Buy Now in an Undervalued Dow

Call me a raging bull. Anyone who has followed my writing on RealMoney since December 2000 knows that I never predict specific levels in the market indices. Until now, that is.

I won't give you an exact date, but I will say this: On the basis of my quantitative valuation work, I wouldn't be surprised if the Dow Jones Industrial Average trades in the 13,000-15,000 range over the next two to three years.

Any observer of the market can recite a litany of reasons to be cautious on equities. Leading the list is our hyperactive Federal Reserve Board. Rather than letting the markets be markets -- fulfilling their function of flushing out inefficiencies and imbalances -- the Federal Reserve has adopted a strategy of micromanaging the economy. Only a couple of years ago, the Federal Reserve pushed interest rates to 45-year lows amid angst over the lack of growth and the potential for a deflationary spiral.

Now the Fed is on an unprecedented hike-a-meeting pace in an effort to fight another phantom, inflation. Equity investors should be concerned. Look at 100 years of interest rate history and there is no exception to this rule: Flat-to-inverted yield curves always presage economic weakness, usually a recession. At the current pace of increase, the curve will invert (when short rates exceed long rates) in a couple of months.

In addition to high interest rates and a potentially weaker economy in 2006, there is plenty more to worry about: high energy prices, falling consumer confidence and a costly and seemingly unending war in Iraq. But the key is, by my calculations, that these worries are already discounted in stock prices, and then some.

Raging Undervaluations

In the face of a negative economic backdrop, I'm bullish on the Dow for just one reason: There is a wide gulf between price and value. Of the 30 components of the Dow, 20 have compelling valuations. In Part 2 of this column next week, I'll rate the top 10 buys in the Dow and list the 10 other undervalued components.

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At time of publication, Alsin and/or ACM was long WMT and MSFT, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.