Dent: Major Crash Coming for Stocks

Interesting perspective here. Harry Dent, founder of The Dent Method, is predicting a summer rally in the Dow and S&P to the 13,200 and 1,430 levels respectively. From that point, though, he says we're in for a major crash, with the Dow potentially dropping to 3,300. That's right, kids. Not a 3,300-point drop, he's talking about the Dow dropping to 3,300. That's about what it was when I started in 1992. If that happens, I'll be on it like a chicken on a june bug. What do you think? Is Dent insane, or does he have a point?

 

Pretty crazy. He looks like a talking dead person though. Maybe if he consumed some vitamins and slept for the first time in 3 months he wouldn't be making such insane predictions.

 

You have to give some credit to the guy. Stock market had a very good last 20 years, achieved superior returns to what was expected from stocks before - pensions funds, mutual funds rose to popularity, we had a major technological leap with computers and internet - all these things drove people to stocks and pushed P/E valuations up, everyone wanted to invest in stocks. Further with electronic trading transaction costs got down, the gap in information available to professional traders and common folks diminished greatly with internet, this in turn created more confidence for foreign investors, etc. But is it sustainable? Baby boomers are already drawing on their pension and mutual funds, and this will accelerate. Who is going to compensate for increased selling?

Even bigger question is economy. Now that economy is artificially pumped back to its levels, and the influx of free cash of course drove the markets up too, the debt is effectively transferred from companies to government. When the next wave hits, who is going to bail out the governments? Jupiter? I can see the reasoning of this guy.

 

I don't buy it, that's not to say it's not impossible though.

However, If it did drop to 3,300, I would start buying like crazy because everything would be so severely undervalued.

 

Althought I agree with his premise (that we are in for a big decline, maybe not a "crash" though), in the three years that I've been following markets I've learned that attaching a shocking number to a theory increases that theories visibility. So maybe we wont hit 3000, but claiming that we will certainly increases the visibility of the claimant and his theory (reminds me of dow 1000 and dow 36000)

looking for that pick-me-up to power through an all-nighter?
 

It just seems like the guy doesn't fully understand the complete list of ingredients necessary for a bubble to form and burst. The suggestion that we are on a bubble again now already just seems wrong. People aren't putting their money into gold and precious metals to take on excess risk, they are doing it as an inflation hedge. To take off risk, they will substitute these investments for investments into other, risky asset classes which isn't bad for financial markets. So, it doesn't make sense that the market for gold will "burst", instead if conditions get better gold investment is likely to taper off, and if it gets worse demand for gold will gradually increase.

Also, just having the fed printing easy money alone doesn't form bubbles. As long as market players are allowed to short the market, there is no reason that, even given low rates, assets would stray far from long run equilibriums. In every historic bubble that you think about there was a component of "irrational exuberance" that pushed asset-price expectations higher than they should have been. This was the case during the tech-mania bubble, this was the case in 07 when government guarantees and shady lending practices fooled traders. This might have also been coupled with easy money, but just having the easy money alone isn't enough.

Ultimately, bubbles form when excess risk is taken to bet on the upside of the market. People still seem to be quite risk adverse so it's unlikely that we are currently in a bubble. I think alot of people see the financial crisis and assume the US economy is built strictly on smoke-and-mirror financial tricks. It's not. The fundamentals are still strong. All this doomsday talk benefits no one.

 

It seems like the major basis of his argument is almost entirely technical analysis (identifying patterns, flags, etc.). And using technical analysis (over a time-span greater than a day or two) you only have a 50% success rate, so either we will continue recovery and he will look like an idiot or he will slump and he will seem like a whistle blower.

I feel like the only way for the market to sink so much (Dow dropping to 3300, a drop of around 285%) is if the US defaults on it's debt...which if we don't trim the budget or raise the debt ceiling, could possibly happen (although still unlikely).

 

Bottom line is that the numbers change when you look at the DJI/SPX in Euro terms. And as the dollar weakens, the fundamentals get stronger for US non-consumer companies. Long-term, stocks track the fundamentals, and on a fundamental basis, assuming no further losses in the value of the USD or increases in inflation, the SPX is priced pretty fairly. Maybe just slightly overpriced. If you factor in 3-4%/year inflation for the next five years like the TIPS market, it looks maybe slightly underpriced. These days, a much larger portion of the SPX/DJI is in hard inflation-resistant assets than it was back in the '70s.

Dent is short, he needs to get out of his position, and he is desperate. So he is trying to scare unsuspecting investors. It's really that simple. If you stick your money in the market today, you should be able to earn about 5.5-6% after inflation over the long term. These aren't quite as strong as the terms you could have gotten two years ago when the market was offering more like 10-12% + CPI, but then again, if you always listen to Peter Schiff and the shorts, you would have passed on that, too.

If you stick to the old strategy of keeping 30% of your money in safe currencies and boring assets and 70% in the market, it's hard to get run over. I agree with Dent that the technicals look a little scary, but the fundamentals are sound. And if the dollar weakens, the fundamentals get better.

DJI hits 3300? That means 20-25% yields on safe, boring Pipeline MLPs. 800 sq. ft Manhattan condos going for $150K. Pharma stocks yielding 12%. It will be a bonanza for value investors and guys in their 20s and 30s reinvesting dividends and saving money. Implied real returns going up to 25%, a level never seen in centuries of western financial markets. When the recovery hits, we will see 30 and 40 year olds retiring left and right- the recovery will feel like the dot com days mixed with the 1950s industrial economic boom with a huge dose of steroids. A 75% drop in the stock market is merely wishful thinking for long-term bulls, though. I think we will see a 20% correction at worst. This is coming from the guy who said we'd see a recession in 2008 to rival 1980-83 with a stock market drop that could eclipse the broader market price drop after the dot com crash- when everyone else was saying we'd have a mild recession. We hit our low in 2008, and though a four digit Dow Jones is still possible, we will not dip significantly further from there short of a global war or domestic unrest not seen since the 1860s.

 
shorttheworld:
a- not going to happen b- if it does ill make a shitload of money either way :D
If I didn't like you, I would hate you.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

See this is getting really cliche. Why do we bother listening to the crazies of the market rant about the potential for a 75% or 90% drop every other day? These people don't belong in front of a blue screen- they belong inside a white room.

Please people, go about your regular lives. Nothing to panic about here If the post-1974 or post-1933 period is any indication, the market is likely to be pretty darned boring for the next decade or so at least relative to 2008.

 
Best Response

In other news, Britney Spears is banning junk food from her latest tour:

http://www.opposingviews.com/i/junk-food-banned-on-britney-spears-world…

Uhoh guys. Yet another crazy person who can get in front of a video camera and attract a lot of attention to themselves is adopting a bearish attitude. Looks like there's a huge crash in place for consumer food products. Let's work ourselves into a panic.


This isn't directed at Eddie. Just venting my frustration about the long stream of perma-bears who've flown in the face of fundamentals over the past two years to argue there's a bigger crash coming and undermine investor and consumer confidence. After two years of recovery, a reduction of leverage in the market, and a shift in the trade balance, it's time for folks to stop listening to the panic-mongers. In fact, I deliberately trade against them when I can find a good excuse because I know it's going to be a crowded trade going the other way. These people may help me make money while they try to avoid margin calls on their shorts, but their book talking and panic-mongering is incredibly annoying after two years.

 

LOL @IP. I know it's not directed at me, buddy, but I wouldn't mind if it was. I don't hesitate to admit that I'm a "perma-bear", at least since early 2010. With the exception of a couple of short positions, I'm entirely in cash and waiting for the market to drop back to the 7,500 range before I'll think about going long again. Like I've said before, if that never happens I'm sure the market will survive without me.

That said, you're right about the bearish pollyannas (like Dent) who get screen time by throwing out ridiculous prognostications. It gets old, but at least they foster thoughtful debates like the one in this thread (cue trolls).

 
Edmundo Braverman:
LOL @IP. I know it's not directed at me, buddy, but I wouldn't mind if it was. I don't hesitate to admit that I'm a "perma-bear", at least since early 2010. With the exception of a couple of short positions, I'm entirely in cash and waiting for the market to drop back to the 7,500 range before I'll think about going long again. Like I've said before, if that never happens I'm sure the market will survive without me.
Eddie, people have been claiming this is all just a head-fake for the past five years, but I honestly don't think it's coming back with all of the earnings growth we've seen and can expect with inflation. There could be a 15-20% correction coming- have you considered shifting from 100% cash to 70% cash/ 30% hard assets and resource stocks when that happens?

The energy companies have P/Es of 8 and dividend yields of 5% right now. In order for the DJIA to get down to where you hope/want it to get, their P/Es would have to drop to about 5 and yields would have to increase to 8.5%. 100% cash is a huge conviction position. In some ways, it's pretty darned inefficient. If you stick 30% into the market, you get inflation protection and real returns, and if it drops 50%, you're still in 85% of the shape you'd be in to pick up more stock. I've been a bull- sometime stronger than other times- since November 2008. 5% real returns from Pipelines, REITs, Pharma, and oil companies is just too good to pass up. But I hedge my convictions by keeping 30% in cash. What is your hedge in case the S&P hits 3000 on an infrastructure or manufacturing shortage?

 

To say I'm 100% in cash would be inaccurate. I still have roughly 10% of retirement funds in blue chips. As for hedging against rapid appreciation in the market (and missing the bulk of that move, obviously), I'm pretty heavily invested in alternative asset classes. I've written about my involvement in P2P lending, and I do a fair amount of angel investing. High risk stuff, but nice when it pays off. I just feel better knowing that I have a more direct role in the outcome.

You're not wrong about valuations, but I refuse to participate in such a government manipulated marketplace. I'm stubborn about it, and it has obviously cost me some money since moving to a heavy cash bias, but you more than anyone can understand a moral stance, which is what it amounts to for me. The major banks should have been allowed to fail, the shorts should have been paid off (even more than they were), and the moral hazard should have been eliminated. It didn't go down that way and that's fine, but I don't have to be a part of it.

 

its hard to know where to get accurate market advice from period, let alone after 2008. This is off topic but does anyone else think one of the real bubble's is the overpriced valuations and IPO's of all of the social networking and ad/banner sites. Im surprised it wasn't mentioned in this interview. I don't doubt commodities are overvalued but i have a hard time valuing groupon.com at 15-20 billion for pedaling online coupons. So much of the valuation is placed on intangibles.

Here's the thing. If you can't spot the sucker in the first half hour at the table, you are the sucker.
 

Agree with you about the banks, Eddie. I don't invest in them either.

But utilities, pharma, energy, and perhaps even real estate are all part of the real economy. And investment banks/lenders only make up a portion of the Dow Jones. You can't even think about getting to a 3300 DJI unless you have a massive, massive capitulation in the real economy- again, something on the order of a civil war or a missile exchange with China. And with the increase in corporate earnings since 2007, 8500 is the new 7500. We could definitely see those multiples again in the next ten years- after the crash of 74, we hit the same multiples seven years later in 1981, but my bet is that profits will be higher due to inflation and perhaps economic growth.

Understand your view on the banks and nanny state, but that's not some oil company's or utility's fault. If anything, the oil company benefits from the fact that there's more dollars chasing the same (unprintable) oil and gas. Agree that it is frustrating that the short-term fundamentals now seem to be more about the fed and politicians rather than the state of the economy.

 

Yeah. Agree on MLPs. The best time to get in is right after a secondary- they typically have to offer a 5-10% discount against the market to do an issuance, and the proceeds are usually used in a way that's accretive to earnings. A lot of pipelines have some degree of inflation protection, as they generally employ long-term contracts tied to the price of commodities or CPI.

That said, the traditional valuation metric is 200-400 basis points above the ten-year yield. If the ten year yield starts going up, guess what happens to the price?

 

So in summary, this guy is betting on both sides. Super bullish on equities S&P. And if shit fell apart, he still made the 3,300 DJIA call. Sounds like the typical economist/chartists out there.

And what's the % of actual money managers on this thread?

 

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