Tuesday, March 29, 2011

Hirsch, Super Boom

Some of you may remember my review of the 2011 edition of the Stock Trader’s Almanac with its prediction of Dow 38820 by 2025. I was not the only skeptical voice at the time, and mine was far more muted than most. Undaunted, Jeffrey A. Hirsch has turned this prediction into a book, Super Boom: Why the Dow Will Hit 38,820 and How You Can Profit from It (Wiley, 2011).

The track record of predictive literature has not been stellar. We have only to think about the embarrassing 1999 call of Dow 36,000 by James Glassman and Kevin Hassett. Since Hirsch’s price target is similar to theirs, though his target date is much farther out, he feels compelled to explain where they went wrong: basically, they had a myopic view of history.

In contrast to the many pie-in-the-sky predictions, Hirsch recounts forecasts that were both timely and accurate, most notably his father’s call in January 1977 that the Dow would rise 500% (to 3420) over the next 13 years. In an appendix he reprints this Smart Money special report, which included a portfolio for the superboom.

Following in his father’s footsteps, using similar reasoning and an identical 500% gain (from the intraday low of 6,470 on March 6, 2009), Jeffrey Hirsch explains why we should see outsized returns for the stock market in the coming years. What will trigger this super boom? “Super booms of the past were conceived during wartime and financial crises, which produced elevated government spending, rising inflation, and pent-up demand. They were weaned on peace, stable political leadership, and effective governing. Finally, they were fed a steady diet of cultural paradigm shifting, enabling technology that changed the world and the way the average person lived. As the boom gains traction and heightened consumer spending spurs business and economic growth, the so-called ‘animal spirits’ of business, entrepreneurs, and investors are restored, shifting the boom into high gear. Finally, the boom reaches overdrive before falling back to earth.” (p. 13)

At the moment the economy remains strangled, and the author thinks that “we will be in a funk for several years”; the next super boom won’t begin until around 2017. (p. 56) We are still involved in Iraq and Afghanistan, government policies have not always been supportive, and inflation—at least as measured by core CPI—remains tame. Even if we include the volatile food and energy sectors, between September 11, 2001 and the November 2010 reading “the inflation index is up a meager 23 percent.” Ah, but the CPI has been revised numerous times, to what end is unclear (perhaps to dampen perceived inflation). “Having made numerous trips to the market and gas station over the past decade, it is simply unimaginable that prices are only up 23 percent. Energy costs have doubled, if not tripled. Medical costs have skyrocketed.” (p. 119)

Even if it’s not here yet, more inflation, hidden or evident, is on the horizon. For the owner of stocks, that’s good news because “the secular bull will not start until inflation returns to our economy and has time to level off, allowing for growth and innovation.” (pp. 126-27) The best hedge against inflation, the author stresses, is the stock market. Between 1980 and 1999, when the CPI more than doubled, “the inflation-adjusted Dow was up 444 percent versus a 22 percent loss for inflation-adjusted gold.” (p. 122)

What kinds of stocks should profit from the coming super boom? Hirsch identifies five areas to explore for investment ideas--alternative energy, biotechnology and genomics, population growth, traditional energy, and emerging markets—and recommends specific ETFs in each area.

Super Boom may turn out to be a book that’s talked about around the water cooler, but in the final analysis it is disappointing. It’s not that I’m taking issue with Hirsch’s 38,820 target. (In this review I have referred to it as a prediction or forecast even though Hirsch himself writes that “DJIA 38,820 by 2025 is not a market forecast; it is an expectation that human ingenuity will overcome, as it has on countless past occasions throughout history.” [p. 110]) I have absolutely no idea where the Dow will be in 2025.

My problem is that the book is cobbled together from Yale Hirsch’s work, Stock Trader’s Almanac research, and a somewhat superficial survey of twentieth-century booms and busts. Arguments are brief (although on occasion presented more than once), and the reasoning is somewhat elusive. Often, it seems, the author is letting his father speak for him. Perhaps the book was simply rushed to press. Whatever the case, it did not rise to the level of my expectations, admittedly elevated because I have great respect for the Hirsch Organization.

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