The Perfect Set-Up

James Finucane was featured in a recent Barron’s article. He is a 67-year-old stock strategist. He makes extremely compelling arguments for the DJIA to visit 18,000 to 20,000 in a year. Here is a list of his main points:

Financial crises yield spectacular buy points. References 1970 Penn Central bankruptcy, 1984 failure of Continental Bank, 1995 Mexican peso devaluation, and the 1998 collapse of Long Term Capital Management.

The sub prime meltdown has been a spreading forest fire, jumping firewalls and springing up in unforeseen areas. The Bear Stearns bail out was the crescendo event.

Crises are accompanied by hair-raising rhetoric. Alan Greenspan called the Long Term Capital collapse as the worst crisis he had seen in his lifetime. Time Magazine called the ad hoc government group cobbled together to handle the 1994 Mexican peso crisis the “Committee to Save the World.” George Soros was predicting a depression after the 1987 stock market collapse, just as he is predicting today.

Liquidity and technical factors give comfort: Money-market cash has soared to $3.45 trillion, versus $2.2 trillion at the market low in March 2003. U.S. domestic equity funds have seen a record nine months of net outflows. The previous record was eight months, following the October 1987 crash. The Conference Board Consumer Expectations Index is at a 17-year low. The Reuters-University of Michigan Consumer Confidence Survey is at its worst level since 1992. The AAII survey is more bearish than they have been since 1990.

Re-cap: Finucane’s thesis: Months of stock market liquidation and cash build-up, horrible sentiment and a bailout that could alter investor psychology have lit a fuse for an explosive rally. It will be ignited by one of those mercurial shifts in mood from abject fear to tentative confidence, and finally, to greed.

If you disagree with his views, the question I’d ask is, what if you are wrong? Good Luck.