Posts Tagged ‘stock market history’

When being Positive can be Dangerous

Saturday, April 25th, 2009

The mood on Wall Street and in Washington went from a very negative outlook to a relatively positive one in a matter of months. Whether they are trying to stay upbeat or believe that the economy has made a turn, the dangers of being positive might outweigh the benefits.

When President Obama took office nearly every speech he or one of his appointees (Treasury Secretary) made was followed by a negative day on Wall Street. Outlook was grim and reality was settling in with Americans. Now the exact opposite is true, speeches appear to be carefully calculated and responses on Wall Street are more positive.

Wall Street for the most part believes the “bottom” is in. Washington believes the worst is over but we could still have some tough times ahead.

Most of the economic data that spurred the month and a half record breaking rally has started to retrench (retail sales and existing home sale). There are still more down economic data months than up which points to a negative trend.

Wall Street points out to investors that the market historically rallies over 50% after a large correction “bottoms”. The Dow Industrial average touched 6440 in February 2009, if it were to rally 50% then the Dow would be 9660. The Dow Industrial Average was closed at 9034 on January 2, 2009. This “rebound” would leave the Dow Industrial up 6.9% from the beginning of the year.

If the economic data continues to slide and the Market starts another correction, what percentage does it historically go down? It seems mostly the positive view is more statistically backed than the negative view. Being negative could save you money while the positive could make you money, what can you afford?

We are taught it is better to think of the glass as half full; but when you only have half left being negative may be the only way to keep it half full.

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Snow Ball Effect

Tuesday, April 21st, 2009

Last week the CEO of NYSE Euronext, Duncan Niederauer, told CNBC that the rally over the last month and a half was not spurred by Investors, but by traders. In the interview he cites the rather low volume considering the movement and that the investor still lacks confidence to venture back into the markets. (Read the Article here)

The rally over the past month and a half is the largest move up in a short period of time since the 1930’s. Without “Investors” buying stocks this might end up being the largest bear market rally on record. The market needs investors to buy and hold stocks to build on this already remarkable short term bull move.

Wall Street has burned bridges before and was able to regain the trust of investors rather quickly in the past. Wall Street needs a bull market to survive so obviously they will rally the glimmers of hope while discounting the vast darkness as “already baked in”. Will Investors buy into Wall Street’s “snow ball effect” attempt or have they finally crossed the line?

Wall Street has led you to believe that the market leads the economy by about 6 months. Wall Street leading the market assumes that the Investor will follow. Recent polls have shown that the majority of Americans do not currently trust Wall Street. Investors have already lost so much over the past year, have they had enough? Americans are spending less and saving more. Will they sacrifice more so they can risk more?

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Turning Ordinary Metal into Gold – The Modern Day Alchemists on Wall Street

Monday, April 20th, 2009

File:HermesTrismegistusCauc.jpgHundreds of years ago Kings and Queens where captivated by Alchemists who claimed to be able to turn ordinary metal into gold. Alchemist preyed on the wealthy to pay for their lifestyle and experimentation into this so called science of the time. By all accounts some alchemists where true believers, but more were just looking to dupe the wealthy out of their riches.

Today most of us view Alchemy as ridiculous and wonder how so many people in such great power could believe in it. Although today most of us think that the so called science of Alchemy is ludicrous, for some reason we still seem to believe that it is possible to turn ordinary metal into gold, figuratively.

This association was never more obvious than during the technology bubble 10 years ago. A person or group with just an idea was able to solicit millions from investors, before there was even a product. Most of Wall Street made speculations of wealth on the notion of near limitless growth which we now view as absurd. Even after those failed speculations we continue to put faith in Wall Street.

Looking at today it is understandable how the practice of Alchemy had captured the minds of yesterday for so long. As yesterday, on Wall Street there seems to be true believers and frauds (i.e. Bernie Madoff) in the art of turning ordinary metal into gold.

I do not believe all investment advice is the practice of alchemy. I will say though that the use of speculation in investment advice does seem to prey on mans’ fascination of turning ordinary metal into gold.

The mystery and lure of Alchemy was spread by stories from witnesses to this incredible act of turning ordinary metal into gold. It was not until the late 1700’s that this art of deception was revealed. A book was published on how these alchemists deceived witnesses. How many stories have you heard of someone who invested in a stock that made them extremely wealthy (i.e. Microsoft)?

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A Real Economic Indicator

Wednesday, April 15th, 2009

Yesterday consumer spending started back down the path of contraction. Remember one of the major sparks for the March rally was the improved retail sales numbers. It is funny how a once very pessimistic market can turn overly optimistic in such a short period of time.


Wall Street and the US government rely heavily this economic data for their analysis of the economy and its current state. Interesting how this data did not reveal the current state of the economy sooner. A year ago very few could have predicted the current crisis and its depth. It would seem that this method of data collection is too slow in reporting present conditions (especially with the recent dramatic revisions of past reports).

The US Federal Reserve went to a tightening status to combat inflation in April 2008 based off of this type of data (which was extremely late to the relatively obvious state of increased inflation). With an already low overnight bank rate, the Federal Reserve was forced to use up its most effective tool to stimulate the economy by taking it to 0% to .25% target. The Federal Reserve has also started to rapidly expand its balance sheet using “innovative” methods to promote lending. When considering debt and leverage, there really are limits to “innovation”; debt still needs to be repaid.

What happens if the home sales numbers start to show weakness again? What happens if (when) commercial real estate write offs start to replace the consumer debt write-offs on banks balance sheets. Do we have any other weapons to throw at the problem?

Unemployment is on the rise and Americans are more interested in saving money than spending right now. The US Government is trying to cure the problem by expanding lending while the US Citizen feels the solution to their problem is to reduce their debt. Interesting how the government and its people can be on such different pages.

Consumer spending makes up 70% of the United States GDP (I would argue that without the consumer we would not have the other 30%). The US Government and Wall Street have declared the worst is over. The average consumer does not feel the worst is over as seen in the retrenchment of retail sales, continued high savings rate and decreased consumer debt. What economic indicator should we believe?

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The Fortune Telling Stock Market

Wednesday, April 8th, 2009

The stock market is typically 5 or 6 months ahead of the economy. That is what we are led to believe; actually many bear market rallies are predicated on this theory. Does it really?

We heard the declared bottom ring in November 2008 when the Dow Industrial Average hit 7552. So according to the Stock Market fortune teller the Dow Industrial Average should not have broken the 7552 level in February and economy should be on the rise by now. Unfortunately this prediction has been proved wrong this time.

One thing is for sure; eventually it will be right (assuming you believe the World’s economies will recover at one point, I do). One of the eventual lows will be preceded by growth.

Sounds kind of like a convenient statistic, where they fail to disclose the accuracy. Over the past year, how many times have you heard “bottom”, how many times has this fortune telling ability been right?

Lately the fortune telling ability of the stock market has been the reason “you can’t afford not to be in this market” according to the mass populous on Wall Street. It may eventually be true, but can you afford its accuracy?

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Is Deflation the Problem or the Solution?

Saturday, April 4th, 2009

Over the past year the US government has taken large steps to ward off the destructive forces of deflation. Deflation takes much of the blame for the financial crisis during the depression of the 1930’s.

Instead of following in the monetary footsteps of the Federal Reserve during the depression, the current US Federal Reserve is attempting to monetize their way out of the problem by flooding the system with money.

One thing is for sure, the Federal Reserve of the 1930’s was successful in the long run. The United States emerged as the power house economy of the world. During the 1930’s prices came down and leverage was reduced through the process of deflation.

The current policy of the United States is to attempt to re inflate the US economy at all costs. This policy reflects a belief that deflation is worse than inflation. The Federal Reserve believes that they can control inflation through the control of the overnight bank rate.

If they can control inflation, than why has debt grown significantly (historically) faster than income over the last 30 years? Stable growth, in my opinion, should be complimented by salary growth and not expanded credit. Unfortunately complex financial instruments have fooled our Federal Reserve into believing we have had very tame inflation over the past 30 years. How do you bring debt back into balance with income? Deflation?

Couple relevant quotes:

“I place economy among the first and most important of republican virtues, and debt as the greatest of the dangers to be feared.” -Thomas Jefferson -1816

“I have sufficiently urged that all suggestions as to financial innovation be regarded with extreme skepticism” John Kenneth Galbraith from “A Short History of Financial Euphoria”

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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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