Thursday, October 05, 2006

Re-Post: When is a Dow RECORD close not that important?

I decided to repost this article from earlier this week because it is increasingly relevant now that the Dow has surpassed it's earlier high.

DOW NEARS NEW RECORDS!!!
Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!

Also an update on why gas prices have fallen........
In August, the major commodity index maintained by Goldman Sachs changed their weighting system to reduce the weight of Unleaded Gasoline from 8% to 2.3%. This might sound like a minor change but billions of dollars around the world march in lockstep with these indices and when Goldman made this change Unleaded Gas futures fell 8% in a day. There has been no major reason given for this change by Goldman, but it is the clearest indication yet as to why gas is lower at the pump. There are some conspiracy theories out there on the web, but I'll let you indulge your tinfoil hat theories on your own.


No comments: