The bulls have their day but the bubble worries won't go away

News Analysis: The Dow may have hit 10,000 but market-watchers can't agree about where it's going next

IT SHOULD not be important, this Dow 10,000 business. What does it mean that on Tuesday the industrials index expanded from a four to five digit-number, if only for something less than a minute? Nothing really. Think of it as a signpost on a high Alpine pass. Just in case you are curious, you are now at an elevation of 10,000 feet above sea level. Drive on and enjoy the view.

But there are plenty of travellers who are feeling nervous. A few with vertigo are surrendering to the urge to look over the edge at the valley far below. Others are turning to their passengers and saying: "Oh, that means that we have reached the top."

Now it's the brakes that will start getting hot. The drive up the mountain has, after all, been awfully fast. Remember when Alan Greenspan, the Federal Reserve chairman, wondered out loud about investors suffering from "irrational exuberance"? Well, guess what, when he said that, in December 1996, the Dow was standing at a mere 6,400. Exuberance? Mr Greenspan barely knew the meaning of the word.

Call it superstition, but investors have reasons to be spooked by 10,000. The event, as brief as it was, has sparked a fresh crescendo of debate among professional market-watchers in New York. And there is no consensus about anything. Does 10,000 matter? What happens next? Is the Dow index, made up only 30 blue-chip companies, relevant any more? If the Dow falls, does the economy slump with it?

For the bulls, whose most famous cheerleader is Abby Joseph Cohen, chief US markets strategist at Goldman Sachs, the puncturing of the 10,000 barrier is sweet vindication. Ms Cohen and the few among her peers who have stuck with her, even through the nerve-jangling weeks of last August and September, when the Dow drifted all the way down to 7,500, continue to be clear that future looks bright.

"The bull market is not over. Bull markets end when fundamentals erode ... but we don't have that problem right now," Ms Cohen remarked. In other words, she remains enamoured of her now famous image of the supertanker US economy. There will be times of choppiness and the occasional passing storm, but the economic expansion that is now entering its ninth year in the US still has steam left in it.

"When the market fell notably in August and September, many investors inferred from that that the economy was in big trouble," she said. "We thought those worries were not well founded." Ms Cohen astonished many when last September she advised her clients to raise the proportion of stocks in their investment portfolios from 65 per cent to 72 per cent.

Ms Cohen previously saw the Dow stopping short of 10,000 by the year's end. She is due to revise her forecasts some time this month. Others are ahead of her. Larry Wachtler of Prudential Securities, for example, yesterday looked forward to a Dow at 11,500 points by Christmas. And consider this from James Glassman and Kevin Hassett of the conservative American Enterprise Institute in Washington. Explaining why they think stocks are undervalued, not the other way around, they wrote in the Wall Street Journal that the Dow could be at "36,000 - tomorrow, not 10 or 20 years from now".

Just as many voices are taking the brush with 10,000 to issue bubble warnings. Stock valuations cannot be sustained, they contend. They point to a number of ominous indicators. The gains in the markets have been narrow, restricted to a few issues that have been driving up the average alone. All this year, the numbers of stocks hitting new yearly lows have exceeding those making new highs.

"This is a very dangerous stock market," argued Charles Allmon, publisher of the Growth Stock Newsletter. "Nobody is looking at risk, nobody is concerned about risk. This is the biggest bubble since the tulip mania of the 17th Century".

Joe Granville, of the Granville Market Letter, was similarly negative. "Most of the rats have jumped from the ship and the ship is going down. When the Dow is pushing into record territory and it is only four stocks that are pushing it up, the red light is flashing."

Lou Todd, head of equities trading at JC Bradford, is also concerned. "There's not enough leadership to take this market to new highs. The lack of leadership scares me. Just a few stocks have taken the market to this level."

In his recent annual report, the billionaire investor Warren Buffett said he continued his "search for large equity investments." but sees "nothing on the horizon".

US stocks were trading lower at midday yesterday, with traders unwilling to make another 10K run without seeing some fundamental conviction from the blue chips. "I'm extremely nervous here." said Hugh Johnson, chief investment officer at First Albany Corp.

"What's allowing stocks to flirt with 10,000 has been aggressive traders, day traders, people trading on the Internet, people who pay a lot more attention to stock price performance rather than valuations."

"It basically has been an entire morning of consolidation," said Joseph Barthel, chief investment strategist at Fahnestock. "My sense here is that this is a week of resting. It's going to be the pause that refreshes."

The case that the Dow does not matter might seem strong. Much of the market mania of recent months has been focused on tech stocks like Dell, Intel and the Internet stocks like Yahoo!. None are on the Dow, nor even on the New York Stock Exchange. Their home is the Nasdaq. And yet, the psychological significance of the Dow Jones remains unarguable.

If Ms Cohen and her crew are right and the medium-term trend of the Dow is up, it will help to maintain consumer confidence, seen widely as the main engine of America's nine-year economic miracle. An upward arrow on the CNBC ticker helps to lift the mood.

And higher stocks give consumers income too - income that can be spent to keep the economy growing. Only last week, the Fed noted that 24 per cent of household wealth in the US is now based on stock ownership, compared with 11 per cent in 1988.

But if the car in fact passed the brow of a hill on Tuesday and the way ahead is downhill, the implications for the wider US economy could be bleak. Barton Biggs of Morgan Stanley recently wrote this in his client letter. "Stocks are incredibly expensive, the rest of the world economy is languishing, and the hyperactive US economy is not a perpetual motion machine."

Time to test the brakes?