The Dow's Lost Decade

One of the best posts I read this week was from Fortune's Andy Serwer. In it, he noted:

At the end of 1999 the Dow was around 11,400. Today the Dow is at 8,400, which means the index has fallen some 26%, a decline of almost 3% per year. With just one year left in this decade - even if 2009 is a humdinger - it is increasingly likely that first 10 years of this century will be one big washout for investors. A lost decade.

I've been thinking about that since I read it midweek. A lost decade in which if you owned the Dow, you'd have lost money on stocks.

But there's a problem with indexes and that is the average doesn't really tell you that much. So I want to look at the Dow stocks and figure out which ones were big winners this decade and which ones were big losers.

Here's a list of the 30 current Dow stocks. Let's take a look at six of them;

3M (MMM)
Citigroup (C)
General Motors (GM)
Intel (INTC)
J&J (JNJ)
United Technologies (UTX)

3M (click on chart to enlarge) is up a bit in the "lost decade" about $10 or a 20% gain in almost 9 years. Nothing to get too excited about but not a loser.

As most everyone knows, Citigroup (click on chart to enlarge) is fighting for its life right now and is down at least 90% since the start of the "lost decade". But for most of this decade, it was flat. The drop has all come in the past year.

GM's chart (click to enlarge) looks quite a bit like Citigroups and it should. It is also fighting for its survival. One difference though is that GM has been in slow decline all decade and then dropped off a cliff this year.

Intel's chart (click to enlarge) is interesting. It's a loser this decade as well, down almost 80% in the decade. But all of its decline happened in the first three years of the decade reflecting the technology meltdown in the first part of this decade. Since then, it's bounced around a lot but isn't down much more.

Finally a real winner. Johnson & Johnson (click on chart to enlarge) has made a slow and steady climb all decade, and is up (even with the recent market meltdown) by about 33% over the past nine years. Even so, that's less than 4% per year.

I'm glad to see we found a good chart (click to enlarge) before this exercise was over. United Technologies is down 40% in the past year but is up around 60% for the decade so far.

So what this shows is the Dow is a mixed bag. A few disasters (GM, Citigroup, Intel), a bunch of so so stocks (like 3M) and a some winners (like J&J and United Technologies).

I looked at a few other stocks as I was doing those charts and there's a lot of yuck in the Dow. IBM (IBM), Hewlett-Packard (HPQ), and Wal-Mart (WMT) are all down for the decade. It's not really clear to me how the Dow has enough positive energy to withstand the blowups in AIG (AIG), Citigroup, and GM. As a group, the Dow looks pretty tired to me.

The point I was trying to make with this post is that the decade we are in has not been lost for everyone. We may have to go outside the Dow to find the best examples. Lets look at two of my favorite stocks: Apple (AAPL) and Google (GOOG).

Apple (click on chart to enlarge) has taken two big hits this decade (the tech meltdown in the early part and the recent market bust) and is still up 3.5x in nine years. The run Apple has had from early 2003 to late 2007 is one of the most impressive runs I've seen.

Apple's run mirrors Google's run (click on chart to enlarge). If you had only owned two stocks this decade, Apple and Google, you'd be a happy investor. Google stock has completely blown up in the past year (down 60%) but it is still up 2.5x from its IPO in mid 2004.

When I think about what's really going on in this "lost decade" it occurs to me that we are finally witnessing the impact of the end of the industrial era and the emergence of the information era. That's not to say every "information stock" has done well. Intel and Microsoft (MSFT) have been a disaster. IBM and HP are down for the decade to date. But we also have to realize that the late '90s drove all information stocks up to crazy levels in anticipation of exactly this shift taking place. The market got it right, but as usual it overshot.

If we go back to Andy's post which got this whole exercise started, he made the following point about what happens after the "lost decade":

at some point stock price returns will revert back up to the mean. In fact, to revert to the mean, stocks will at some point have to exceed the mean, in other words go up more than 8%. I know it could be years off, but you see my logic. It's just math.

And if that does happen, I don't think it will happen in tired stocks like many in the Dow. It will be stocks like Apple, Google, and companies we don't even know about yet that will lead us back out of this downturn. And I bet there will be a bunch of companies from what we used to call the "emerging markets" that will lead us out of this mess. I think I'll call them the "emerged markets" from now on.

I am an optimist, I guess you have to be one to be in my line of work. Even in the midst of the worst downturn in my lifetime, I am thinking about what's next, how we are going to make money in the next run. Because as Andy points out, there will be one and we should be using this downturn to position ourselves well for when it comes.

Disclosure: Author owns positions in GOOG and AAPL

Comments

[Fliujniligui:]

I agree with that, but buying AAPL and GOOG now at the big price. As you say, investor having bought those is happy now. Holding to current positions in this stocks seems to me a good option, but it must be supplemented by a value-tech investing strategy. AAPL and GOOG will work with an Intel processor and a video card (NVDA). Earnings from INTC and NVDA along with their P/E and their technological leadership are on the raising side while the share price is on the decline side. I think we are now in the presence of a lifetime opportunity to load on these stocks as their price goes down.

2008 Nov 23 10:55 AM

[Pipo:]

We have witnessed a selling climax on the last few weeks. Jim Rogers said that every time we buy a selling climax we can profit from it.

jimrogers-investments....

2008 Nov 23 11:20 AM

[Fliujniligui:]

I forgot to talk about CSCO but this one is a fat pick too.

2008 Nov 23 11:23 AM

[Moral Hazar...:]

Good work, Fred.

AAPL is a great company with great potential, yet it’s my opinion that it’s also great short and will be unless it breaks above $90 and stays there.

Pull it up on a candlestick chart and notice the incredible support it had around $87. Yet on Thursday, (Nov 20) it broke down through that support very convincingly with high volume. That strong support is now strong resistance.

Friday, it set an even lower low but did not make it back to Thursday’s high. It also deviated from the general market in that the $SPX was up 6.3% but AAPL was up only 2.6%.

Fundamentally, this consumer stock hasn’t yet been punished enough to reflect market realities, imho. The great credit superbubble has burst (as I’ve been pointing out for months) and iPods, iPhones, and music downloads at .89(?) are not a necessity that today’s shell-shocked and credit contracting consumer really needs to have.

This stock has some support around $70, but I expect it to break through that without much effort.

I’ll go long when we start to crawl out of this financial vortex.

Disclosure; purchased April puts on AAPL last week.

2008 Nov 23 01:49 PM

[DougM:]

Why not look at one of the energy stocks in the Dow before you declare the "old economy" toast?

2008 Nov 23 03:20 PM

[Dividend Gr...:]

The etf that covers Dow Industrials (DIA) closed 1998 at 91.53. The closing price for 1999 was 115.19.

Since the end of 1998 DIA has distributed $20.03 in dividends/share
Since the end of 1999 DIA has distributed $18.36 in divs/share

In 1999 DIA distributed $1.67 in dividends. In 2007 it distributed $2.75. I would say that investors didn't do as bad, although not as good as in prior decades.

2008 Nov 23 06:29 PM

[DollarTalk:]

While I believe that information technology may be the hope we have for a good return in publicly traded companies, I'm honestly beginning to wonder if the optimism of Mr. Wilson (and others like him, including myself) is part of the problem in the financial markets. The general public does not share the optimism, nor have the character trait of optimism, that entrepreneurs, venture capitalists, investment managers or plain old stock brokers have. There is a required level of optimism that is higher than the general public in order to be successful in business.
I realize this is more of a social observation than investment observation, but I'm beginning to believe that this has impacted our financial markets more than anyone anticipated and will continue to do so. This may mean that the best places to invest our excess capital will increasingly be private equity, rather than publicly traded companies, especially if the trend of distrust continues against Wall Street, et al. This will be a positive for those taking the risk in their own businesses, but a negative for the publicly traded markets, while the risk of private ownership may actually begin to decrease. We need more entrepreneurs in this country anyway.

2008 Nov 23 10:00 PM

[closed:]

Most people sense that the financial crisis that has now been escalating for 15 months, and the "sudden'' collapse of the real economy, are only the beginning. These were just the first waves of the storm, but the really powerful tsunami wave is coming toward us. The catastrophe could still be avoided, but that would require responsible figures in governments and financial institutions to admit their mistakes and accept competent help.

But here we have a problem: Those who now should be taking decisive measures to defend the common good are still not ready to face up to the origins of the crisis. The communiqué of the G-20 summit in Washington on Nov. 15 admitted that "risks in the financial markets were underestimated.'' The latest annual advisory of Germany's Council of Economic Advisors, the so-called Five Wise Men, speaks in nebulous terms of "a darkening of the entire economy'' as the main reason for the crisis. "The chain of failure includes many,'' declared German President Horst Köhler at a conference of top bankers in Frankfurt--and one can only agree with him.

But Köhler's perhaps well-intentioned, but completely ineffective, appeal to the bankers who made ``a lot of money'' in recent years, to set up a ``Hardship Fund,'' is hardly a strategy to overcome the crisis, and the answer from those so addressed was just a tired smile. It is clear from all these statements, that the government, as well as the so-called experts, are still not willing or able to take the necessary steps to reorganize the financial system.

- Derivatives: The Main Problem -

In Europe, it is Italian Economy Minister Giulio Tremonti who, as a government representative, has had the courage to call a spade a spade, when he compared the financial crisis to a video game, in which every time you kill one monster, another pops up. And when you kill all of them, along comes the super-monster, which is derivatives outstanding.

This is exactly where the body is buried! Now panic is setting in, as investors in November have been massively withdrawing their deposits from hedge funds and financial institutions, in turn, forcing these to sell whatever assets they can. This generates a double feedback-loop: Since the depression is coming to a head, asset prices are falling--most of them having been bought on credit in the first place--which further stresses the balance sheets of banks and hedge funds, which therefore curtail their lending even further. These various intensifying phases of "deleveraging'' of so-called structured paper are the main problem.

The volume of derivative contracts outstanding was said to be, according to the Bank for International Settlements, $675 trillion at the end of 2007; the French magazine Marianne recently gave the figure as $1.4 quadrillion, but it could be much more. If an attempt is now made to honor what these bankers themselves call "toxic waste,'' then, on the one hand, this leads to hyperinflation, since more and more liquidity is pumped in to try to back up the virtual values; but at the same time, it brings on deflation, since the collapse of the real economy leads to falling prices.

This is the reason for the breathtaking speed of collapse of the real economy worldwide--the auto sector, the steel industry, petrochemicals, construction, shipping, etc., etc. And it is a global phenomenon: The U.S.A. is plunging into depression; China's American export market is collapsing; the Chinese economy is falling apart; China is no longer buying textile machinery in Germany; shipping is collapsing, since in the four or five weeks that it takes a ship to go from Europe to Asia, conditions have dramatically changed, so that the letters of credit are no longer accepted, etc., etc.: a downward spiral to...! Until an orderly bankruptcy reorganization is carried out.

- The Roosevelt Solution -

Fortunately, there is an historical precedent for how the problem can be solved: We need a new financial architecture, in the tradition of Franklin D. Roosevelt's Bretton Woods System: a New Bretton Woods. That was the idea that motivated French President Nicolas Sarkozy to propose the summit meeting of the G-20 countries, and this is the policy that is being proposed by Tremonti on a daily basis. This is what Lyndon LaRouche and I have proposed for a long time--since the beginning of the 1990s, to be precise. We must win the Berlin government over to supporting this policy.

We need a real New Bretton Woods conference, at which a new financial system is decided upon, just as Roosevelt intended in 1944; that is, replacing colonialism with a new, just economic and financial order.

Second, we need a worldwide New Deal, such as Roosevelt implemented in the U.S.A. during the 1930s, to end the Depression through state credit creation.

Concretely, for Germany, this means that after (!) reorganization by means of a New Bretton Woods system, there must be an investment program of about EU200 billion for the creation of full, productive employment, as the BüSo has demanded for years. We need to build the Eurasian Land-Bridge as the centerpiece for reconstruction of the world economy.

From a technical standpoint, such a reorganization is absolutely no problem. The problem lies elsewhere. For the last four decades, the economy and morality have been completely separated from one another, and a unrestrained dog-eat-dog society and personal profiteering have taken control. On the one side, you have totally unnecessary luxuries, such as the recent dedication of an artificially created luxury island in Dubai, which was apparently planned as a refuge for the super-rich before the outbreak of a world financial crisis; at the opening festivities, the fireworks alone cost $20 million and 1.7 tons of lobster was consumed; on the other side, billions of people are threatened with starvation and brutal poverty.

Pope John Paul II, in his encyclical Centesimus annus (1991), called it an "abuse in the sight of God and humanity, if someone directs his capital against the people and their work,'' and this has happened, without a doubt, under the now-shattered system of globalization. We need a new paradigm, in which the economy and morality are brought into harmony, and man is placed at the center of politics and economics.

Do you really want those who neither foresaw the crisis, nor are ready now to come to terms with its real origins, to be left to decide what should happen now?

I propose that you help us, the BüSo, to carry out the necessary mobilization of the population, so that we can implement a New Bretton Woods System and a new New Deal!

2008 Nov 23 10:35 PM

[dspg:]

Hard to follow up on closed comments. That being said, I'm not sure what we should be looking to do with any investible cash we might have sitting around. Maybe gold, if it plays out the way he suggests.

2008 Nov 23 11:46 PM

[Nikola:]

This was a lost decade for America, not just for Dow.

2008 Nov 23 11:50 PM

[E.D. Hart:]

Compare the charts of xto to aapl over ten years and upl to goog over four years---and look at which stocks of this decade are really.

If you could only own two stocks for the last decade or the next one, I would choose XTO, and UPL. And they are still cheap.

My thesis: natural gas stocks look like they have limited downside, and large upside. Google and Apple could trade sideways for years.

It isnt just the information economy its also the "we need to get off imported oil economy". That basic truth will not be going away and will only intensify.

2008 Nov 23 11:50 PM

[Sentinel:]

What makes the loss worse is inflation, which was not factored into the article. We're probably on tap for an ADDITIONAL lost decade in the Dow if you take into account the inflation that's coming from all the furious printing of money we are doing to save everybody's butt.

In addition, any tick up in the economy for any sustained period will only bring spikes in energy and building supply commodities which will only bring back high gas prices and high food prices. Couple that with the loss of 10's of trillions of dollars in retirement funds just when the Baby Boomers were set to coast into their sunset years and ...."Hey!....Honey?...... you seen that decade? You know....2010-2020...I could have swore it was here somewhere!"

Welcome to Peak Everything....Peak Oil, Peak Food, Peak Real Estate, Peak Financials.........Pea... Capitalism.

Every nation, every culture has to ride the bell curve of birth to zenith to nadir. Just like life....Birth, Maturity, Death. America is no different. Get use to it.

2008 Nov 24 02:30 AM

[malach hamo...:]

Rash generalization, at best. It's not about the industrial era vs. the information era - after all, Citigroup has as many programmers on its staff as Microsoft.

It's really an issue of a complete lack of real earnings by many institutions, cutting across multiple industries with a pattern that is discernable only to those who create numerous exceptions to define rules.

If information were dominant, Microsoft would be riding high along with Intel which virtually solidified its hold as the core of all tech.

2008 Nov 24 04:10 AM

[craigimass:]

Uh....
whatever happened to earning money the old fashioned way - working!

2008 Nov 24 08:23 AM

[cocomurph:]

Write a headline, then mine for data to prove it .....the time honored way for most folks out there. I wonder what the figures would look like for the previous decade....?

2008 Nov 24 09:05 AM

[lightwarrior:]

We need to go back to basics and start thinking in long term investments and sustainable profitable activities.
If you need some adrenaline and feel you 'beat the house" on gambling, please go to Vegas or your favourite casino.
There is no "free" lunch.

2008 Nov 24 10:34 AM

[mollytjm:]

thank you, 'closed'. too many investors (and the general public for sure) have no idea about history or how it really is in the rest of the world. we can't afford to be so ignorant. people want a 'sound bite' not actual information. the public thinks of their 'debt' as what they owe as the monthly payment..not what they owe entirely. with such a high level of comfort about debt, through ignorance of what it really means, we got to this terrible point.
trying to 'fix it' without really understanding it could lead to something far worse. panic and fear allowed us to be duped and make terrible mistakes after 9/11. this present scenerio presents another time of panic and fear. i hope we do better this time.

2008 Nov 24 01:38 PM

[Jason Rines...:]

You are dreaming! Once this new Bretton Woods is rammed through and the citizens of the US not only have to carry our debt load but that of the world we will default. Capitalism is not such and those of us in business are already curtailing our production in hours and shielding our taxable revenues for the inevitable. And this is the stuff of wars, for the U.S. is now at the point of having to decide on servicing the global debt holders through direct and indirect taxation or to serve the interests of its own people.

The time for the U.S. to be a good economic steward for the globe is indeed over! What will replace it will no doubt be worse for a short time.

Let me explain a simple fact. Unlike the Eurozone, 60 million citizens are gun owners in America. We know what to do when the King George's of the world demand taxation without representation. The U.S. must eat it's own poison pill and indeed it is. Then the historical aspects of our nation occur, the worst leadership are removed and the country moves on, albeit much poorer for a couple of decades.

On Nov 23 10:35 PM closed wrote:

> Most people sense that the financial crisis that has now been escalating
> for 15 months, and the "sudden'' collapse of the real economy, are
> only the beginning. These were just the first waves of the storm,
> but the really powerful tsunami wave is coming toward us. The catastrophe
> could still be avoided, but that would require responsible figures
> in governments and financial institutions to admit their mistakes
> and accept competent help.
>
> But here we have a problem: Those who now should be taking decisive
> measures to defend the common good are still not ready to face up
> to the origins of the crisis. The communiqué of the G-20 summit in
> Washington on Nov. 15 admitted that "risks in the financial markets
> were underestimated.'' The latest annual advisory of Germany's Council
> of Economic Advisors, the so-called Five Wise Men, speaks in nebulous
> terms of "a darkening of the entire economy'' as the main reason
> for the crisis. "The chain of failure includes many,'' declared German
> President Horst Köhler at a conference of top bankers in Frankfurt--and
> one can only agree with him.
>
> But Köhler's perhaps well-intentioned, but completely ineffective,
> appeal to the bankers who made ``a lot of money'' in recent years,
> to set up a ``Hardship Fund,'' is hardly a strategy to overcome the
> crisis, and the answer from those so addressed was just a tired smile.
> It is clear from all these statements, that the government, as well
> as the so-called experts, are still not willing or able to take the
> necessary steps to reorganize the financial system.
>
> - Derivatives: The Main Problem -
>
> In Europe, it is Italian Economy Minister Giulio Tremonti who, as
> a government representative, has had the courage to call a spade
> a spade, when he compared the financial crisis to a video game, in
> which every time you kill one monster, another pops up. And when
> you kill all of them, along comes the super-monster, which is derivatives
> outstanding.
>
> This is exactly where the body is buried! Now panic is setting in,
> as investors in November have been massively withdrawing their deposits
> from hedge funds and financial institutions, in turn, forcing these
> to sell whatever assets they can. This generates a double feedback-loop:
> Since the depression is coming to a head, asset prices are falling--most
> of them having been bought on credit in the first place--which further
> stresses the balance sheets of banks and hedge funds, which therefore
> curtail their lending even further. These various intensifying phases
> of "deleveraging'' of so-called structured paper are the main problem.
>
>
> The volume of derivative contracts outstanding was said to be, according
> to the Bank for International Settlements, $675 trillion at the end
> of 2007; the French magazine Marianne recently gave the figure as
> $1.4 quadrillion, but it could be much more. If an attempt is now
> made to honor what these bankers themselves call "toxic waste,''
> then, on the one hand, this leads to hyperinflation, since more and
> more liquidity is pumped in to try to back up the virtual values;
> but at the same time, it brings on deflation, since the collapse
> of the real economy leads to falling prices.
>
> This is the reason for the breathtaking speed of collapse of the
> real economy worldwide--the auto sector, the steel industry, petrochemicals,
> construction, shipping, etc., etc. And it is a global phenomenon:
> The U.S.A. is plunging into depression; China's American export market
> is collapsing; the Chinese economy is falling apart; China is no
> longer buying textile machinery in Germany; shipping is collapsing,
> since in the four or five weeks that it takes a ship to go from Europe
> to Asia, conditions have dramatically changed, so that the letters
> of credit are no longer accepted, etc., etc.: a downward spiral to...!
> Until an orderly bankruptcy reorganization is carried out.
>
> - The Roosevelt Solution -
>
> Fortunately, there is an historical precedent for how the problem
> can be solved: We need a new financial architecture, in the tradition
> of Franklin D. Roosevelt's Bretton Woods System: a New Bretton Woods.
> That was the idea that motivated French President Nicolas Sarkozy
> to propose the summit meeting of the G-20 countries, and this is
> the policy that is being proposed by Tremonti on a daily basis. This
> is what Lyndon LaRouche and I have proposed for a long time--since
> the beginning of the 1990s, to be precise. We must win the Berlin
> government over to supporting this policy.
>
> We need a real New Bretton Woods conference, at which a new financial
> system is decided upon, just as Roosevelt intended in 1944; that
> is, replacing colonialism with a new, just economic and financial
> order.
>
> Second, we need a worldwide New Deal, such as Roosevelt implemented
> in the U.S.A. during the 1930s, to end the Depression through state
> credit creation.
>
> Concretely, for Germany, this means that after (!) reorganization
> by means of a New Bretton Woods system, there must be an investment
> program of about EU200 billion for the creation of full, productive
> employment, as the BüSo has demanded for years. We need to build
> the Eurasian Land-Bridge as the centerpiece for reconstruction of
> the world economy.
>
> From a technical standpoint, such a reorganization is absolutely
> no problem. The problem lies elsewhere. For the last four decades,
> the economy and morality have been completely separated from one
> another, and a unrestrained dog-eat-dog society and personal profiteering
> have taken control. On the one side, you have totally unnecessary
> luxuries, such as the recent dedication of an artificially created
> luxury island in Dubai, which was apparently planned as a refuge
> for the super-rich before the outbreak of a world financial crisis;
> at the opening festivities, the fireworks alone cost $20 million
> and 1.7 tons of lobster was consumed; on the other side, billions
> of people are threatened with starvation and brutal poverty.
>
> Pope John Paul II, in his encyclical Centesimus annus (1991), called
> it an "abuse in the sight of God and humanity, if someone directs
> his capital against the people and their work,'' and this has happened,
> without a doubt, under the now-shattered system of globalization.
> We need a new paradigm, in which the economy and morality are brought
> into harmony, and man is placed at the center of politics and economics.
>
>
> Do you really want those who neither foresaw the crisis, nor are
> ready now to come to terms with its real origins, to be left to decide
> what should happen now?
>
> I propose that you help us, the BüSo, to carry out the necessary
> mobilization of the population, so that we can implement a New Bretton
> Woods System and a new New Deal!

2008 Nov 24 06:30 PM

[SeekingTruth:]

To Closed:
I also have believed for decades that we need a new financial system. One that legally "requires" honesty, transparency, and all the predictability that is within reason, and one in which the laws have sharp teeth, and a quick bite.
Any sound and pragamatic system can be degraded and destroyed if the power mongers and greed hounds are left to run wild which our politicians and so-called leaders have not only condoned but all too often encouraged and abetted.
I am unsure of the efficacy of the Bretton Woods agreement , but I am willing to learn and try to properly assess it if it in any way could improve on the egregiously profligate proclivities and ruinous frailties of our current "system".

2008 Nov 24 09:47 PM

[Vox Rationalis:]

The cited article said: "At the end of 1999 the Dow was around 11,400. Today the Dow is at 8,400, which means the index has fallen some 26%, a decline of almost 3% per year. With just one year left in this decade - even if 2009 is a humdinger - it is increasingly likely that first 10 years of this century will be one big washout for investors. A lost decade."

How can a critique of this statement not include a discussion of dividends, which are not included in the price gain (or loss) of the DJIA?

Jan 31 11:30 PM