Posts Tagged ‘dow’

Dow 15,000 = $10 Soda?

Wednesday, November 4th, 2009

The Dow Industrial Average has rallied from 6,500 to just over 10,000 in a matter of months. Great news right? Maybe not if you consider at what expense, literally.

In my view the US economy is like a large aquarium. If you lean it in one direction the level may seem like it is going up on one side, but it is always at the expense of the other.

This stock market rally (Since March 2009) is undeniably at the expense of the US Dollar. Every time the dollar is weak the Dow is strong. This weakness in the dollar causes commodities to go up and US buying power to go down. So if the Dow manages to soar another 50%, don’t be surprised when your cost of living soars with it.

The famed “Dr. Doom” Nouriel Roubini has been expressing his concern over the “carry trade” where investors are borrowing dollars (shorting) and buying commodities. Many asset managers of recent have referred to the short dollar trade as “crowded”. This “rally” seems more like a another misuse of leverage. Looks like Wall Street gave up drinking by switching to beer.

Dow Industrial in red and US Dollar in green

Dow Industrial in red and US Dollar in green

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Was it Real Growth or just Credit? The Last 30 Years

Sunday, March 29th, 2009

The following two charts are disturbingly similar side by side:


First is the Dow Industrial Average over the last from 1928 till 2006:

Dow Industrial Average 1928 till 2006

Dow Industrial Average 1928 till 2006

The second chart is total US debt as a percentage of GDP from 1923 till 2006:

Percentage of Total US debt to GDP

Percentage of Total US debt to GDP 1923 till 2006

In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.

In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.

The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?

I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?

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Dow Industrial Average 1529?

Saturday, March 28th, 2009

Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.

From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.


In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.

From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.

So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.

I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.

Dow Industrial Average from 1929 till 1980

Dow Industrial Average from 1929 till 1980

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What Does a Market “Bottom” Look Like?

Friday, March 20th, 2009

If you watch any of the popular business networks on cable you will hear one word more than most, “bottom”. The term is used so frequently you could play a drinking game where every time says “bottom” you drink, I would imagine you would collapse after about an hour of playing the game.
So what does a bottom look like and why is everyone so anxious to make the call. Here are a couple of bubble market bottoms. One major distinction with these bottoms is that they encompass a full index.

nasdaq-bubble
The above is the NASDAQ from the late 1990’s to the early 2000’s. We all remember (well most of us) the hype that engulfed the technology sector that launched the NASDAQ to nearly 5000. The reason the NASDAQ reflects the bubble so well is because most technology stocks that were pumped up to extraordinary heights reside on the NASDAQ exchange. Notice that after the bottom was attained that the index did not rebound in weeks, it was slow and steady. If you had tried to buy as the knife was falling you may still be underwater today. Remember the NASDAQ only recovered to about half of its glory before the latest debacle.

dow-bubble-1930

The above is a chart of the Dow Industrial Average from the late 1920’s to early 1930’s. The bubble that burst in the late 1920’s is commonly agreed to be caused by a credit collapse (the world’s economies where in a similar dire straits as the US at that time, sound familiar). Since the US economy is based on expansion and contraction of credit, the Dow Industrial average is a good reflection of the pain felt by the US Industries. Again after the bottom is attained the rebound is slow and steady. Also if you attempted to catch this falling knife it could have been costly. Remember the Dow Industrial average did not return to its lofty heights of 1929 till the mid 1950’s.

My opinion is that the bottom will not feel like an opportunity, it will be a hard decision. You will be a minority among your peers and family when buying in.

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