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If you follow Dent Theory you are advised to pull out of stocks (market timing) and put assets into cash/bonds to preserve capital before the “Big Shakeout” when the market is expected to crash back to a Dow level of around 7,500. However, a number of “market timers” boasted how they yanked all their money out of stocks before the 1987 crash and many did not get back into the market until it has passed its previous highs. Market timing may get satisfaction from having sold before market declines …but by not knowing when to re-enter the market, they realize inferior returns to those investors who never try to time the market.

I am a die-hard, “buy and hold” investor, but after reading Dents book I am conflicted on “IF” this is still being a good strategy in the long run. Diversification depending on your goals is key, but it appears some market timing strategy may be prudent …. if Dent is right.

To summarize Dent predictions, he is saying the following in his latest book “The Next Bubble Boom”:

· Stronger bull market than the 1990's to year 2009 – 2010
· The tech wreck we saw in 2001-2003 was necessary to major advances in progress
· 40,000 Dow by end of this decade (by 2009-2010)
· There will be another tech bubble by 2010
· The roaring 20's bull market was the least anticipated in history due to devastating tech bubble and crash that preceded it
· Between 2005-2015 investors will receive higher rates of compounded returns than the 1990's bull market. Keep in mind; both Buffett and Templeton do not see this. They see 6.5 to 7% average annual growth rates in stocks over the next decade, so opinions vastly differ on this outlook.
· Every decade sees recessions, consolidations and stock declines into the first few years and then most gains are made in the second ½ of the decade.
· Dents predictions are based on a “age wave” theory that follows the spending wave of Baby Boomers. Analogy is the Python swallowing the pig. The spending patterns of Baby Boomers is one of the main reasons for 1990's bull market
· Strong rally by mid 2005 due to resurgence in capital spending by business (Note: cash in corporate reserves as of 11/04 was at all time high)
· The Dow will hit new highs by Q2 2005 which will bust the “bubble has burst and the bull market is over,” thought pattern.
· Tech companies will lead growth and earnings in 2005 and on like they did in 1995 – 1999 time frame
· Inflation will go up in 2006 and we will see the Fed start to tighten up more. But, the market will ignore this because earnings will be soaring due to high productivity rates.
· Between April and August 2006 we will see a test of the 2000 Naz high of 5050.
· 2006 will look like 1998; a pullback, then another rally in 2007 in best year of the four year Presidential Cycle. This correction will be a huge “buy” signal.
· The last part of the cycle accelerate again in 2007 – continuing to rally to the end of 2009 – 2010 and a Republican will win the White House in November 2008.
· The Federal Budget Deficit will disappear around 2010
· The Dow will hit12, 000 by end of 2005, maybe higher.
· The Dow will hit 20,000 late 2007, then 35,000 by June 2009 and finally reach 38,000-40,000 by 2009-2010.
· Now for the bad news: The bubble will burst in 2009 – 2010 with a subsequent crash
· There will be recession similar to the Great Depression of the early 30's. The Dow will be at 7500 around 2022 and the Naz at 1100 with a new long term bull starting in 2023
· Starting in 2010 we will see housing prices start to decline in high-end urban and suburban and resort areas.
· We will see more terrorist activity in the 2009 - 2010 just when we think we have won the war on terror.
· After 2010 we will experience a thirteen (13) year bear market, until the Echo Boomer age wave kicks in with increased spending

After some research, I have concluded Dent is an “age wave” theory guy, based on his predictions of what is going to hit asset markets over the next 10 years. His claim is that a demographic phenomenon called the “age wave” will eventually crest and drown stockholders as surely as it sent stock prices soaring in the last decade.

The story goes like this: The Baby Boomer generation born between 1946 and 1964 (those in the current age group between 59 and 41) is rapidly accumulating assets in anticipation of their retirements. Dent and other “age wavers” predict this accumulation process will accelerate in the last half of this decade 2005 – 21010 and the Dow will hit in the 35,000 to 40,000. Dent says, the reason most people don't think this will happen is because we think “linear” and not “cyclical”.

The Baby Boomers highest savings years occur when they are in their forties and fifties with the mortgage paid off (or nearly so) and children well on their way to finishing college. Many are hoping to prepare for retirement by accelerating the tax-exempt contribution (401K, Ira, Keogh) plans.

So far, the market has been good to Boomer over last 10-12 years. Stock and bond returns in the 1980's and 1990's have been far above the norm and have left many with substantial assets despite the 2000-2001 bear market. With their retirement nest eggs in place, may are projecting a life of leisure. The only problem is that when it comes times for them to cash in their assets, they cannot eat their stocks and bond certificates. Assets can only be turned into purchasing power if there are buyers willing to give up their consumption so that sellers can enjoy theirs.

In the past, the young generations when reaching middle age, usually has sufficient purchasing power to buy to buy its parent's assets. This time however the situation is different. There are not enough generation X-ers' (generation born in the 60's and 70's) with sufficient wealth to absorb the Boomers substantial portfolios of stocks and bonds at current prices.

Who are buyers of the trillions that fund private savings? The big problem indicates that the main threat to Boomers is not weather the trust fund contains government or private assets but that there is not enough buying power to absorb the sales on any assets. The massive distribution of stocks bonds portends soaring interest rates and falling security prices.

Dent predicts a crash similar to 1929 around the 2009-2010 time frames after the Dow hits 35-40,000 followed by a long and deep depression with deflation, unemployment rates of 10 to 15% and declining real estate values increasing in personal bankruptcies and the election of and FDR type president.

Dent advocates moving assets into long-term bonds, cash, CDs and Asian stocks by late 2009. But, what if three different scenarios develop?

First, what if the Boomers have not saved enough and have to keep working or want to keep working? Won't that funnel more assets into investments as they try to save more at the last minute? How will that impact Dent's predictions?

Second, we can rely on more rapid economic growth. One can compensate for the dearth of numbers of generation x-ers who follow the Boomers by making all Generation X-ers's better off so that they care able to buy the abundant assets of the Boomers. It may be surprising, but according to the very figures published by the SSTF (Social Security Trust Fund), if productivity would rise from the paltry 1.5% rate assumed by the trustees to 3.5%, the trust fund would be fully funded for the next 75 years. There are no comparable figures on how increased growth would influence private pension funds, but it is certain that absorption of the Boomers assets would be far greater if productivity growth rates were higher. The only problem with this line of logic is that gambling on productivity growth rates to solve the long-run age wave problem is clearly risky. Although most economists have raised their long-term productivity projections to 2.5%, few believe that productivity growth can be boosted to 3.5 % over long periods of time.

Third, it is unlikely that US growth rates alone can solve the looming crises. A solution most likely will involve the global economy. We know the “age wave” is a phenomenon of the DEVELOPED world. The DEVELOP-ING world such as India, Indonesia, Africa and Latin America has experienced ever-increasing population growth. Over the next half century workers aged 20 to 60 will decline from 60 percent of the population to 54% of the population in the DEVELOPED world, whereas in faster-growing DEVELOP-ING countries, the percentage of such workers is predicted to rise from 51% to 58%. The DEVELOP-ING world can emerge as one answer to the age mismatch of the industrialized economies. If their progress continues they will sell goods to the Boomers and thereby acquire the buying power to purchase their assets. In the 1990's the developed world is many times richer that the DEVELOP-ING word and is providing it with capital to develop its industries and infrastructures. As the economies of the developing world grow, their people will increase their standards of living and levels f savings. If this occurs, the developing nations will pay off their debts acquire ownership of their own capital and eventually buy a significant stake in the assets of the DEVELOPED world (US, Europe, Japan and emerging China). This scenario doesn't depend on DEVELOPING nations becoming as rich as DEVELOPED countries, but it is critically dependant on the continued integration of world economies. Protectionism, import restrictions or other impediments to the free flow of goods and services and capital around countries would sharply curtail the ability of the word economy to undertake these massive asset transfers. A permanent slow-down in growth of the DEVELOP-ING economies will have a sharply negative implication for all world markets.

Dent says that you cannot predict the market in the short term but the market does show some patterns over the long run based on consumer spending patterns. Does this man have credibility and should we take him seriously? I wonder what Greenspan would have to say.

Cheers …
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