Thursday, October 15, 2009

It’s Just a Number

Here it comes – another grumpy post…

Sure, I’m as happy as anyone that the Dow Jones Industrial Average (DJIA) has once again breached the 10,000 level. Yet all this attention over the attainment of one particular level – we sure love big, round numbers, don’t we? – is, in my view, really beside the point. The fact that the 10,000 level is big news is just another sign that a large percentage of the population looks at the stock market as one thing – the DJIA. These reports fail to note that the DJIA is comprised of only 30 stocks, 30 big stocks. Until recently, it contained former “blue chip” names such as Citigroup (C) and General Motors. Most of the Dow companies are “American” only in that their headquarters are located in the United States. A huge portion of these companies’ revenues and profits come from operations outside this country. Most of them are experiencing solid growth in China, Brazil and other so-called emerging economies. My point is that the DJIA represents just an abstract number, a data point which actually represents the aggregate opinions of thousands of investors regarding each company – its valuation and future prospects.

For me, the bigger celebration should have been August 3rd of this year, when the S&P 500 broke through the 1,000 level, which in addition to being a nice, round number, was an important resistance level, and is now a key support level. Most people who invest in stocks don’t just buy “the market;” they buy Raytheon (RTN), Agrium (AGU), OM Group (OMG), or whatever. The concept of the market being just one thing, one number, probably increases the common misconception that investing is akin to gambling. The market goes up; it goes down. It may seem quite random to many people. This is unfortunate.

Stock prices are higher than they used to be because interest rates are low, earnings are growing and skepticism is still high. These are not random forces – they are powerful, sustaining and sustainable forces. The Fed wants to maintain low interest rates to aid many industries, including autos, finance and housing. Earnings have been growing due to aggressive cost cutting from the early days of the recession and a resumption of spending. Skepticism and cash levels are high because investors have been dealt a gut punch, which may take a while to get over. Oh, and by the way, many of the “gurus” on television told them to sell stocks and hold cash earlier in the year.

Many of the articles “celebrating” the 10,000 level were replete with warnings from traders and strategists suggesting that the party can’t last and that “the market” is ripe for a fall. In my view, this is the real reason to celebrate this level – people are still very worried about a lot of stuff. This concern, this worry will keep sentiment from becoming overly bullish. Overly bullish sentiment is one of the things I really get worried about.

The typical bull market lasts about 4 years and can propel “the market” to a multiple of its bear market trough. For me to predict that we could see Dow 20,000 by 2013 would break all three of my rules of making predictions: 1) if you predict level, don’t predict timeframe, 2) if you predict timeframe, don’t predict level and 3) I don’t make predictions. Yet, if this bull market turns out to be normal, 20,000 by 2013 would not be unexpected. Remember folks, you heard it here first…

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