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MARKET VIEWS .TV INTERVIEW CHART PAGE

The following charts are for reference to the interview of George Slezak by Ike Iossif of Market Views .TV on January 22, 2010.

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BOTTOM LINE?  

STOCK MARKET COMMENTARY 1/22/2010

I look for the market to end January at new recovery highs. 

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GDP and the Dow Industrials

Generally, we are "technicians," not economists. We don't need to prepare detailed forecasts of GDP to forecast the markets, but we should be able to have a feel for whether the economy is growing or being restrained and consider that in our opinions of the market.

How often have you heard it said that the One Trillion Dollar deficits for the net ten years will be a high percentage of our 14 Trillion Dollar GDP? I agree. But what if GDP doubles  in ten years to 28 Trillion Dollars? The following table of GDP shows that we probably should EXPECT a doubling of GDP every then years!

Look at the following tables of GDP of the United States. Click here for source web page The never seen before Jimmy Carter deficits of 50 billion dollars were dramatic compared to the 1.8 trillion GDP of 1976, but proportionately different relative to the 4.7 Trillion Dollar GDP ten years later.

Please review the following table to gain a view of the "value" of the Dow Jones Industrial Average.

Following is a table of operating earnings of the companies in the S&P 500 since 1988. A broad view of the table shows the price of the S&P is correlated to earnings, and the PE ratios move to what could be called over optimistic at market tops. PE ratios at market bottom give little information. At market bottoms I think we need to LEAP from earnings relationship to the price of the stock index to the relationship of a return to GDP growth to the index price.

http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS 

When I study the above tables I get some interesting thoughts for discussion!

First, the top of the GDP list shows a 50% drop in GDP from 1929 to 1933! The only drop in GDP since year 2000 was 2009! Why is this such a different answer than during the 1930's? I think it is the Fed and the Dollar.

Next, look at the relationship of the Dow to GDP. See when the Dow might be considered overpriced because it ran ahead of economic growth? Do you see places where economic growth or a stable economy and a falling Dow resulted in a cheap stock market? Are we cheap now? Does it make sense to call a 10,000 Dow relative to a $14 trillion GDP an under priced stock market?

Do you see that for the the Dow to go back under 3,000, as some suggest, GDP would have to fall to 3 to 6 trillion?

Do you understand that it is INFLATION that sets up the continuous growth of the economy and thus the continuous growth of the stock market?

Do you understand that the stock market is related to NOMINAL GDP and not inflation adjusted GDP?

Here is an idea to consider. We KNOW we were in a serious recession and that unit sales are lower than they were before the recession. But because of general price increases from rising commodity prices, GDP has not had a significant decline. When unit sales growth returns at this higher price level, GDP will spurt higher, and, that increases the target for the stock market!

Following is a 12 year chart of the WEEKLY JOBLESS CLAIMS compared to the Dow. When EMPLOYMENT FINALLY BEGINS TO GROW, WON'T THAT GROW GDP? ISN'T THERE A LOT, A REALLY LOT, OF ROOM FOR EMPLOYMENT TO GROW?

I think the following chart comparison of the current Dow to the Dow in 2003 shows we are in a similar place in the rise out of recession. The sloppy up and down markets, with the upward bias, is just the markets way of WAITING to see if the economy is going to catch up with the market and allow the market to leap ahead again.

The point I want to make is that the current position of the market can either fail and turn back down or continue higher, possibly completely recovering to new all time highs. The uncertainly of the continued recovery is in the market's wobble pattern. 

When / IF we see recovery in jobs, I think we could see a spectacular surge in the stock market! A recovery in jobs could lead a GDP growth that could indicate a MUCH higher Dow!

Good luck and good trading!

George

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