could account for the decline in P/E (assuming prices grow modestly or stay flat) called for by the Dow Theory.

But that doesn't account for what others in a possible upcoming Kondratieff winter.

Thanks.