Dow Headed to 15,000?

Is the Dow going to 15,000 in the next two years? One well-known professor from the Wharton School of finance seems to think so. Personally, I tend to be a bit more pessimistic. That in itself is a shame. I used to be such an optimist. But after finding out that good old Uncle Sam is spending $1,250,000,000,000 (that 1.25 Trillion dollars) more than we’re making every year, I’ve become a bit cynical. The following article takes a look at both sides of the issue.

The cover story in the latest Barron’s proclaims that “even by conservative measures,” the Dow Jones Industrial Average could exceed 15,000 in two years. The story goes so far as to say that Dow 17,000 is a “50-50 bet.”

At Top Gun Options we like to explore both sides of such predictions and let you decide.

Written by Gene Epstein, the Barron’s article titled “Enter the Bull” frequently quotes Jeremy Siegel, the well-known Wharton School finance professor and author of Stocks for the Long Run. The article’s main argument is that history is on their side. History always repeats itself, right? Sometimes…

Epstein writes that chances are better than two in three that the Dow will reach 15,000 or higher, based on cyclical patterns of market history.

The article says Professor Siegel’s stock market performance data, which date back to 1871, show that the market reacts in a cyclical manner, known as the “rubber band” cycle of expansion and rapid collapse.

The article adds that the stock market saw double-digit earnings growth last year, but stocks had a muted response because of worries about the U.S. economy and Europe.

Although we at Top Gun Options always look at market data to gather intelligence, the old disclaimer “Past performance is not an indicator of future results” applies. So let’s explore the other side of this bullish argument.

In a word, sold!

Greece will most likely fail in its austerity efforts, as will other European nations like Italy that are accustomed to living the high life, with bloated civil services, underutilized workers and bloated pension plans.

These sovereign defaults will be followed by the U.S.’s own Greece and Italy: California and Illinois. With their bloated budgets (the “great state” of California is more than $25 billion in the red — yes that’s “billion,” with a “b”), these states will have to be bailed out by the federal government (read U.S. taxpayers).

Seems “fair,” right? States such as Florida that have individual income tax don’t have budget issues, while California — with all its budget woes — has a 10% “right off the top of your paycheck” tax.

The Golden State spends more than $12.5 billion on benefits and services that go to illegal immigrants. That’s nearly $1,500 per legal resident in the state, including children. Seems only “fair” that the other 48 states and their taxpayers, each with their own issues, bail out these states before they go bankrupt, right?

Meanwhile, there are the housing and unemployment situations, which could still worsen. Unemployment will remain above 8% — something that wasn’t supposed to happen with bailouts and two rounds of quantitative easing — and rising foreclosures will remain clouds on the market horizon.

Our own federal debt situation will worsen, and bleeding the DOD budget down to rubber bands and popsicle sticks won’t fix it while we pay for 99 weeks of unemployment insurance. Give the unemployed computer training, health care and a sense of self by having them serve their country instead of the other way around.

Oh … and Obamacare … that should help out small businesses! Companies are sitting on their hands, flush with cash but not hiring because they don’t know whether they’ll be the next target of a Washington lightning bolt. Ask the Catholic Church, which got blindsided last week.

Overseas, Israel will attack Iran because the U.S. has become the Barney Fife of the world. “Stop! Or we’ll say Stop again!” We’re going to wake up one day to news of an Israeli strike, and oil will go to more than $200 a barrel as the Middle East explodes and Israel endures daily attacks. Then Assad, in an attempt to shift attention away from his domestic troubles, will attack Israel.

We wanted to show you that there are two sides to everything, especially investing, and you need to decide on your own what you believe is right. No one cares about your money more than you. Professor Siegel is a smart man, but in 1871 Iran was ruled by the Qajar dynasty, not by a man who believes it’s his destiny to wipe Israel off the map and welcome the arrival of the 12th Imam.

So there are a lot of other domestic and international concerns to be aware off before you go all in thinking that Professor Siegel is correct. Markets tend to go up over time, and we hope he is correct. But in the interim you can potentially profit from the resulting volatility in the market.

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