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03062013 Interim March 6, 2013

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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It was NOT the ‘market’ that hit an all-time high yesterday or today.

It was the Dow Jones Industrial index that hit an ‘all-time high’ yesterday and again today.

The full market is made up of over 40,000 stocks.  The Dow Industrials make up 30 of those 40,000 – less than 1/10th of 1%.  The Dow is often quoted more often simply because it contains a cross-section of various industries and lists companies who are easily identified as household names, such as Home Depot, IBM, Microsoft, etc.  It is the advances in these few, well-known stocks that create much of the buzz in daily business news, practically everyday.  A big move in any ONE of these stocks can move the Dow by 40, 50 or 60 of those 100-200 point days.

The last time the Dow made all-time highs in 2007, it represented the peak, until this year.  Over five years have been required for the index to retreat, rapidly downward to a 12-year low in 2009, and to finally rebound to that previous level, before finally exceeding it this week.  (Less than two years down – four years to get back up.  Remember that.)  The last peak represented a selling opportunity. The last low in 2009 represented a buying opportunity.

What do you think that this latest record high represents? Buy, hold, or sell?

Also, unfortunately, TSP funds aren’t directly impacted by the performance of the Dow Industrials.

By comparison, other indexes are not quite performing near record levels.

S&P100 & S&P500 – closest to our C fund, are still below pre-crash highs of 2007; basically flat compared
to their February 20 levels, pre-sell off levels , in spite of this week’s Dow record.

Russell 2000 – closest to S fund, is still below it’s all-time high of 2 weeks ago, in spite of a 1.17% advance on a ‘gap up’ open Monday; also basically flat when compared to the February 20th level

EFA – closest to our I fund, is still at or near 2011 highs and far below the record highs of  2007; flat when compared to the February 20th level

NASDAQ Composite– barely above it’s multi-year high of mid-September, in spite of a ‘gap up’ open and 1.5% advance yesterday; still less than 65% of it’s 2000 all-time high; no impact on TSP.

Dow Jones Transportation – hit 3 all-time highs between 2006 & 2008 before losing over 50% of it’s value in the following 7 months.  It hit another all-time high in 2011 before losing 30% over the next 3 months.  As a matter of fact, every all-time high since 2005 has led to a 20% or more loss within months. Is this time different?

In the bigger picture, other major market indexes are not following the Dow with these all-time highs.  In a broader sense, all of the markets are making a triple peak, going back 13 years.  Each of the previous peaks, including pushes into previous all-time highs, led to the double-digit declines, erasing years of gains, within a year after these previous peaks.   (55-year chart of the S&P 500) Gray bars denote official recessions, i.e., consecutive quarters of negative GDP growth.

We are now at the top of the red point on the far right.

55-Year Chart of the S&P500

55-Year Chart of the S&P500

And, just in case anyone is wondering how different the economic health of the US might be between the previous peak in 2007 and now, here is a table from the web site ZeroHedge with some key traits from 2007 to the current time.

  • Dow Jones Industrial Average: Then 14296.24; Now 14164.5
  • Regular Gas Price: Then $2.75; Now $3.73
  • GDP Growth: Then +2.5%; Now +1.6%
  • Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
  • Americans On Food Stamps: Then 26.9 million; Now 47.69 million
  • Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
  • US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
  • US Deficit (LTM): Then $97 billion; Now $975.6 billion
  • Total US Debt Outstanding: Then $9.008 trillion; Now $16.43 trillion
  • US Household Debt: Then $13.5 trillion; Now 12.87 trillion
  • Labor Force Participation Rate: Then 65.8%; Now 63.6%
  • Consumer Confidence: Then 99.5; Now 69.6

This second view shows that even at these relative stock highs, the amount of money moving FROM the safety of bonds TOWARD any opportunities in stocks, money that is not so heavily dependent on Fed feeding, remains limited and restrained.  This resistance or ceiling shown would not exist if stock demand (desire for risk) was actually rising as bond demand (desire for safety ) was falling.

Ratio of the S&P500 to the 10-Year Treasury Note

Ratio of the S&P500 to the 10-Year Treasury Note

Don’t fall into the casual mode of waiting, waiting, waiting on these paltry gains that occur over very long periods of time, only to have them erased in a much shorter period of time.  The February 19-20 pullback erased gains that had occurred over the previous 27 days.  This is the game.  If you risk, you’ll win.  Until the 28th day, when you not looking.

Notice the shallower slope of the uptrend in the first chart as compared to the steeper slope of the downtrend.

The day when the Fed, or the European Central Bank announces, or hints, as on February 19th, that they will hesitate from continued feeding via quantitative easing, is the day of the next drop.  Or, the day when the Bank of China suggests a review of the relationship between the yuan and the dollar.  You see the point.  The risks are clearly visible.  Ignoring the risk is completely voluntary.

For now, enjoy the public euphoria that goes along with these peaks, for as long as it lasts.  There is no reason to expect any different of an outcome this time than before. This is just another day as a part of those actions designed to create day-to-day delusions for the uninformed, while it also creates major opportunities for those who ‘distribute’ stock at these well-choreographed, highly publicized highs.  I recently saw a story which discussed the attempts by Michael Dell to take his company private, in a desperate attempt to restructure (find a way to survive) without public scrutiny.  I distinctly recall Michael Dell and his wife selling their stock in large quantities (distribution) between $35 & $40 dollars a share in 2005.  Dell stock is now at $14 a share after being as low as $7.  (These insiders know when to sell!!)  This period is another period of ‘distribution’ of stock that was purchased during the lows of 2003,  2009 and 20011. According to Marketwatch, insider selling is currently at the rate of 920 shares being sold for every 100 shares being bought.   This ratio is similar to 9.2:1 ratio in 2011, before Dow fell nearly 15% after the credit rating downgrade, the same scale of a downgrade that was placed on the UK late last month.

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