S&P to 2000 by 2013?? Here's How

S&P to 2000 by 2013?? Here's How

David Petch

Most people assume the S&P500 or 100 is firm with the components. They actually fluid and can be changed based upon the sector in favour. Currently the S&P have financials occupying 40% of the index. In 1980 (a little foggy on the precise numbers), oil stocks represented between 30-40% of the S&P and gold stocks occupied 25-30%). The DOW as we know it would be 0 or close to it if older companies were there, because most went under, or were bought out. One by one, as the oil, gold silver and other metals take off, they will replace the downtrodden stocks of the current S&P. Financials are likely to get whacked since heavy institutional ownership by mutual funds creates a slow exit, and the housing bubble starting to fall apart. Housing is likely to start creaking in late 2005, early 2006. By 2010-2012, the S&P will likely be comprised of approximately 40% oil stocks and 25-30% gold stocks or other metals. The S&P in actuality could hit well over 2000 by 2013 should this occur.

One point I think should be addressed is the difference between 1980 and the top we are expecting in the PM's by 2011-2013. In 1980, there was a 14-year bear market. Everyone hated stocks, and was bearish on stocks. This was reflected in gold stock prices being low relative to gold hitting $850. It was only after 1985 once the bull market was underway did gold stocks have a meteoric rise with the commodity (gold) trading 50% lower than its top from 1980. We came off an 18-year bull market recently, so the overall positive, feel good, high expectation of returns is generationally locked in psychologically. People want to make money, and be in the hottest area, so higher stock prices are likely to accompany the rise in gold prices, without the delay seen in the 80's.

North American Politics

Watch for the American Government to push for a common North American Currency in the coming years. With a decreased USD, commodity prices will be too expensive for them to import, especially if most commodities are paid in Euros. If the Canadian dollar was at parity with the greenback, they benefit due to a common currency.

The Chinese taking a position in the oil sands, buying up mines is supportive for the Canadian dollar. Canadians actually stand to increase their net worth as a society during this commodity boom, provided we maintain a separate currency. The Chinese selling US dollars to buy mines or oil field positions is a negative for the US currency.

Having China make investments in Canada serves as an insulation blanket to any armed conflicts between the US and China, or does it? As long as Canada can maintain a strong position on its environmental policies and sovereignty, we can play other countries as pawns, rather than the current role. Although the US is a major importer of Canadian goods, a relationship with China will knock out those artificial trade barriers the US government has installed to benefit themselves such as the lumber issue and fishing (harvesting a small percentage of the Great Lakes will be the next sore spot). While certain industries that have made their money in the currency conversion to the US this past decade, there has been no initiative for increasing productivity for this observed relationship. A Canadian dollar to trade at parity with the US or higher will see those former companies making their profits in currency conversion wither, unless they change their corporate business structure. Some industries will hurt, but a more diversified trading plan with other countries will ease this burden. The great Polar bear has been awakened.

David Petch
Market Letters Digest
October 14, 2004

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