Dow 10,000: Nothing to Celebrate

Dow 10,000 is Nothing to Celebrate

Last Wednesday, October, 14, 2009, the Dow Jones Industrials closed above 10,000, and this milestone was met with the predictable cheerleading among the financial media.

But what was conveniently overlooked in all the hoopla was the sobering fact that the first time the Dow crossed 10,000, the date was October 15, 1999, just one day later and ten years earlier in what could only be described as an eerie coincidence.

And so, in my opinion, this “milestone” was nothing to celebrate because buy and hold investors have lost ten years of their investment lives; not to mention that when you factor inflation into the matrix, the rate of return is profoundly negative.

But in spite of the cheerleading, average retail investors have figured this out and have responded by pouring more than $200 Billion into bond funds this year compared to $15 Billion in stock funds as they seek safety and some sort of rate of return.

But I’m concerned that many of these people who got out at the bottom of the bear market are now setting themselves up for a double hit. With interest rates near zero, the next move very likely has to be up and when interest rates rise, the NAV of bond funds declines; so it’s quite likely that this flight to bond funds could generate significant losses ahead.

With this week’s burst above 10,000 and then Friday’s fallback, the question remains the same, “Can this year’s fireworks continue?”

Of course no one has a crystal ball but Dow 10,000 was an obvious target and some backpedaling would not come as a surprise. With 3^rd Quarter earnings down -23% from a year ago, a significantly overbought market and continued weakness in the consumer sector, some retrenchment would be in order and even welcome.

For followers of Fibonacci theory, 1121 on the S&P 500 marks a 50% retracement of the difference between the October, 2007, high and the March lows. Typically this level marks serious resistance and a possible turning point and so we’ll have to see if that materializes.

With plenty of warning flags all around, we expect choppy prices ahead. A decline below 1060 on the S&P would indicate further weakness ahead while short term resistance is at 1100 and a break above there would open the door to higher highs.

The View from 35,000 Feet

The news was mixed last week as GE, IBM and Bank of America (BAC) earnings disappointed, while Intel (INTC), Google (GOOG) and JP Morgan (JPM) brought in some feel good numbers.

To date 3^rd Quarter earnings are down -23% from a year ago, the ninth straight quarter of declines, and the onslaught of reports will continue this week with notable reports expected from Apple (AAPL), Texas Instruments (TXN) and Zions Bank (ZION) on Monday, Coke (KO), Yahoo (YHOO), Caterpillar (CAT) and DuPont (DD) on Tuesday, Boeing (BA), Wells Fargo (WFC) and Morgan Stanley (MS) on Wednesday, CIT, Dow Chemical (DOW) and American Express (AXP) on Thursday and Microsoft (MSFT), Whirlpool (WHR) and Honeywell (HON) on Friday.

Last Friday, consumer confidence took an unexpected drop to 69.4 from the prior reading of 73.5 and a consensus estimate of 73.3. As the consumer goes, so goes the economy; so this is not a good number by any measurement.

On the home front, MGIC, the largest US mortgage insurer, got clipped for a 12% drop in its stock price as more homeowners head for default and foreclosure. RealtyTrac reported over 900,000 foreclosures for the 3^rd Quarter, up 23% from a year ago, and equating to 1 out of every 136 dwellings in America being somewhere in the foreclosure process.

The U.S. budget deficit came in at $1.4 Trillion for 2009, up from $455 Billion for 2008, as we continue spending money we don’t have and tagging our kids and grandkids with the bill.

The Week Ahead

Tuesday: September Building Permits, September Housing Starts, September Producer Price Index

Wednesday: Fed. Beige Book

Thursday: Weekly Jobless Numbers, September Leading Economic Indicators

Friday: September Existing Home Sales

Sector Spotlight:

Leaders: Oil, Commodities

Laggards: Real Estate, Japan, Silver

Disclosure: No Positions

Comments

[Dave Wrixon:]

The real problem is that it doesn't not have a cat in hell's chance of staying there.

Oct 18 06:02 AM

[j-dub:]

Sorry John- like it or not, the dow is at 10k so I'm throwing an economic recovery party and you sir, are invited!!!!

If there is any other economic indicator that I or anyone else needs to know about, I'm sure the government will send out e-mails.

Sure I still wish I had had a job, a possibility of finding a new one, or that the price of Ramen noodles or cereal wasn't so darn expensive, BUT NO ONE GETS EVERYTHING THEY WANT.

At least the Dow is at 10k!!!!!!!! (flutes clanking)

Oct 18 09:45 AM

[T.Stamps:]

We've got an administration that prints lots of money to push
up these markets and re-pay constituents. How long will the
printing continue? As long as we have a fascist in office.

Oct 18 12:19 PM

[Gavin G:]

DOW 10000 is for the Wall St , by the Wall St and only of the Wall St, nothing for Main Street by any chance.


On Oct 18 12:19 PM T.Stamps wrote:

> We've got an administration that prints lots of money to push <br/>up
> these markets and re-pay constituents. How long will the
> printing continue? As long as we have a fascist in office.

Oct 18 12:59 PM

[jerrydd:]

It really far worse as 10k in 99 was worth twice as much because real inflation has been over 100% since then. So the Dow in constant $ is only 5k. So we haven't just lost 10 yrs of gain, we lost 50% of value/buying power too.

Now didn't Bush, Repubs, tax cuts work great!! Euro's were $.75, gas $1.20/gal, bread $.79, oil $22/bbl, etc.

Oct 18 05:30 PM

[Mad Hedge F...:]

vjo When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask “Is this real? What can go wrong?” I’m reminded of the slave whose task it was to remind conquering Roman generals “All glory is fleeting.” Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men’s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk is definitely high than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

Oct 19 11:37 AM