The Dow Jones Industrial Average is in the midst of its longest streak of losses since 2004, following negative reports on jobs and manufacturing. Macroeconomic data clearly shows a slowdown while traders on the New York Stock Exchange remain cautious about what?s yet to come.
"I do think that ultimately we will have a pullback in the Dow, probably a 5 per cent correction before the end of the year and then we will rally back" says Joe Greco, managing director of Meridian Equity Partners. That said, he believes "we are not in danger of seeing a relapse of where we were two years and a half ago".
Last week, James Altucher, predicted that Dow Jones could reach as high as 20,000 points in the next 18 months. He justified this assumption giving 10 reasons as non-financial companies are cash rich thanks to their fear of a double dip and they can put that money to work if it never comes or that the effects of stimulus usually lag by 6 to 18 months. Therefore, QE2 won't help the economy until the end of 2011. For Greco, this prediction is completely wrong."Is an interesting calculation because what is pricing in is the inflation and also the devaluing of the US dollar, where It would become significantly more advantageous for foreign investors to put their money into our market, thus booming the stock prices and pushing the Dow Industrial Average up to something as hi as 20,000 points", he explains.
Meridian Equity Partner's managing director points out that the situation will not be attainable because for that to happen we really need a strong underlying economy to do that and right now we do see the economy slowing a little bit from the peak we where. "I don't see the Dow going up more than a couple of hundred points. We are not going to have days as we did a couple of years ago when the market was moving 700 points up per day", he adds.
As for debt ceiling being discussed in the Capitol Hill, Greco recognizes that the US government is "living a lavish lifestyle in terms of what it's spending" and that the country's GDP is not growing "at the pace that it should to steam our spending appetite". In some way as it's going on in Europe with Greece and other peripheral countries, "many states in the U.S are having issues now with local and state governments not being able to generate enough tax receipts, which make them miss their budgets, forces them to ask for money from the federal government, which is not available, and all that has a domino or a chain reaction".
Under these circumstances, oil and commodity prices also play a big role in consumption. Big trading houses as JP Morgan, Goldman Sachs and Morgan Stanley predicted during the last couple of weeks that crude oil barrel will approach 130-140 dollars during the summer.
"Their motivation is purely as speculators. We saw them really successfully talk about oil a couple of years ago when saw them very successfully, almost to the dollar, talk about where silver was going to go, 50 dollars was the target and touched 48 and a half dollars", Greco says. "I think there is definitely a lot to be said for that, those are very savvy investors and traders but at the end of the day for them to get there you need to have several factors intact and in agreement with OPEC, that said they're not cutting production and that there should be enough supply", he assures.
Meridian Equity Partner?s managing director doesn?t have the expectation to see the barrel at 130 dollars anytime in 2011. That said, as an asset he can see some pressure moving it to the upside in early 2012, especially if we have a harsh winter in the northeast coast.