-- Posted Thursday, 16 November 2006 | Digg This Article
The Dow closed at another new, all time high today (12,251 on Wednesday November 15) so the economy must be doing great, right? But just a second - guess how many Dow stocks made a new high today, along with the index?
The answer is two: American Express and Exxon/Mobil. This is actually a big improvement over yesterday, when the Dow made a new high without any of its components closing at a record high!
In fact, only 7 of the Dow's 30 stocks have made new highs this year: American Express (AXP), Boeing (BA), Caterpillar (CAT), "Altria" (MO), Proctor & Gamble (PG), United Technologies (UTX), and Exxon/Mobil (XOM).
Of today's two stars, American Express (AXP) is a financial services company that uses money to make more money, while Exxon/Mobil (XOM) has recently been raking in the dough thanks to high oil prices, which are generally considered to be a drag on the rest of the economy at large. Of the remaining five, Boeing and United Technologies have been beneficiaries of the Federal government's war spending; and Altria and Procter & Gamble are both defensive stocks. While Caterpillar (CAT) hit an all time high of 82 this May, it closed around 61-1/2 today - a decline of close to 20% in six months, victim of the slowdown in construction. With this in mind, does it really seem like a new bull market?
The stocks that got the credit for yesterday's big Dow move were Wal-Mart (up 2.9% yesterday), Intel (up 4.2%) and Home Depot (up 4.3%). Of these, Wal-Mart made its all time high in 1999 near 70 and today closed around 47 - still down 33%. Home Depot made its all time high in 2000, also near 70, and closed today around 37 - still down 46%. Intel made its all time high in 2000 near 76 and closed today near 22 - still down a whopping 71%, the worst performer in the Dow.
The majority of Dow stocks are still down over 20%. I constructed this simple Dow at a Glance page as a way to keep tabs on the daily market action. A quick glance shows that the majority of Dow stocks are still well off their 2000 highs. In spite of the fact that this advance has, and continues to be extremely narrow, bullish sentiment just keeps getting stronger.
Memories of 1929
One of my readers was kind enough to send me a DVD copy of the PBS American Experience Documentary, "The Crash of 1929" and I spent an hour yesterday watching it. The recent rally makes much more sense in the context of 1929. There are so many striking parallels to the times we live in today, and I'll be writing more about these over the coming weeks. For now, I have selected a few quotes (full transcript here) that stood out to me as the most relevant to current times:
(See a short video clip of this segment here.) NARRATOR: Everything was not fine that spring [of 1929] with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer. Does that sound familiar?
Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own. (emphasis mine)
Much of the stock market activity throughout the boom was artificially induced:
NARRATOR: Wealthy investors would pool their money in a secret agreement to buy a stock, inflate its price and then sell it to an unsuspecting public. Most stocks in the 1920s were regularly manipulated by insiders like RCA specialist Michael Meehan. (RCA was like the Google of its day - a new technology (radio) with lots of excitement and stock activity - Ed.) Of course, nothing like that would happen today, would it? I mean, company executives these days are honest, right? There is no more "painting the tape." And the journalists - they have higher standards now.
Mr. MICHAEL NESBITT Grandson of Michael J. Meehan: In those days, that was legal and it was a quite common practice for a group of Wall Streeters to take a stock in hand. They would acquire a position in the stock early on and then, they would see to it that there was good press on the stock, a lot of publicity.
Mr. ROBERT SOBEL (Historian): I would say that practically all the financial journals were on the take. This includes reporters for The Wall Street Journal, The New York Times, The Herald-Tribune, you name it. So if you were a pool operator, you'd call your friend at The Times and say, "Look, Charlie, there's an envelope waiting for you here and we think that perhaps you should write something nice about RCA." And Charlie would write something nice about RCA. A publicity man called A. Newton Plummer had canceled checks from practically every major journalist in New York City.
Mr. NESBITT: Then, they would begin to -- what was called "painting the tape" and they would make the stock look exciting. They would trade among themselves and you'd see these big prints on RCA and people will say, "Oh, it looks as though that stock is being accumulated."
Mr. SOBEL: Now, if they are behind it, you want to join them, so you go out and you buy stock also. Now, what's happening is the stock goes from 10 to 15 to 20 and now, it's at 20 and you start buying, other people start buying at 30, 40. The original group, the pool, they've stopped buying. They're selling you the stock. It's now 50 and they're out of it. And what happens, of course, is the stock collapses.
Finally, Ben Karol was a newspaper delivery boy in 1929:
Mr. KAROL: My father and I had an ongoing discussion about the stock market. And I used to say, "Pop, everybody's getting rich but you. You know, you work so hard and you're never going to make a nickel. All you do is you keep delivering these newspapers and that's about it. The guy who's shining shoes is in the stock market, the grocery clerk is in the stock market, the school teacher's in the stock market. The teller at the bank is in the stock market. Everybody's in the stock market! You're the only one that's not in the stock market." I guess we'll all see, too.
And he used to sit and laugh and say, "You'll see. You'll see. You'll see."
The Bottom Line
Regardless of what is or is not going on in the economy, the Dow made a new high today and that high must be respected. And not only the Dow, but the S&P 500 and the Nasdaq are all moving higher together. As 1929 and 2000 have shown us, stocks can rise for a long time without being supported by fundamentals. But the outcome is always the same. I'm keeping my eyes peeled for a top, and I'll let you know what I see, but picking THE top in advance is near impossible.
For the time being, bears must be patient in the knowledge that their turn is coming. The trick for bears is not getting in too early, and not getting wiped out before the top is in. The nice thing about trading futures is that profits can be made just as easily on the downside as the upside.
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As always, memories and comments are welcome on this story.
-- Posted Thursday, 16 November 2006 | Digg This Article
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