Ringing in the new year with stock bets
Contrarian: Bert Dohmen says investor liquidity is the only measure that matters
Veteran market watcher and one-time Hawaii resident Bert Dohmen has established a national reputation as a notable contrarian, appearing in Forbes, the Wall Street Journal and Louis Rukeyser's Wall Street Week.
True to form, Dohmen's outlook for 2006 eschews some conventional Wall Street wisdom in favor of what Dohmen says are his time-tested theories. The result is a bearish outlook for stocks through much of 2006, with an upturn forecast near year's end.
Although Dohmen blazes his own path to this conclusion, some of his views are consistent with those of his peers. As with many analysts, the housing market looms large in his forecast. Unlike other analysts, however, Dohmen puts the issue of liquidity at the center of his market view.
According to Dohmen's rule of thumb, when there's plenty of cash floating around, stocks tend to do well, and when liquidity dries up, stocks falter.
Everything else amounts to little more than noise, says Dohmen, who is president of Dohmen Capital Research Institute Inc. in Los Angeles.
During a recent visit to Honolulu, Dohmen shared his forecast on liquidity and, by extension, the market.
Over the past few years, the housing market has provided a major source of liquidity for average people. With real estate prices soaring and interest rates low, homeowners raised more than $1 trillion in cash by refinancing home mortgages.
"There is no shortage of money," Dohmen said. "Your dog can get a mortgage."
But he said the Federal Reserve's recent round of interest rate increases is likely to discourage people from continuing to use their homes as piggy banks. And that will lead cash to dry up.
Then there's the issue of the dollar. The weak dollar of recent years also has contributed to liquidity, Dohmen said, because international central banks have tended to buy U.S. dollars to prop up the currency and thereby prevent their exports from being too expensive. These dollar purchases were made with newly minted foreign currency, Dohmen said, increasing "liquidity by huge amounts."
But the strengthening dollar, he said, "eliminates the necessity of this maneuver, reducing liquidity."
"As liquidity shrinks, a source of cash will be stocks," Dohmen said. And as investors sell shares to raise cash, stock prices will decline.
But two things will change all of this by year's end, Dohmen said.
First, there's the Fed. Dohmen doesn't expect the Fed to raise rates at the next meeting of its policy-making Federal Open Market Committee later this month, which will keep interest rates at a "neutral" level that the markets will like.
Second, he said, there's the dollar. On this, Dohmen is zigging while the consensus zags.
"This year, everybody is ready for the dollar to continue going upward," he said. "I expect the dollar to go downward."
That will create more liquidity as foreign central banks again buy dollars, he said.
Finally, Dohmen said he expects the Fed to cut rates this year, creating "the next big upswing in the markets."
"But first comes the period of pain for the bulls," he said.
Dohmen said he's not worried about some of the talk on the street.
A recent inversion of the bond yield curve, which is frequently called a harbinger of a recession, is a nonevent, Dohmen said.
The alleged national housing bubble exists only in a couple of overbuilt markets such as Las Vegas and Miami -- and certainly not in Hawaii, where Dohmen said oceanfront real estate is a bargain.
"From what I see in Hawaii, there's still a lack of supply," he said. "It's very similar to Southern California."
"Demand will increase for real estate in Hawaii, especially for oceanfront," he added. "Hawaii is the most desirable place for anyone in the world who has money."
Likewise, Dohmen pooh-poohed the other bogeymen often raised by analysts, saying it all comes down to liquidity.
"Forget budget deficits, current-account deficits, trade deficits, Iraq, elections, etc.," Dohmen writes in his outlook for 2006. "Only money matters in the markets."
