Here comes Dow 13,000

Opinion: American companies are fundamentally undervalued and are ready to ride overseas profits.

By TheStreet Staff Feb 7, 2011 2:28PM

Image: Arrow Up (© Photodisc/Photolibrary)By Peter Morici, TheStreet

 

The U.S. economy is growing only moderately and the job market remains sluggish, but stocks keep roaring ahead, as they should.


American companies are fundamentally undervalued, and unless upheavals in the Middle East or a European debt crisis derail global growth, the Dow Jones Industrial Average ($INDU) is headed for 13,000.

 

Growth in the range of 3% to 3.5% in the United States and about 10% in China is great for U.S. equities. American companies may not add employees in large numbers, but they can boost profits with only moderately expanding domestic demand, thanks to breakneck productivity advances. And America's larger companies -- those of the S&P 500 ($INX) -- earn about half their profits abroad, where they are poised to win big.

 

Investors should rebalance toward U.S. equities. Don't abandon emerging markets, but put new money into U.S. companies with global reach.

 

American companies that bring together multiple technologies, such as General Electric  (GE) and IBM (IBM); complex expertise, such as in investment banking, construction and engineering and natural resources; and more focused technology companies that are part of complex virtual networks like Advanced Micro Devices  (AMD) and Cisco (CSCO) are poised to reassert U.S. competitiveness. Healed from the recession, those companies are prepared to exploit profit opportunities in a moderately growing U.S. economy and rapidly growing Asia.

The structure of the U.S. private economy is changing -- not necessarily toward more services, as that is largely played out. Investors should not be alarmed that housing is not recovering -- the country has enough unsold homes to last several years.

 

Industrials that don't use a lot of labor in production have abundant opportunities, and supporting industries in software, logistics, etc. all look bright. That's why manufacturing, led by the auto sector, is stronger and finally adding some jobs.

 

As long as China grows anywhere near 10% and the U.S. at least 3%, don't worry about U.S. equities being overvalued until the Dow hits 13,000, and maybe not even then depending on what happens during that journey.

The Obama administration has made the U.S. economy irrelevant to large American businesses playing on the global stage. It lacks the nuanced understanding of business and globalization possessed by the administrations of Bill Clinton and George H.W. Bush.

 

Eloquently pronouncing whichever nation succeeds in green industries will win the future does not make it true. Those activities are too small and will stay too small, in terms of shares of gross domestic product and employment, to base the prosperity of a $15 trillion economy. The United States is not Switzerland but a continental economy -- niche industries and finance are not enough. Abandoning main line industries for solar panels and fanciful, money-losing high-speed rail is folly.

 

Clinton and the elder Bush did not seek to micromanage industry with telephone-book-sized instructions on how to value a home or make a bottle of ketchup. Instead, they set goals for sound practice. What the Obama administration fails to grasp is that the BP (BP) mess in the Gulf of Mexico was caused by corrupt government regulators, not the absence of impossible licensing requirements, and the financial crisis was a failure of too much bad regulation.

 

Sarbanes-Oxley, with its onerous and costly requirements, did not keep the big banks from fooling Treasury that the structured investment vehicles were no threat.

 

President Barack Obama's regulatory-reform task force is charged with ridding the country of irrelevant regulations, which are hard to find, and not reforming the overly burdensome and ineffective approach taken in recent years.

 

With the administration tone deaf, big American companies are simply taking their show on the road and investing abroad. When Washington gets realistic about the costs and disadvantages its policies impose (health care, currency strategy toward China and mindless, as opposed to necessary and well-crafted regulation), U.S. companies will start creating jobs in America again. In the meantime, they will employ minimal labor here, go abroad and send profits home.

 

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4Comments
Feb 7, 2011 9:58PM
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How did all the smart people on wall street get into a situation where what happens in China controls the US economy?  Anytime anyone other than you controls your future, you are in trouble.  Greed has made people make some very poor decisions.
Feb 7, 2011 7:31PM
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Might be a slow start on the 2nd qtr ,3rd qtr should be the high flyer!Smile 
Feb 8, 2011 9:47AM
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Great article Pete, until you turned it into an Obama bash fest. I can read the trash your spewing about the administration anywhere, but it's not hidden behind a headline intended to draw those of us interested in market activity in.
It's interesting that you would blame our economic woes on the administration that put the bottom in the worst recession since the great depression, a recession caused in no small part by the previous administrations.
This is laughable: "What the Obama administration fails to grasp is that the BP mess in the Gulf of Mexico was caused by corrupt government regulators, not the absence of impossible licensing requirements, and the financial crisis was a failure of too much bad regulation." So the fact that there were too few regulators/inspectors of the oil industry in past administrations to actually do the job properly, and the Bush Administration let the oil companies essentially regulate themselves, and BP didn't want to spend the time and money that would have prevented (their) spill is now the administrations fault? That's as absurd as blaming Obama for the financial crisis due to bad regulation and deregulation from the previous administration, oh, wait, you did that too!
Equally hilarious: "With the administration tone deaf, big American companies are simply taking their show on the road and investing abroad." Maybe you are completely blind to the fact that Americans, American manufacturing and business have been throwing money at China in a HUGE way over the last 10 years, it's the new frontier for making money, if we can exploit it we will! This did not start and will not end with the Obama administration or stripping American business of all taxes and regulations. China doesn't pay their labor a living wage, that's the bottom line.
In addition U.S. factories out-produce Chinese manufacturers by more than 40%, and factory activity is growing at its fastest pace in 7 years, and the manufacturing sector has expanded for 18 straight months, and January's reading was the highest since May 2004. This is devastation?
I hope you find something your good at one day.
Feb 7, 2011 7:28PM
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I think towards march dow will see about 13,000 
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