Saturday, October 14, 2006

Dow record?

The last week has been filled with news from CNBC, network programs, and newspaper headlines about a record by the Dow. Does it mean anything other than the latest day by day hook of the media? Stocks are, over time, meant to go up or otherwise no one would invest in them. The Dow has been higher over the last week than in it was in January 2000, shortly before the tech bubble deflated. The Dow however is not especially tech heaven. Some companies like GE traded at 50+ multiples at that time, but much of the Dow, notwithstanding everyone's completely silly efforts to join the "new economy", was trading at higher but not bizarre levels. Major banks for example were trading at around 14 to 15 multiples as opposed to 12 to 13 today. So in a sense, it's about time that the Dow is back where it is. No big news really.

On top of that, an article in Barron's today points out that, on an inflation adjusted basis, the Dow is 20% below its high six years ago. The Dow needs to reach 13,900 to get us even with that former high. What do those smiling chuckleheads on CNBC say to that---"let's go to our sponsor". Barrons points out that the S&P is 12% below its all time high and 32% below on an inflation adjusted basis, and the Nasdaq, now there was the bubble, is 55% below its all time high, and they don't bother to calculate the inflation adjusted level but a guess would be maybe 80%.

The point is that all of this record setting talk of late is self serving business and general media talk. It means almost nothing as far as the long term valuation of the equity market. It is, however, important in a different way. If this begins to draw back retail investors who have shrugged off their bubble pop disaster of six years ago, who can't get enough of on-line, Las Vegas, and speakeasy poker, of offshore sports betting, and now their real estate investments, this could be something important for a limited time frame. On Larry Kudlow's show the other night he asked his panelists what was the key issue on their minds regarding the stock market---housing market, energy prices, interest rates, Democratic ascendancy in a few weeks, etc. and they opined in line with the question except for Herb Greenberg at the end. He wouldn't commit at all, and pressed by Kudlow he finally said "momentum" was it right now. He may be right. Is retail back in to add the icing onto the cake. Is CNBC beginning to be watched from the stairmaster and treadmills again.

There are plenty of issues clouding the equity market today. They will have their impact. But two important considerations are: valuation---is the market playing catch-up in the short term relative to earnings and dividends(stocks are supposed to go up over time); and momentum---is another segment of the investment community coming back into the market. The clouds will likely have their day, but when.

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