And then it was gone. Just like that. Twelve years of growth gone in a few months.
The Dow Jones Industrial Average closed this morning at a level not seen since 1997. Can you believe that? Of course, if you take inflation into account the markets are telling you that the value of companies today is worth even less than that.
In fact, since 1997 prices of goods and services in the United States have risen by 31.6%, which means if you had bought the Dow Jones Industrial Average in 1997 and held it, your capital today would be worth 31.6% less than it was back then.
In other words, if you take inflation out of the equation, today’s Dow Jones closing price is the equivalent of it having fallen to about 5,400 points.
So much for long-term buy and hold strategies.
When The Daily Reckoning’s Bill Bonner was over here last November he said that the Dow Jones could be trading around the 5,000 point level before it bottoms out. In inflation-adjusted terms it’s almost there.
In non inflation-adjusted terms it’s only about 30% away, and with seemingly little interest by US investors in buying stocks at the moment you’d be brave to bet against it.
What about Australia? Our inflation rate over the same period has been even higher at 37%…
So far the S&P/ASX200 hasn’t challenged the lows of 1997. One reason is because it didn’t exist back then, but still, it is in 2004 territory. Our Swarm Trading technical analyst Gabriel Andre told us this morning:
“The level 3,350 remains a key support level. The index closed right on that point yesterday. Today looks like it is going to be bearish so it will be likely to close below that level. That means the next point of support is somewhere around 3,000 points.”
He hasn’t disappointed us yet with his calls on the key technical support levels. Remember, whether you like it or not, the technical analysts and technical traders are controlling the market at the moment.
Fundamental investors are still nervous about buying into this market, even though it may look cheap. It’s all about sentiment. A perfect example of this was a comment at lunch with a couple of old broking pals last week.
One of them said, “I can’t believe investors don’t want to buy stocks at these prices. They were happy to pay $150 for Rio Tinto a few months ago, yet now they won’t pay $40 for it!”
Your editor’s response was simple, “That may be because those same investors were also happy to buy Rio at $120, $100, $80, $70 and $60 on the way down. With those losses piled up it’s not surprising they’re being a bit gun-shy at the moment.”
Anyway, back to our point about inflation adjusted returns. Even if we take the 2004 level, buy and hold investors are still worse off to the tune of 14%. So to them it is the equivalent of today’s index being at around the 2,800 level.
And even if you take into account dividends received over the same period, you’re still struggling to break even.
BlueScope Stealers
Is it any wonder that investors are scared to buy into the market when you get results and comments like we saw yesterday from BlueScope Steel?
The company announces that the first half dividend will be cut by 77% to just five cents per share. Not surprisingly, the shares took a bath by nearly 11% when the company advised that the second half of the year would be weaker than anticipated.
Of course all this information was released to the market a couple of weeks after the company completed a capital raising to the market at $3.10 per share. Now suddenly the company announces that it’s all going to hit the fan and the share price dumps to $2.65.
It all makes a mockery of the ASX continuous disclosure rules. Those rules being that the company must announce to the market any information that may have an impact on the share price. Can we really believe that within the course of the last four weeks the outlook for the rest of the year has weakened further than expected?
Can we really believe that only in the last few days the board has decided to slash the dividend?
Of course not. It just means that the boards and management at ASX listed companies ensure that information is only filtered to them at appropriate times. Telling the board of directors a week before a capital raising that the second half isn’t looking so hot is clearly not going to happen.
Other Stuff on the Markets
12 year lows for the Dow Jones Industrial Average. Will selling pressure push the index down below 7,000 points?
Gold holds steady just below USD$1,000.
The Aussie market needs to settle above 3,350 today in order to remain above a key support level, according to technical analyst Gabriel Andre.