Every year I do a bottoms-up analysis of the Dow Jones Industrial Average. This is not the usual "I think the Dow goes to 14,000 by year-end" kind of prediction, because I believe that has little value and is just thumb-sucking. All my investing career, I have preferred looking at projections for each individual stock and then adding up what they produce as a return to find out what the percentage gained or loss might be.This year will be particularly difficult to divine, in part because I believe that it will be split between two halves: the pre-bottom in housing and the post-bottom. The post-bottom, with interest rates that I believe are going to 4.5% for conforming loans and 5% for jumbos and a decline of another 20% in home prices, may not leave people in existing homes happy about their situation -- and therefore their wealth -- but it will certainly flush out the millions of people who have been waiting on the sidelines, and very few new homes are being built. Of course that's a huge positive. The other imponderable is unemployment. We are blessed with a new president who has an understanding of economics and recognizes that there is an "all bets are off" level of unemployment -- a 10% job loss -- that would render many of my predictions too bullish. I believe, though, that 10% can be taken off the table with aggressive stimulus and a big tax credit for housing (also part of my housing-bottom thesis) as well as a weak dollar, all of which I believe is in the cards but not in the stocks. So I am using a positive prism in my bottoms-up analysis, particularly because it looks as though we were more victimized by tax-loss selling and hedge fund closings than we had been in years. I believe that abatement more than offsets the belief from individuals that the market has become corrupt and that buying stocks is simply not investing anymore but pure gambling. I am also factoring in the 3.6% average dividend yield of the 30 stocks, something that's of immense help when you are starting from such a low level -- the Dow lost 34% last year. And every bit of percentage matters. This brings us to my total for 2009. My analysis brings me to a 13.1% gain for the Dow 30 in 2009 from the 2008 close and a 9.8% gain from Friday's close. Also, we are not piercing 10,000 with this analysis, so some would say this is not much to write about. I say, better than a sharp stick in the eye. As a reminder, my predictions were based on the existing 30 components of the Dow. That includes General Motors ( GM), whose equity has become irrelevant, and Alcoa ( AA), another incredibly shrinking stock, which may also be replaced by a stronger company before the year is through. With that, let's take a look at each of the stocks in the Dow 30. Alcoa: This company requires a major turn in the world's economic fortunes, and I don't see it happening in time to save the company's dividend or maybe even its coveted position in the Dow. Its high debt load doesn't help. There are two hopes here:
- China comes back, boosting aluminum demand.
- The company's equity shrinks to such a level that Alcoa is at last taken over.