Not too much has happened with the DJIA since we first saw the DJIA fall below the -40% line in a dramatic fashion in October 2008. I'm still onboard for a good dead-cat bounce, but I'm glad I'm not holding my breath until we get one. I suspect there are back room discussions between the bear and our "policy makers" going on. The DJIA will inform us when they've concluded their talks.

The weekly closing price BEV (Bear's Eye View) results for week 65 in the Dow Jones' 1929 & 2007 bear market's race to the Bottom are as follows:

1929/32: -52.43% from its weekly closing high price of 380.33

2007/09: - 38.98% from its weekly closing high price of 14,093.08

Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.

Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.

Volatility is calming down, but we are still getting one or two 2% days each week. Even if we are seeing many 2% up days, this is not a bullish argument for the bulls.

In the 200 day M/A data point for 09 January 2009, there are 66 days whose volatility exceeded 2%. Some 2% up days, some 2% down days, just like during the Great Depression bear market. Extreme volatility is a bear market marker. As we can see in the chart above, we are in a big bear market.

Historically, daily 1% swings from the pervious day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."

My Step Sum plot is heading down, but for now the DJIA is not paying attention. My comments of last week still holds - the DJIA wont go below -45% and can't seem to break above -35% in its BEV chart.

I've taken a good look at the DJIA's dividend yield for this week focus section. It may be the most important thing I've written so far in these reports. I recommend that anyone reading this report take the time to read it and consider its implications.

The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish the Step Sum will rise. When bearish it falls.

Think of the "Step Sum" as the sum total of all the up and down "steps" in a data series as prices change over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, to have more up days than down days during a bull market makes sense as does having more down days than up days during a bear market. Understanding the Step Sum is no harder than that.

How is that? Simple. After 26 years, the Yields for the DJIA Dividend are trending towards its technically significant 6% yield. Assuming that the DJIA's Dividend Payout stays at its current level of $314.07, a DJIA Dividend Yield of 6% would revalue the DJIA downward to 5234.50. If, in addition to that, we also see a 50% reduction in dividend payouts, (along with a 6% dividend yield) the 2007/09 bear market has a chance to take out the 1929/32 bear market's position as the #1 DJIA Bear Market of all time. You don't think this is possible? I make my case below.

As I write for the benefit of retail investors, the following report on dividend yields is rather long for their benefit. My intension is to educate investors with a real day job. As always, my articles are full of charts and tables that experienced investors would understand with no need of explanation. My work is data driven, so there is never any harm in previewing the charts and tables before reading my text. In fact I would always recommend my readers doing so.

Historically, there are only two reasons for investors to purchase stocks. One reason is for dividend income, the other is for capital gains. Whether investors choose one method or the other is a function of "monetary policy's" effect upon stock market valuations.

From 1982 to 2007, inflationary capital gains were the only show in town. The highest flyers in the American stock market, the high tech issues, seldom paid a dividend. With double digit yearly capital gains provided by "liquidity injections", who cared about dividends in the 1990s? Traditional dividend-paying industrial companies saw their dividend yields fall to absurd levels that were unthinkable previous to 1994.

Here is the current danger in the general stock market. Even after dropping 40% from the BEV Terminal Zero of October 2007, (last all- time high of the bull market) the stock market is still overvalued on a dividend-yield basis. See chart below.

The stock valuation model is shifting from "liquidity-driven" capital gains to again being a source of income for their shareholders. The effects upon the DJIA and other market indexes will be devastating to investors and the money management industry.

The Dow Jones Industrials Average dividend yield, for sixty years was a key bull and bear market-timing indicator. That changed in 1987 when Allen Greenspan became Chairman for the Federal Reserve. In the chart below, note the vertical black line around 1987. This line fixes the starting point of the Greenspan Fed. This vertical black line also marks the first time in 62 years where a DJIA 3% dividend yield did not produce a bear market ending with a Dow yield over 6.00%.

I didn't plot the DJIA BEV chart along with the DJIA Dividend Yield above. If I had, it would have clearly shown that from 1925 to 1982 the DJIA Div Yield was an excellent market-timing mechanism for the patient investor.

The logic to this system is as follows. When bull market stock valuations are near their top, the DJIA Dividend Yield approaches the 3.00% line.

Bear markets traditionally have driven stock prices down to where they would once again pay a good dividend yield. The DJIA with a 6.00% yield was not necessarily the bear market's bottom, but usually signaled a point where an investor could return to the market and miss the worst of the bear. Seldom would one catch the exact bottom, but investors would be paid well while waiting for the next bull cycle to begin. This assumes they sold their stock portfolio when the DJIA's dividend reached its 3% line.

From 1925 to August 1971, (US went off the gold standard in 1971) interest paid by banks on savings deposits ranged from 1% to 5%.

The chart above plots the prime rate, but it provides us with a template how interest rates have risen and fallen since 1921. All during the 1960s, and before, interest paid for deposits in banks were below 5%. This being the case, for someone with $10,000 (a significant sum of money for most of this time line) to purchase established industrial stocks for their dividend yield (when the DJIA was returning 6%) was to receive more income on their capital than a bank would have provided. That, plus the promise of future dividend payout increases and capital gain (as the DJIA's dividend yield once again fell to the 3% line) made for successful investing for decades.

One drawback to using the Dow's Dividend (or maybe its biggest blessing) was this system would keep people out of the stock market for long periods of time, sometimes a decade or more. But stock valuations are cyclical and investors should not always be in the stock market. Note the DJIA Dividend Yield during the 1960s. Buying stocks from 1963 until 1975 (see dividend yield chart above) would have produced little in the way of capital gains or dividend income in most industry groups. Retail investors generally did well avoiding the stock market.

This patient person's low-risk timing system, became inoperable with the Greenspan Administration of the Federal Reserve. With his "injections of liquidity" into the financial markets, Greenspan changed the old rules of market valuation and made "liquidity-driven", inflationary capital gains the foremost consideration in investing. People, long familiar with the stock market, who insisted upon valuing stocks with income, missed the 1990s "liquidity" driven capital gains bubble market.

With this in mind, it's good to remember that there is one unchanging rule that applies 100% of the time in any market we deal with:

"Buying low and selling high is not as easy as it seems because when we start to understand the market, someone always changes the rules."

To those who purchase stocks in 2009 with the intention of selling them later for capital gains, they may discover that the rules can also change for them.

The last time the DJIA's yielded a 6% dividend was in October 1982. Today in 2009, 26 years later, we are again seeing the Dow's Dividend Yield trending up towards the 6% line. I believe this signals a long overdue change in the stock market's valuation model. No longer will "liquidity driven", inflationary capital gains be the key to a successful investment strategy. In its place will be acquiring stocks yielding payouts competitive with corporate bond's current yields for income.

If I'm correct, the day is coming when the DJIA will once again be yielding over 6%. Would a 6% DJIA Yield signal a buy for the DJIA? I don't think so. The Greenspan bubble era excesses were grotesque. There is still much of his 'liquidity" distortions in market pricing to be corrected if stock dividend yields are again to be competitive with future corporate bond income.

But that's my opinion. Can I add some historical data to support my opinion? I can.

As we all know from Economics 101, the price of a stock (or the DJIA) is a discount for future earnings, or dividends. So there is a little math we can use to understand the price of the DJIA in relation to its payout and yield.

Mathematically, the above table could be expressed as follows.

Keep in mind this formula operates as people making decisions on what price to pay for stocks. I try to be consistent in my daily life, but often I am not. Nature is consistent. Introduce a 10:1 mixture of air to gasoline vapors into a closed container; put a spark to the mixture, and every time you will get an explosion - right now! Such consistency is frequently missing in human affairs. However, note that in January 2009, the DJIA's yield is rising to levels not seen since 1990. This is historic. I hear a bell ringing. But little attention is paid to rising dividend yields in the financial media.

This is to be expected. Since August 1982, (26.5 years) market focus has been on stock profits based upon inflationary price appreciation. In the years to come I expect this to change and income producing dividend payouts at yields competitive with best grade bond yields will become a primary consideration in stock market investors objectives.

As this Bear Market Report is a comparison of the current bear market to the 1929/32 bear, let's see what the DJIA yield of 80 years ago tell us about a stock market when its valuation model swings from inflationary euphoria to deflationary despair.

The DJIA Dividend Yields of the 1929/32 and 2007/09 bear markets are worlds apart.

The DJIA Dividend Yield of the 1929/32 bear was typical of bull market tops from 1925 to 1982. The 2.88% DJIA yield in 1928 was no herald of the coming doom of 1932. However, seeing the current DJIA yield below 4% for 18 years, (and still counting) with its bottom at 1.40% could very well be an ill-omen of things to come.

In the chart below, we see what happened to the DJIA's dividend payments during the 1930s. To avoid bankruptcy, DJIA companies with shrinking earnings were forced to divert 78% of their bull market dividend payments to bond payments. In troubled markets, dividend payments are never secure.

In the chart below, (excluding the October 2008 spike) the DJIA payout has fallen about 14% during the current bear market. With the current chronic credit conditions, prospects for rising or even stable DJIA earnings are unfortunately not very good. As earnings pay for dividends, it is prudent to assume future DJIA dividend payouts will decline as this bear market progresses.

If the 2007/09 DJIA Bear Market is similar to the 1929/32 bear, a DJIA dividend payout reduction of 50% would not be impossible.

Why the 1929/32 bear was so bad can be seen by re-examining my charts above of DJIA Dividend Payout (1925/40) and its yields. The market was demanding a higher dividend yield to compensate for rising negative market risks. That as dividend payouts were falling! The DJIA's valuation was crushed between these two trends. The table below gives the specifics.

What if someone, in June of 1930, had followed the 6% buy rule and returned to the market with the DJIA at 218.78? The DJIA had fallen by 42% when the 1930 DJIA's Dividend Yield reached its 6% line. This investor was expecting a safe $13.26 yearly income stream from the DJIA as they waited for the next bull market cycle. But two years later they would have seen their payouts reduced to $4.28 while the DJIA was yielding 10.38%! With the DJIA bottoming at 41.22 in June 1932, their investment capital would have fallen 81% from their 6% DJIA Dividend yield entry point of 218.78!

I had to double check this math, but this is what happened to anyone coming in * after * the DJIA fell -40%, had a 6% dividend yield in June 1930 and held on to June 1932.

Assuming the current market will force the companies in the DJIA to cut dividend payment by 50% (to about $150) * and * we see a DJIA Dividend Yield of 6%: these two conditions would value the DJIA at 2500. That's a reduction of 82% in the DJIA from its October 2007 BEV Terminal Zero (market top). A 1932, DJIA 10% dividend yield would drive the DJIA down to 1,500. That would be an 89% reduction from its October 2007 top.

This is all very hard to believe. I don't really believe it myself. But to ignore these calculations is to deny the pricing mechanism of the stock market. If DJIA dividend yields start chasing after Barron's Best Grade Bond Yields, and inflation-adjusted income becomes paramount; and inflationary capital gains are only remote memories of a world long gone by an aging population: the DJIA will be at levels inconceivable to most people today.

To ignore this grizzly market math, one has to believe both of the two below premises to dispute my variables in pricing the DJIA.

1). The DJIA current yield of 3.48% is a high that will last for decades. In the near future, it will once again return to Dr. Greenspan's bull market yield levels substantially below 3%.

2). The current credit crisis will not reduce corporate earnings or the dividend payments.

Washington and Wall Street don't believe that one. Daily we see the "policy makers" speak of the urgency for financial rescue legislation of over $1,000,000,000,000 (1 trillion dollars) coming from Washington in a few weeks. It seems the last $1,000,000,000,000 (1 trillion dollars) did not do the trick! I don't see the next trillion dollars doing anything useful either. Then we can expect a third, trillion and then a fourth and fifth.

When I consider the future plans of our current "economic policy makers", I see the bond market collapsing and bond yields of public and corporate bonds exploding at some unknown future point. Can the general stock market ignore a major bear market in its much bigger brother, the bond market? I doubt it can if the Barron's Best Grade Bond Yields approach or exceed those of 1980.

Want more? If you insist! What if the DJIA Dividend Yield once again exceeds the yields for Barron's Best Grade Bonds? As you can see in the charts above, the DJIA used to pay a higher yield than Barron's Best Grade Bonds! In fact, in 1942 the DJIA's yield was 5 percentage points higher than Barron's Best Grade Bond's Yield!

Barron's has been publishing this data for decades. It may be time for investors to ignore all the "expert advice" in the financial media that never produces data that goes back more than a year, and take these decades long data series seriously again.

So where does one go for shelter in this coming storm? I would say gold and silver bullion as well as gold mining shares in politically stable countries.

In the chart above we see how most countries are adhering to "monetary policy" in the fashion of the post Bretton Wood era. It seems not only has deflation in credit instruments been outlawed globally, but that the United States does not have a monopoly on Block Headed "Policy" Geeks in charge of national affaires.

But let us not dwell upon these idiot savants who rule our world and think of making a little money. Remember, in any circumstance, good or bad, there are always winners and losers. I think precious metals and their miners are a logical investment in today's markets, and its time to dump the high tech and financial shares.

Next week, I think it's time to look at gold and long term US Treasury interest trends. Gold is predicting much higher interest rates.

Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."

Dow Jones Industrials Average Market Volatility is the source for my volatility studies.

The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart

Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.