The 1929 & 2007 Bear Market Race to The Bottom
Week 78 of 149
Stock Market Earnings & Dividends
Wealth is Fragile in 2009, it's a "Policy Thing"
10 April 2009
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
What can I say? The plot is going in the right direction. CNBC reports that the past 4 weeks have been the best since 1933. And they are correct. But note that they were referring to last Friday's close. Using last Friday's closing data, during the following week, is alright by me.
The move for the past four weeks (one week later, at Thursday's closing) is 11.9%. The move is losing steam. But the DJIA deserves a rest after such a huge move.
If this is a Bull market, there will come a pause that refreshes. The DJIA will then take out the BEV -40% line before running up the chart to the BEV -30% line in the coming months. A Bull Market, born from the ashes of a horrendous BEV -50% Bear Market, should have plenty of energy to charge up this chart with authority! Look at the 51.87%, four-week move in August of 1932! But then the 1929/32 Bear was a nightmare BEV -89% Bear Market!
But, if this is only a Bullish correction within a massive Bear Market, the tiring Bull will frequently stop to graze upon the green grass below the BEV -40% line. (DJIA 8497) Maybe he will snort, now and then, at the circling Bear as he dawdles upward in the chart. We will have to wait to see how this new "Bull Market" moves.
And then there is always Dr Bernanke. He may "inject" this market with enough "liquidity" to make the Bull's eyes bulge with blood. But then he tried that last October, and we remember how that ended. The Bear was eating prime rib as the DJIA dropped 20% in two weeks and became a BEV -40% Bear Market. But, in October 2009, at Barney Frank's dog and pony show, he asked for and got "new tools" to manage the market. I am no friend of this Bear, but I pity this Bull if he stops to take a nap!
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
The 40 Day M/A has backed off a bit. But the 200 Day M/A is still rising to new highs. Seeing the DJIA daily Volatility's 200 Day M/A at 2.10%, and rising, tells us how powerful this market is. It moved up 20% in only 4 weeks. But I remind you, the DJIA also fell -20% in only TWO WEEKS last October! Bull or Bear, when this market decides to move, it moves big.
As of 09 April 2009, the 200 Day Moving Average includes all the trading days from 25 June 2008 to this week's close. The huge daily moves of September to November, 2008, will be in the 200 Day Moving Average for the next 2 to 4 months. If we continue to see big 2% days in the next two months, the 2007/09 Bear might exceed the 1929/32 Bear's 200 Day M/A record by this summer.
I still think we might see a -60% DJIA Bear Market by June. And why not? Bears eat financial garbage. And, as we sit here so enjoyably, President Obama's Economic Wrecking Crew is working over-time, and long into their weekends, making our new dollars out of their old toxic waste. There will be no shortage of half-eaten "Credit Default Swaps" or "Asset-Backed Securities" laying around for this Ursa Major to feast upon before he resumes his hibernation. And he's not going anywhere until it's all gone! I'm not so sure the same can be said for the United States.
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.
(Remember, with the 2007 data, up is down and down is up!)
1929/32, Wk 78 200 Day Moving Average Volatility: 1.51%
2007/09, Wk 78 200 Day Moving Average Volatility: 2.10%
These 70% A-D Breadth days use to happen once a year. Now they've become a weekly occurrence in the stock market. This is not good!
Friday 09 April 2009 was a +75.16% A-D Breadth Day.
Historically, daily 1% swings from the previous 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."
What can I say? This chart looks very promising. But does the Bull have the legs to run up the hill much further?
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 price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
Stock Market Dividends & Earnings
I wrote an article on the Earnings for the Dow Jones Industrials Average a few years ago. Earnings are important, but a much over-rated indicator of future stock market price trends. It would be worth a few minutes of your time to scan this article's charts. Or read it in its entirety for background to this article. All investors should see the 80 year history of DJIA's earnings charted with the DJIA itself. Earnings and valuation trends, in the stock market, are seldom bolted together!
This week's focus on dividends & earnings is actually just an expansion of that article, with new material, and the inclusion of the 70 year history of the Barron's 50 Stock Average Earnings.
Look at how far Greenspan drove down the DJIA Dividend Yield with his bubble. We are now the #2 All-Time Bear Market since 1885. Still we have not seen a DJIA yield of even 5%? Mark my words, this is an omen of much worse to come.
Every DJIA Bear, since 1929, has terminated only when the DJIA yielded over 6%. I don't expect #2 on the list to be an exemption! In fact, this chart provides me with the confidence to say that this Bear will be eating the financial garbage in our portfolios for a long time to come.
The current DJIA Dividend Payout is $307.88. That yield's 3.84% on last Friday's closing price of 8017.59. If the 2007/09 Bear follows the historical pattern, and yields 6% on the DJIA, the current payout of $307.88 fixes the DJIA at 5131.26. That is a BEV valuation of -63.77%.
If the DJIA's dividend payouts collapse 77.8%, as it did in the early 1930s, that would reduce the DJIA paying to $72.15. At a 6% yield, the DJIA would be valued at 1202.5!
That is a BEV Valuation of -91.51%. This would make the 2007/09 DJIA the #1 all-time Bear Market from 1885 to 2009. Note that I did not use the 1932 DJIA Dividend Yield of 10.38%. If I did, it would reduce the DJIA to 695.08! This dividend math is hard. So I'm not going to give the BEV value. But from a 2007 Bull market high of 14,164.53, 695.08 ain't much.
Is this going to happen? Well who is man enough to take the syringe away from Dr Bernanke? And even if we got the needle away from the Doctor, the economy is hopelessly addicted to cheap credit. The economic withdrawals would destroy the financial system, and your pension fund. I expect most private sector social support groups would see their assets disappear in the deflation. Needle or no needle, our addicted economy's future is bleak. So, the DJIA might fall to these levels anyway. But the dollar may still be saved if we go cold-turkey on the cheap credit injections. That would be no small thing for the future.
But can America's deeply indebted companies maintain their dividend payouts during a time of economic contraction? They sure can * If * their earnings don't fall dramatically. So, can corporate America maintain their high earnings? It seems not!
This collapse in earnings is logical. Even for the dubious reasons economists constantly remind us of why * our * economy needs * their * constant "stimulation" with "liquidity injections."
"Liquidity" is "injected" into the banking system, which creates reserves for bank loans. This "stimulates" (or use too "stimulate") demand for goods and services. This is true. But, as in so many other financial metrics, it's obvious above that something had changed with corporate earnings after August 1971, when the US broke the link to the US dollar and gold.
The charts in my past article on DJIA earnings and CinC are much more detailed, but the above chart tells the story. When the US dollar production was constrained, however poorly, by the Bretton Woods gold link, US corporative earnings growth were (on balance) in-line with the expansion of CinC. Since August 1971, the increase in "stimulation" has seen re-occurring bouts of "liquidity" withdrawal in corporate earnings.
This is to be expected. CinC creation goes hand in hand with debt creation, via bank loans. The "policy makers" can increase Fed Credit by tens of billions in a day with no more effort then using a few key strokes on a computer. But it's not so easy for the productive elements of the economy to service this debt with hard-earned profits and wages.
If the earnings for the 30 Dow Jones Industrials companies appears to be struggling to keep up with debt creation, only to fall down after they catch up with it, the most likely reason is because the earnings of the Dow Jones Industrials companies * are * struggling to keep up with debt creation, (government regulations, and taxes too) only to fall down after they've caught up with it. And the latest collapse was spectacular! The last time earnings on the DJIA went negative was during the Great Depression. The Financial Media is obsessed with earnings. But did they report this fact? If so, I didn't catch it.
In the chart below I've plotted key items on the Fed's balance sheet along with CinC.
- Total Fed Credit consists of debt instruments that the Fed Deems of sufficient quality to back the US Dollar. The huge spike in Fed Credit is from the Fed's purchase of toxic assets from un-named favored financial institutions.
- US Securities Held Outright consists of US Treasury debt backing the US Dollar.
- Currency in Circulation (CinC) is the cotton paper and base metal slugs we call "money" circulating in the economy.
I usually use CinC in my charts for my inflation index. CinC may no longer be notes payable in gold or silver, but cotton paper and base-metal coins are something we can touch. Also, we can see that for decades, CinC was almost equivalent to Total Fed Credit, until recently. I think CinC is the most exact inflation index published by the US Government.
Yes, I know that CinC does not take into account the multiplying effects of the banking system. But the current "policy" refuses to recognize defaulting bank loans deflationary impact upon M1&2. The monetary aggregates (M1&2) are only as honest as Dr Bernanke. And how honest is his buying toxic waste, from unnamed favored financial institutions, with monetary inflation, and then pretending that M1&2 have not been reduced? The new rules on marked to market for questionable financial assets will also distort the monetary aggregates. The dollar was once backed with gold and silver. Today it is backed by delusional "social engineering." I think I'll stick with the cotton and slug money as my deflator. And CPI? It's worthless.
Let's look at some BEV Charts. If this is your first article of mine and don't understand BEV Charts, go below and click on the link for DJIA -40% Bear Markets to see what I'm doing here. But basically, a BEV Chart reduces every new all-time high, of a data series, into a zero value. Any data point, not a new all-time high, is registered as a negative percentage from its last all-time high. This BEV Chart (using DJIA Earnings data charted above) shows us (in negative percentage terms) how far the earnings for the DJIA have fallen from their last all-time highs from 1929 to 2009. This chart is an eye-opener.
The 1920s was an era of easy credit that resulted in negative earnings for the DJIA during the 1929/32 Bear. The same thing happened during the 2007/09 Bear. But, if earnings were a future indicator of market valuations for the DJIA, the 1982/83, 93% decline in DJIA earnings should bookmark a massive -40% DJIA Bear Market. It doesn't. Instead it marks the start of the 1982/2007 Bull Market.
So much time is spent on CNBC discussing earnings. But this focus on earnings is mostly uninformed "expert" opinion. Or so I've concluded. In any case, a historical examination of the actual data for the DJIA has shown that earnings trends have little to do with future valuation trends.
I love Barron's 50 Stock Average. It's a weekly statistics series compiled from * Thursday's closing data *. Well, it's an antique from a time when stock charting was done with a pencil and charting paper. The Thursday deadline allowed the time needed for someone at Barron's to long-hand calculate price, earnings, and dividend data from 50 stocks before the Friday's print deadline as Hitler invaded Poland in 1939. Today, they still do it the old fashion way at Barron's, and I approve. But I suspect they use a computer now.
Note that the Barron's 50 started in 1938, while the DJIA earnings goes back to 1929. One has only 50 companies, the other 30 in their average. I admit it, these averages are not large samples of the market. But both contain a significant history of the 20th Century American stock market. And all that for a very reasonable issue price. Without Dow Jones and Barron's effort through the decades, these charts would not be possible. Thank you Barron's & Dow Jones! Now if you guys would just cover gold and silver issues like you did in the 1970s, you'd be perfect.
I've charted the S&P 500's earnings data I have. It's not much, but it's enormous by the standards of what "experts" show the public when discussing S&P earnings in CNBC.
As I've noted above, the Barron's 50 Stock Average and the DJIA are very small samples of the market. But the S&P 500 contains 500 companies and so is a much better sample. As we can see above, like the Barron's 50 and the DJIA, earnings for the S&P have collapsed under the weight of debt created by our "monetary policy." Unless these trends in earnings reverse, we will see massive cuts in dividend payouts. And you now know what history says about that.
Wealth is Fragile in 2009. It's a "Policy Thing."
Economists, as a whole, distance themselves from the fact that the Federal Reserve's "liquidity injections" has a major impact upon asset valuations. I can understand why. It's a major embarrassment how fragile individual "wealth" (for an entire generation of Americans) has become when prosperity is dependant upon re-inflating assets bubbles, payable in US Dollars.
- Housing ceases to be shelter from weather.
- Commodities, like gold, silver and copper, have become leveraged-digital contracts traded at the COMEX.
- The stock market is a nightmare that just will not end!
Examples of monetary inflation, devastating economies from centuries ago, and up to the 20th century, can be found in history books. So why do our influential universities' schools of economics pay only slight, if any attention to the inflation of ancient Rome and China?
"Such were the sources of that flood of paper money which, ever since, has alternatively accelerated and threatened the economic life of the world."
-William Durant: Our Oriental Heritage, (1935) pg 780
The above quote is William Durant's concluding comment on China's 10th century experiment with paper money. What a mess! A thousand years later, the Keynesians, ignoring history, have learnt nothing.
Consider the following. Modern military historians still study the battle tactics of King David in the Bible. Modern architects and structural engineers still study the construction techniques of ancient Rome and China. There are good reasons for doing so. Military practices and structural techniques that have stood the test of centuries are worthy of study. But then, generals want to win battles and architects want their constructions to last long after they are gone. So why do the "social sciences" spend so little time studying mankind's 5000 years of recorded history for examples of successful societies and economies? Because sociologists and economists are frauds and charlatans who have nothing to offer the world but snake-oil remedies for the maladies they themselves have inflicted upon the world.
Barron's during the late 1940s and early 1950s wrote frequently about "urban renewal" & "social engineering." There were articles on the housing projects being constructed in NY and Chicago. Barron's editorialist of the time did not trust the social do-gooders, and believed no good would come from their projects. Today we see these same "social engineering projects" on the History Channel as backgrounds for their Gangland Series on the criminal gangs, who now control America's inner cities.
These "social-constructs" may seem like a hell on Earth to you or me, but they are the primary reason for government funding to "prestigious" university's Social Sciences Departments, and a living for a graduate sociologist. And the more dysfunctional our inner-cities become, the more money Washington award the "social scientists."
If we were to overlay two maps, one of where government spends its money on its "social engineering projects," the other, a map of where social order has broken down, where violence and chaos is a way of life, I suspect they would overlap almost exactly.
Our economy suffers under the dictates of these government-sanctioned quacks. Whose idea was it to create a system dedicated to providing quarter-million dollar mortgages to the chronically unemployable? The same people who now think it's acceptable to back the US dollar with the toxic waste of American social science. As long as we see Barney Frank listening intently to Dr Bernanke at his congressional dog and pony show, things are not going to end well.
10 April 2009
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.
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