Archive for Wednesday, February 8, 2012

Dow approaches 13,000, and maybe a record to come

February 8, 2012


— It was just last summer that the Dow Jones industrial average shed 2,000 points in three terrifying weeks. Investors had a host of things to worry about, including the possibility of another recession.

Now the Dow is within reach of the rarefied 13,000 mark — a level it hasn’t seen since May 2008, four months before the financial system almost came apart.

A strong one-day rally — caused by a deal on bailout money for Greece, perhaps, or an unexpectedly positive economic report — could put it over the top.

What’s more, the average is just a 10 percent rally from an all-time high. And 10 percent rallies can happen fast these days.

The stomach-turning summer is a bad memory. Europe appears to be getting its act together, last summer’s downgrade of the U.S.’ credit rating was quickly forgotten, Washington is mostly behaving, and recession fears are gone.

“There are signs that the economy is getting back on its feet and the market is reacting to that,” says John Prestbo, executive director of Dow Jones Indexes. “The mood is just better in this country than it has been for a while.”

On Wall Street, too. The Dow traded Tuesday at 12,878, a 21 percent rally from Oct. 3, its low point for last year. In January, the average rose more or less in a straight line and added 3.4 percent, its best start to a year since 1997.

From here, the record is tantalizingly close — 14,164.53, reached Oct. 9, 2007, when the investment houses Bear Stearns and Lehman Brothers still existed and the unemployment rate was 4.7 percent.

A 10 percent surge may seem like a lot, but it’s really not. The Dow has gained almost 15 percent since Nov. 25, just 10 weeks ago.

Though there’s a long way to go to get the country back to economic health, there are pockets of encouragement. Unemployment is still 8.3 percent, but it’s the lowest since February 2009. Economic output grew every quarter last year.


Ron Holzwarth 5 years ago

Yes, the Dow Jones Industrial Average is way up there, 12878.20 at the moment.

But it's measured in dollars, and the dollar is way down there. One troy ounce of gold is now at $1,7813.

In 1932, it was $20.

Ron Holzwarth 5 years ago

The DJIA all time high was 14,164.53 in 2007, and now it's 2012.

Inflation in 2007 was 2.85% (although October was late in the year) Inflation in 2008 was 3.85% Inflation in 2009 was -0.34% Inflation in 2010 was 1.64% Inflation in 2011 was 3.16%

Of course, the official calculation of inflation is absolutely accurate. 14,164.53 x 1.0285 x 1.0385 x .966 x 1.0164 x 1.0316 = 14,164.53 x 1.081842.187 = 15,323.79.

There's quite a bit of difference between 14,164.53 and 15,323.79, it is 1,159.26.

So, the DJIA needs to get to 15,323.79 to equal its all time high on Oct. 9, 2007. At that point, a hypothetical investor that picked the DJIA stocks in 2007 would have a return of nothing, excluding dividends.

From 12,878 now to 15,323.79 in order to equal the all time high is quite a jump, it is 18.899%. But, it could happen.

Are my calculations right? I don't want to go through all that again.

Paul R Getto 5 years ago

It's all just paper profits and somewhat phony numbers, but this is bad. The Republicans would like to see the DOW drop a thousand or two in the next few months, shedding another few trillion dollars of potential wealth, so they can prove their economic "theories" are correct and they deserve another chance to coddle their Wall Street friends. Not that Obama isn't doing his part; both parties are owned by the bond traders.

Ron Holzwarth 5 years ago

There is another way to calculate inflation, and that is to measure the US dollar against the price of gold. As noted above, in 1932 it was $20.

Late in 2007, the price of one troy ounce of gold was approximately $800, and now it is $1,744.26. You will notice if you check this link that it will display a slightly different price quite often. But it is not really possible to determine if that is because the price of gold is changing, or if the value of the dollar is changing. It has changed twice since I started writing this, so I will stick with $1,744.26.

$800 x (1.X) = $1,744.26 therefore (1.X) = 1,744.26/800 = 2.180325 That means that the inflation of the dollar relative to the price of gold has been 218% (truncated) since late 2007. (I think my math is correct!)

14,164.53 x 2.180325 = 30,883. (truncated)

So, if the gold standard measure of inflation is used for correction, the DJIA needs to rise from 12,878 to 30,883 in order to approach its all time high on Oct. 9, 2007.

That means a jump of 30,883/12,878 = approximately 240% would be required in order to reach that all time high again, if it is corrected by using this method. I doubt very much that will happen anytime in the foreseeable future.

But we wouldn't want to measure inflation that way, would we? It might scare people.

Again, are my calculations correct? I'm pretty sure they're at least rather close.

Ron Holzwarth 5 years ago

Made_in_China, you posted while I was busy with research and calculations. Have I proven that your assessment is correct?

Ron Holzwarth 5 years ago

If I were in charge of a portfolio, I would shift from growth stocks to dividend stocks as much as is prudently possible, and with the dividends I would invest in gold and silver bullion coins. And, cash out some of the poorer performing stocks and invest those proceeds in bullion also.

It is possible to purchase larger pieces of bullion, that is, bars and ingots, but they are not as negotiable and readily sold as recognizable gold and silver coins. Also, the value is large, so transactions present difficulties. And, I would lean towards lower denominations for reasons that should be obvious.

There are other alternatives such as palladium, but they would not be as readily negotiable should the need arise to do so in short order.

A serious downside of investing in bullion is storing it safely. And, it is only a method to preserve wealth, because nothing of value is created by such an investment.

notaubermime 5 years ago

Gold is not a very accurate measure of inflation. The price of gold is dependent on demand and the demand tends to go up during a recession. When demand starts to rise, the price of gold can become a bubble (as it has now). Once the economy shows consistent growth and the price of gold starts to drop, the price of gold will likely drop back down to levels close to what it was in 2008.

Ron Holzwarth 5 years ago

Yes, notaubermime, you are certainly correct. When the economy is not doing well, the stocks are not performing, and the GDP is not growing, investors will shift to bullion in order to preserve wealth as I suggested in my comment above.

Now that I'm thinking about it, some, I said "some" real estate might be a good investment at the moment. I'm thinking along the lines of farm properties.

Ron Holzwarth 5 years ago

There's another factor that will certainly affect the price of gold in the future. Gold mines are being shifted into production everywhere it is possible to do so. But, it takes quite some time to actually dig up the ore and refine it. From what I've read, it's at least a two or three year time frame to produce any at all.

I'm quite sure that the total amount of gold on this planet is much larger than most people seem to think. For one thing, I have never heard of a gold mine underneath the ocean, and you know there's got to be some there. We just don't have to technology to mine it.

Paul R Getto 5 years ago

Ron: I''m no gold bug, nor an expert. From what I've read, the "return to gold standard" types are strange and not plugged into the rest of the economic realities of modern times. I heard a guy the other day say you could make a gold standard work, but it's no guarantee of anything and people can screw up any economy if they work at it. The people who bought gold decades ago made some money; those buying it now are, in my opinion, nuts.

Ron Holzwarth 5 years ago

I don't think it's possible to go back to a gold standard because there are far too many dollars in circulation. I don't think a currency can be backed by a commodity when the money already in circulation could purchase the present world supply of it several times over.

A basket of other currencies or commodities, or a combination of the two, could be used to define the value of a currency. But with all the money trading going on, I think our currency's value already is defined by a basket of other currencies. And I think that any real change in how our currency's value is defined would be very difficult to implement.

When you said "people who bought gold decades ago made some money" you exaggerated a bit by using the plural of decades. Ten years ago, in 2002, gold was selling for approximately $250 an ounce. At the moment it is $1,742.94. That's a pretty good return for a ten year investment!

I think that investing in some gold would not be a bad idea in the present uncertain economic climate, but any portfolio should never have more than 5% of its total value invested in any single asset.

Ron Holzwarth 5 years ago

Have faith, my brother, and the loaves and fishes will multiply. That's what we're going to need.

xtronics 5 years ago

Ron - you really believe those fake government inflation numbers?

I would go with the formula they used to use in 1980 : (bottom graph)

Any way - gold 10 years ago was $300/oz the DOW was about 10000

Today the DOW is 13000 - a 30% gain

Gold is 1740 a 580% gain --- in dollars.

Other industrial metals have done almost as well - so we can assume that the dollar has is only worth 17% of what it would be if backed by gold. Gold is not in a bubble (yet) - less than 5% of the public owns any.

This means that someone with stocks invested in the DOW has lost about 4/5 of the value they had invested. Mostly retired people are the ones they rob when they print money. Nice people don't rob old folks - this is the fault of the demopublicans - they cooperated to commit this crime. .

The jump in the DOW is partly due to expectation of increased inflation (due to election year spending ) and partly the phony jobs numbers they just reported. ( Strange how payroll withholding goes down at the same time they claim employment went up )

Stocks and bonds are a fools game with the level of money printing going on -- much better to own real things - real-estate, precious metal, scrap metal etc..

Ron Holzwarth 5 years ago

Did you notice this part of my posting:

"Of course, the official calculation of inflation is absolutely accurate."

sarcasm [sahr-kaz-uhm]
noun 1) Harsh or bitter derision or irony. 2) A sharply ironical taunt; sneering or cutting remark: a review full of sarcasms.

And, did you notice that I recommended investing in gold, silver, perhaps palladium, and rural real estate?

But, you did raise other valid points. In the economic climate we are in today, few if any investments seem to be secure.

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