We have
benefitted from the 10,645 point rocket ride the stock market has experienced
since 2/11/16 from 15,541 to 26,168, a 68% increase. This happened over the
past 2 years. The first year from 2/16 to 2/17 sent the market to 20,090 and
was supported in part by QE from the Fed and the fact that stocks were the only
game in town. The ride from 20,090 to 26,168 occurred from 2/17 to 2/18 and was
due to Trump’s actions and the fact that stocks were clearly the only game in
town.
It is important
to look at this correction to determine what caused it and what may need to be
fixed. I looks like the automated sell order program may be at fault.
In the US
on 2/5/18 stocks prices started to correct and the Dow Jones Industrial Average
declined by 1,175 points to 24,345. Today,
2/7/18 the Dow is back up over 25,000, because the stock market is still the
only game in town. It is also important to look at what companies are included
in the Dow.
The Dow
Jones average is the average stock price of 30 big companies selected as
“representative”. But they are all in the “bigger they are, the harder they
fall” category. The US economy has thousands
of companies whose stock prices are blown around by corrections in the Dow.
As small
and quirky as the Dow Jones is, if it sneezes, the world gets a cold. Watching
the Dow too closely is behaving like the statistician who drowned in a lake
with a mean depth of 3 feet.
All of
these 30 companies had their stock prices decline. Some went down less than 1%
like Intel at 0.29% and Microsoft at 0.57%.
Others
went down more than 5% like Boeing at 5.75%, Cisco at 5.25%, Exxon Mobil at
5.69%, Johnson & Johnson 5.29%, Pfizer 5.3% and United Health 5.11%.
Many
companies saw their stock sink 4% to 5% including American Express 4.83%,
DuPont 4.3%, General Electric 4.67%, Goldman Sachs 4.2%, IBM 4.09%, JP Morgan
Chase 4.8%, Travelers 4.35% and Verizon 4.68%.
Some
companies saw their stock sink 3% to 4% including Coke 3.94%, Disney 3.68%,
Merck 2.27%, Proctor & Gamble 3.79%, and Visa 3.84%
Those
companies who saw their stock sink 2% to 3% included 3M 2.83%, Chevron 2.31%,
Home Depot 2.08%, Nike 2.94% and United Technologies 2.55%.
General
Electric stock is down to $14.56 per share and profits are way down, so GE may
be dying. Healthcare is in trouble and
that affects Johnson & Johnson, Merck, Pfizer and United Health.
I would
categorize GE as a “zombie company” that may sell itself off in pieces. It was formed in 1892 and became the biggest
company in the world, but it invested too heavily in Obama’s fantasies and paid
the price.
I confer
“zombie status” on any entity that can’t pull its own weight and is heavily
subsidized by government. After the 2008 Meltdown, all the big banks were
zombie banks, because they were living on printed money from the Fed.
On 2/1/18
the DOW closed at 26,186. On 2/2/18 it closed at 25,520 reversing its march to
27,000. . On 2/5/18 the DOW closed at 24,345 signaling its first real
correction.
On
2/7/17, the DOW closed at 20,090. On
2/11/16 the DOW hit a low of 15,451 when global trade continued to falter.
Since February 2016 the DOW rose from 15,541 to 26,186. That’s a rise of 10,645
and that’s a rise of 68%.
Other
stock prices across the globe followed suit on 2/6/18.
The
reasons for the DOW correction are being offered. It looked like stock prices
finally outran their headlights.
Stock
prices normally rise because of investor confidence and lower based on investor
fear. Big investors control the DOW and
these include big funds like Vanguard and Fidelity as well as big pension
plans. There are also foreign investors that include foreign governments who
have large holdings in US stocks. The SEC looks for collusion by large
investors to move the market around. They treat big stock price moves like the
NTSB investigates airplane crashes.
The usual
suspects for the lowering of stock prices include fears that rising interest
rates will punish equities and reward debt investments and fears that after a
rapid rise in stock prices, there will be a severe correction and fears that
high debt will choke off growth. If stock prices recover quickly it’s likely
that these fears were unfounded, the sell-off was self-inflicted and was
actually a mistake.
In 1987,
the DOW had a one day rapid decline that was caused by pre-loaded automatic
computer trading orders based on stock price triggered sell orders in the
system.
In 2009
we had the Meltdown crash. On 10/9/07 the DOW peaked at 14,164. On 3/6/09, the
DOW dropped to 6,443. By 4/29/11 the Dow rose back to 12,810. The Fed QE kicked
in to subsidize the big banks who used it to subsidize the DOW.
The DOW
Jones Industrial average is made up of the stock prices of the 30 large US
companies.
The
S&P is made up of the stock prices of the 500 largest US companies.
The
NASDAQ is made up of the stock prices of smaller companies in the US and
elsewhere and larger companies like Microsoft, Apple, Facebook Google and
Amazon who just want to list there. Microsoft is in the Dow Jones averages, but
is also in the NASDAQ averages
Toyota is
listed on the NYSE but is not a US company.
The Price
Earnings Ratio (PE) is a measure that has been 14:1 and is now 15:1. It measures
the stock price and compares it to profits.
If a stock earns $1 per share, the price would be $15. It helps
investors avoid overpaying for a stock.
The
market has risen so rapidly it’s hard to tell how much overcorrection we will
have to endure, but once it settles down we should have stock prices that more
nearly match the guesses investors have made about their future value.
There are
logical reasons why investors buy and sell stocks. They want to buy low and
sell high. They will buy when they think the stock is undervalued and sell when
it’s ready to harvest. This is measured in “volume” and is routinely reported
as the number of trades each day. Warren Buffett likes to buy low and not sell.
Everybody with a 401k is forced to act like Buffett.
I expect
investors to recalibrate values going forward, I also expect corporations to
recoup funds to invest in corporate plans designed to yield the most profit, if
things go as they expect.
Investors
also look at what companies are betting will happen. I don’t think self-driving cars will be in
demand, so I’m skeptical of Ford’s wild-eyed interest in spending a lot of
money on this.
But I
laughed when they wanted to sell me gold for $37.50 an ounce in the 1970s and I
didn’t buy it again in 2000 when it was $279 an ounce, so what do I know. I
also laughed when bottled water came out.
Investors
have had a chance to look at fundamentals and continue to analyze specific
industries and observing liquidity shortages and other factors.
The surge
from the 15,541 in 2016 to an all-time high of 26,616 on 2/26/18 was
unprecedented.
I think
it was a reaction to anticipation of deregulation and anticipation of the
needed lower corporate tax rate.
Now
investors have seen the early reaction of the corporate tax cut and have
evaluated the size of the tax savings and guessed at the eventual use of the
extra cash corporations will be allowed to keep.
The
excessive QE money printing by the Fed hasn’t resulted in inflation because
consumers don’t have the cash to increase systemic demand. The Fed kept
interest rates low and the Central Banks used the QE to support stock prices
for the last decade.
The US
economy is basically fixed and now Trump will be working on the “main street
economy” to end Obamacare, lower costs in healthcare and education, end
excessive immigration and remove bureaucratic obstacles to growth to speed up
resource extraction with pipelines that are still under construction. The goal
is to streamline permits and inspections to reduce construction time from 10
years to 1 year. We will all be watching to see how much manufacturing returns
to the US over the next couple of years and where it goes.
I will be
watching the cheerleaders on Fox cable news report the Dow Jones” tortured
climb back to 26,000.
Norb
Leahy, Dunwoody GA Tea Party Leader
No comments:
Post a Comment