Friday, April 27, 2007

Dow 13,000

By Michael Johns

Predictions of the demise of the American economy are, regrettably, routine these days, but don't be fooled. They also are vastly overrated. For the past six months at least, we have been subjected to routine predictions of sluggish growth, diminished productivity among small and mid-size capitalized companies, and euphoric fascination with the growth prospects in the so-called BRIC countries (Brazil, Russia, India and China).

Not to take anything away from the fascinating promise of these four nations, but this week's development: the Dow Jones Industrial Average blowing right through 13,000 sends the message that American leadership is alive and well in the global economy. Analysts underestimated first quarter earnings for a vast number of leading American companies, perhaps convinced that the sub-prime mortgage squeeze and other pressures would curtail our economic growth. They too shorted the promise of this American economy.

What is behind Dow 13,000? Many things. The vibrant optimism of the American consumer, the prospects for a stabilization of the conflict in Iraq (there actually is progress), and a validation of some of the domestic and economic policies of this administration. President George W. Bush is suffering from predictably diminished approval ratings that have confronted nearly every U.S. President fortunate enough to earn a second term, but this economy under his watch deserves greater praise: nearly full employment, continued global leadership in many important industries, and now a record in the most closely watched stock index in the world. It's not a small accomplishment and is certainly a tribute to the continued promise of the American dream and at least partly to the generally free market, pro-growth policies of this grossly under-appreciated Bush administration, which certainly is not the only factor behind Dow 13,000 but, especially in its support for sensible tax relief on dividends (paid by most Dow stocks)--has played a hugely supportive role, attracting capital to Dow equities.

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1 comment:

Mike said...


Good post. I enjoy your enthusiasm and confidence in the American economy.

However, although I strongly agree that this is a bullish time and that the U.S. economy will rebound strong in 2008, you cannot discount some of the important numbers that bears seem to focus on.

First and foremost is that American-based companies are profiting off higher growth overseas. A significant portion of income is now derived from the global economy, not just the U.S. operations. Additionally, the weakness of the U.S. Dollar in Europe has also contributed to big gains. Sometimes Wall Street cannot predict earnings and sales properly because of this fluctuation in currencies.

Another thing to be cautious about is inflation. Although there is no immediate cause for panic or even concern, the CPI and PCE both rose and do pose a potential threat if this continues. Should the FED need to raise the target rate to curb inflation, the stock market will likely suffer.

Despite the pessimism of this comment, do not be fooled. I am still bullish, like yourself and Larry Kudlow. I do feel that you should keep a close eye on things and understand the ramifications of global trade and how they can provide a different perception then reality.

Good post though, keep them coming.