This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Cult of the Bear III: Getting to Dow 6800

Today, the economy has far greater structural imbalances. As the markets get further extended, they become increasingly less able to absorb what has become euphemistically described as "an externality." As the current account deficit rises and the U.S. fiscal deficit worsens, so too does our ability to shake off an economic disturbance. Nouriel Roubini, professor of economics at New York University's Stern School of Business, calls this an "increased probability of a systemic risk episode."

Getting to 6800

What would have to occur for 2006 to be the strong year for the Dow many are expecting? Forget Goldilocks, we would need a Cinderella scenario, where nothing goes wrong, and many things go precisely right: Earnings must stay robust, while energy prices and inflation moderate. The consumer would have to keep spending, despite signs of tiring. Businesses would need to build on third-quarter capex spending, and begin to hire in earnest. All of the vulnerable Dow stocks would have to avoid their major issues, or even a minor hiccup.

None of the negative "externalities" currently contemplated -- from a major bird flu outbreak to protectionist legislation or other policy mistake to an energy shock to a dollar crash to a geopolitical crisis over Iran's nuclear ambitions -- can come to pass, much less something currently not on the radar. Finally, equities would somehow manage to avoid the regular corrections so common in secular bear markets.

If Cinderella fails to show, how might the Dow work its way down toward 6800?

The momentum from the beginning of the year should carry stocks higher into February. But a series of earnings disappointments and a few negative surprises from select names -- think DuPont (DD) and Alcoa (AA) -- creates a wobbly market. Disappointments after the close Tuesday from IBM (IBM), Intel (INTC) and Yahoo! (YHOO) won't help matters and may prevent the early 2006 momentum from carrying as far as I originally thought.

Investors start to gradually recognize that all is not well in the economy. The P/E multiple compression discussed in part II only adds pressure to stock prices, as does options-expensing. Companies on calendar years are required to expense options, starting this quarter. The effects of expensing options will be seen in first-quarter and full-year guidance.

Vulnerable Giants
A host of risks complicate the rosy '06 Dow forecast of most Wall Street strategists.
Dow Component Risk Assessment
GM Any dividend cut will lead to selling by income funds.
Home Depot Will feel the impact of the housing slow down more than most.
AT&T VOIP continues to eat into core business.
Verizon What happens when Google or Yahoo offers free phone service?
Alcoa/DuPont Inability to pass along price increases is squeezing profits.
Wal-Mart Core clientele vulnerable to rising rates, energy prices and minimum credit card payments.
Hewlett-Packard/ Microsoft/IBM/Intel Option expensing will crimp earnings; high P/Es.
Citigroup/American Express/JP Morgan Flat yield curve hurts transactional business, as does slowing housing market.
Boeing Commercial aviation market recovery fully priced in; not priced for any slowdown.
Pfizer/Merck/Johnson & Johnson No blockbuster drugs in pipeline; fund managers prefer biotech.
GE Stock in a rut for five years.
Coca-Cola Pricey, and losing share to Pepsi.
McDonald's Nice rebound from the teens is over.
Disney Core customers are economizing.
Exxon Mobil Increasingly expensive to explore for oil; downside risk to oil prices.
Honeywell/P&G/United Technologies Pricey.
Caterpillar/3M Growth is slowing.
Source: Barry Ritholtz

3 of 5

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs