Message-ID: <18365455.1075861166996.JavaMail.evans@thyme> Date: Sun, 25 Nov 2001 17:57:07 -0800 (PST) From: yardeni@yardeni.com To: econews@yardeni.com Subject: New On Dr Ed's Economics Network Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Ed Yardeni" X-To: econews X-cc: X-bcc: X-Folder: \ALEWIS (Non-Privileged)\Lewis, Andrew H.\Deleted Items X-Origin: Lewis-A X-FileName: ALEWIS (Non-Privileged).pst Sunday evening, November 25, 2001 COMMENT: I hope you enjoyed your Thanksgiving. What a wonderful holiday. All you have to do is give thanks and eat. We have much to be thankful for. The war on terrorism is progressing better than had been widely expected. US authorities are acting to foil new terrorist strikes at home. The intelligence agencies of nations around the world are cooperating more in the effort to attack the global network of terrorists. The new airline security legislation should revive public confidence in flying again over the next six to 12 months. US relations with Russia have improved greatly. Freer trade is increasingly viewed as one of the best responses to anti-globilization. China has joined the World Trade Organization. Russia could be next. There is ample financial liquidity. Energy costs are low. Interest rates are low too, and 0% financing has boosted auto sales. The economic recession is likely to remain shallow and should end by next spring. The profits recovery during the second half of 2002 should be robust. The bond market seems to share this assessment. Two weeks ago, I wrote "the flood of liquidity is likely to revive the economy next year. This suggests that the bond rally may be coming to an end. This is why I am raising my stocks/bonds ratio." Since then, the 10-year bond yield is up an extraordinary 80 basis points. Over this same two-week period, the Dow Jones Industrials Average rose closer to 10000. In 1995, when the Dow crossed 5000, I predicted it would cross 10000 by 2000. It did so on March 29, 1999. I didn't expect it would rise above 10000 two times again as it has since then. Odds are the Dow will soon (this week) rise above 10000 yet again for the fourth time How much longer will the Dow remain flat around this level? It could be a long time. After all, it did rise ten-fold from 1000 to 10000 from 1982 through 1999, following two decades of meandering in a flat trend between 500 and 1000. A long period of consolidation after the extraordinary gains of the 1980s and 1990s is possible. The Dow's 200-day moving average has been relatively flat between 10000 and 11000 since late 1999. The week following the September 11 terrorist attacks, the Dow bottomed at 8235, which was 2214 points, or 21%, below its 200-day moving average. That was probably "the bottom." Bottoms are often made by panic selling during major crises. The Dow was oversold and it quickly bounced back. It is hard to see the Dow moving much higher soon since it is already discounting a solid rebound in earnings next year with a reasonable valuation of those earnings expectations. Since 1999, the 52-week consensus expected forward earnings per share has hovered around $500 per share and the forward P/E has hovered around 20. If both continue to do so through the first half of 2002, as I expect, the Dow Jones Industrials will continue to hover around 10000. By the end of next year, however, the Dow could retest the record high set in early 2000 of about 11500. That would be a 15% return from current levels. The major risk is that consumer spending might weaken significantly in early 2002. Auto sales are bound to tumble as the stimulative impact of 0% financing wears off. While the pace of layoffs may be slowing, it is becoming harder to find a job because many firms have imposed hiring freezes. Also, the coming bonus season will probably be the worst since the early 1990s. Many job losers are losing high incomes and are unlikely to find comparable-paying jobs soon. The good news for many of them is that they are receiving large severance pay packages. This development may partly explain the surprising resilience of consumer spending, as well as some of the amazing surge in liquidity this year. MZM--which includes M1, savings deposits, and money market mutual funds--is up $930 billion over the past 52 weeks, a record rate. GOODWILL: The November 9 issue of EARNINGS WEEK examines the likely impact on earnings of the elimination of goodwill amortization expense next year. We come up with a $5 per share boost. Will the market treat the accounting rule change as a technical adjustment with no impact on stock prices? In other words, will a lower P/E offset the higher E? My hunch is that there will be some bullish impact even though nothing real changes. (What does reality have to do with stock valuation? Reality probably matters in the long run., but perceptions certainly matter in the short run.) MOVIES: "Harry Potter" was too long. It reminded me of "Star Wars" set in a British boarding school for would-be wizards. It isn't my cup of tea. My 11-year-old son enjoyed it, but he isn't interested in seeing it again. I predict that "Harry Potter II" will be much less successful. "The Man Who Wasn't There," starring Billy Bob Thornton is the latest film noir classic from the folks that made "Fargo." I enjoyed it. Billy Bob was perfect for his role as a barber. Dr Ed ******************** Home: www.yardeni.com Global Portfolio Strategy: www.yardeni.com/weain.asp Earnings Week & Month: www.yardeni.com/stocklab.asp#earnings Weekly Audio Forum: www.yardeni.com/waf.asp Global Economic Indicators: www.yardeni.com/ecindin.asp Stock Lab: www.yardeni.com/stocklab.asp Stock Market Indicators: www.yardeni.com/stockindicators.asp Greenspan Center: www.yardeni.com/greenspan.asp People Polls: www.yardeni.com/polls/ Multi-Lingual: www.yardeni.com/#languages Mega Trades: www.yardeni.com/megatrades.asp ********************************************** VIRUS ALERT: No attachments sent with this message. ********************************************** The information and opinions in this report were prepared by Deutsche Bank or one of its affiliates (collectively "Deutsche Bank"). This report is based upon information available to the public. The information herein is believed by Deutsche Bank to be reliable and has been obtained from sources believed to be reliable, but Deutsche Bank makes no representation as to the accuracy of completeness of such information. Deutsche Bank and/or its affiliates worldwide may be market makers or specialists in, act as advisers or lenders to, have positions in and effect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Deutsche Bank and/or its affiliates or their respective officers, directors and employees hold or may hold long or short positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions, estimates and projections in this report constitute Deutsche Bank's judgment and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law permits otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Banc Alex. Brown Inc., a member of the NYSE, the NASD and SIPC. In the United Kingdom this report is approved and/or distributed by Deutsche Bank AG, which is regulated by The Securities and Futures Authority (the "SFA"), is not for distribution to private customers (as that term is defined under the rules of the SFA) and no financial instruments referred to herein will be made available to any such private customer. In jurisdictions other than the U.S. and the U.K. this report is distributed by the Deutsche Bank affiliate in the investor's jurisdiction, and interested parties are advised to contact the Deutsche Bank office with which they currently deal. Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Deutsche Bank's prior written consent. Copyright 2001 Deutsche Banc Alex. Brown Inc., all rights reserved.