3/11/2013 4:15 PM ET|
4 reasons to ignore Dow's new highs
I'll happily pocket any profits the market's rise gives me. But when you adjust for inflation or consider how we got here, it's not impressive.
If you need to sell papers, you splash headlines like "Brits to leave European Union over horsemeat in lasagna" even if they're total exaggerations.
When Wall Street wants to flog stocks, it runs out stories like "Dow Jones Average hits all-time high" even if the story doesn't mean what Wall Street wants the average investor to think it means.
So, yes, the Dow Jones Industrial Average ($INDU) hit an all-time high on Friday, when it briefly moved above 14,400. The Dow Transportation Average ($DJT), the Russell 1000 large-cap index and the Russell 3000 small-cap index all hit all-time peaks. The Standard & Poor's 500 stock index ($INX) is within 1% of its all-time high price set in 2007.
And of course, on Monday, the Dow rose again for yet another new all-time high.
But . . .
I can think of four reasons why the "all-time high price" recorded last week doesn't mean what Wall Street and the headlines say it means.
Is that all we get?
First, while I think it's great (and I'm certainly not giving back any profits I've made lately) that prices of U.S. stocks have by and large returned to the levels of 2007 -- and even beyond -- I've got to ask "That's all? That's all we get from an unprecedented flood of central bank cash?"
The Federal Reserve's balance sheet now exceeds $3 trillion, up from $488 billion in January 2011. The European Central Bank's balance sheet hit what I think is likely to be a temporary peak of $4.2 trillion in June 2012, up from $2.98 trillion in June 2011. China has been printing money. Japan has been printing money. And this money poured into a global economy where growth was so slow and economic conditions so uncertain that much of this cash went into financial assets rather than into capital or consumer spending. What we got from this is a return to the stock market levels of 2007.
Second, U.S. stock prices are at new highs only if we forget about inflation. In other words, these are nominal rather than real highs. Adjusted for inflation, this peak on the Dow Jones Industrial Average is still 10% lower than at its 2007 peak. Adjusted for inflation, that 2007 peak wasn't actually a peak either; it was lower than the 2000 high. So far, what investors have -- if they adjust for inflation -- isn't a series of ever-higher peaks but of ever-lower highs.
To date, in fact, what we've got is a classic bear market pattern of lower highs. Maybe the 2013 rally can break that pattern, but we aren't there yet. From this perspective, there's a lot riding on this rally -- the difference in real terms of a continuation of the bear market that began in 2000 and a move onto either an actual bull market or at least a consolidation that might launch a new bull market.
But despite the yelling about new highs for U.S. stock prices, we aren't there yet.
Third, if you think calculating the inflation-adjusted price level of the Dow or the S&P takes a little luster off the current claims of an "all time high," you should see what happens to stock market prices when they're compared with those of other assets. If, for example, you measure the gain of the S&P 500 in terms of gold -- and not U.S. dollars -- the price of the S&P is down 53% from the 2007 high.
And, fourth, why all this focus on the prices? Sure, stock prices are an important component of gains for investors, but they're only a component. Over time, about 40% of the total return for the Dow Jones Industrial Average has been in the form of dividends.
If those dividends were reinvested, then dividends account for 50% of the total return on the Dow Jones Industrial Average. If you include the dividends from the Dow stocks in your calculations, then the Dow Jones industrials -- even adjusted for inflation -- hit a new high in February. (Besides the famous Dow Jones Industrial Average that business sections report so prominently, there's also a Dow Jones Industrial Average Total Return Index ($DJITR), which includes dividends from the Dow stocks. Chart the two against each other to see the difference that dividends make in total return.)
What's my point? I've got several, actually.
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So does anyone really believe the 2% inflation and the 7% unemployment rates?
It's called "cooking the books". Metrics were meant to reflect reality, but government can't handle bad news, so they generate bogus numbers.
This is all fabrication by Bernanke and the Fed. Funny money, monopoly money call it what you want this cannot last. China is tapping it's foot wondering when we're going to start raising interest rates on our treasuries while the major banks are still holding bad debt. The moment the Fed raises rates everything explodes. Markets tank and inflation kicks in with a vengeance.(and that will coincide with a republican taking the white house.)
But we can take solace for now in the fact that the Fed has no plans to raise rates until either Bernanke exits or BHO is out of office.
Wall street means nothing! Their just playing with funny money. Ignore the investors, brokers and everyone else that says to get in the market NOW! It's just another scam for those bast**ds to fill their pockets with our money!
....The only thing running the stock mkt right now is bernanke and his printing press....
"When Wall Street wants to flog stocks, it runs out stories like "Dow Jones Average hits all-time high"
Exactly. And, who presents these sales pitches for them? It’s the so-called Independent News Media which is only slightly more captured by their Wall Street masters than government regulators.
The whole thing is a sham. If only one of the thousands of self-proclaimed geniuses on Wall Street would come up with an investment that guarantees purchasing power of your savings after taxes. Then they would have something to brag about. And, they don’t even need to waste time coming up with some exotic name for this investment like they usually do. I think it’s what Ron Paul refers to as sound money.
Hey, you have to keep the Monopoly game going by printing more currency when the bank runs out. If you don't print more currency there's no reason to keep playing the game and working. If everybody stops playing the game then there's no more assets for the banks and Wall Street crowds to steal.
Just think if all the progress we've made going from free 6 TV channels to $100 month 86 channels of reality, reruns and news about violent crimes and two parties of pigs. Now we'll get to store all of our stuff online and pay $100 month to access it. We'd be better off turning off all media and putting gold and silver bars under our beds.
ANOTHER ENCOURAGING ARTICLE FROM JUBAK. EVENTUALLY HE WILL BE RIGHT AND THE SKY WILL FALL. AUNTIE EM AUNTIE EM......
ALMOST ALL THE ARTICLES DEAL WITH INDIVIDUAL STOCKS FOR PROS LIKE HIM. ALL MY INVESTMENTS ARE MUTUAL FUNDS RUN BY PEOPLE WHO I HOPE UNDERSTAND STOCKS. THERE'S NEVER ANY USEFUL INFO FOR MUTUAL FUND INVESTORS IT SEEMS. NEVER PUT YOUR EGGS IN 1 BASKET IS WHY I AM IN MUTUALS. I HAVEN'T A CLUE HOW TO ASSESS AND FOLLOW 1 STOCK AT A TIME
The only thing he gets wrong is the same thing all idiots get wrong and that is the ridiculous idea that government spending is needed to help an economy recover. The greatest recovery in U.S. history took place when Reagan cut taxes and let the American people get to work. And that was after a far greater recession than the "great recession" which was exacerbated by government interference in the housing credit markets.
The reason government spending has always failed is because it's not an infusion of money, it's a transfer of money. It's present and future money taken from the private sector so it takes the American people out of the equation. It makes far more sense for the American people to keep their money and invest and spend it (a demand economy) than it does for the government to take it and spend it (a command economy). Ask the Soviet Union and China how well that command economy works. After a combined 125 years of failure the honest answer is that it doesn't. And if it fails for a long time it also fails for a short time, which has been our experience in America.
Look at the ends of the first couple of QE's and the "twist" and you see the market started dropping after the end of each. As it will when this one stops. At some point the FED not only has to stop printing but it has to take the 3+ trillion off its balance sheet. Deficit spending a trillion a year and printing a trillion a year is a very dangerous game to play with long term rates and the possibly very bad outcome.
The beats on earnings come from a couple of things. One ... Earnings estimates were lowered. Another few things that eat into earnings numbers are hiring and capital expenditures. They have both been almost nonexistent thus not affecting numbers negatively.
I wouldn't be surprised to go higher short term but the current policies (deficit spending and printing) getting me more nervous now than what happened in 2008.
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