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The Dow's Phony New High

by Michael Nystrom
Tuesday October 3, 2006
Cambridge, MA

See Part II - Update here

The Dow closed at its highest level ever today, and the mainstream press will certainly have a field day celebrating. This is BIG news - the kind you see recycled every half hour on CNN Headline News® until you're both thoroughly sick of it and also thoroughly brainwashed. Big, shallow news.

At 12:33pm EDT today, Marketwatch.com breathlessly reported:
NEW YORK (MarketWatch) -- It took nearly 7 years, but the Dow Industrials has erased the memory of the post-millennium bear market by reaching a fresh all-time high on Tuesday…
But look beyond the headlines, and you see a different story. While the Dow hit a new high today, not a single of its component stocks did. Interesting, isn't it? The index is at a new all time high, but 70% of its components are down 20% or more!

The Dow Jones Industrial Average is composed of 30 stocks. Of these, fully one third of them - 10 stocks - posted their all time highs last century: Coca Cola (KO) and Dupont (DD) in 1998; and McDonalds (MCD), Walmart (WMT), Honeywell (HON), IBM (IBM), Pfizer (PFE), Verizon (VZ), AT&T (T), and Microsoft (MSFT) back in 1999 - seven years ago. Ten stocks made their all-time highs in 2000: Citicorp ( C), JP Morgan (JPM), Walt Disney (DIS), American International Group (AIG), General Electric (GE), Hewlitt Packard (HPQ), Home Depot (HD), Merck (MRK), General Motors (GM), and Intel (INTC).

Only 7 stocks made their new high in 2006, and of these only 3 of them are within 5% of their new high today. 21 of the 30 Dow stocks - that is 70%, folks! - are down 20% or more!

See for yourself in this chart:

Dow Stocks Record Highs, Year Achieved and Percent Away
Stock Symbol
All Time High
Price - 10/3/2006
% From High
Procter & Gamble PG 62.85 2006 62.27 1%
American Express AXP 56.19 2006 55.90 1%
United Technologies UTX 66.39 2006 64.84 2%
Johnson & Johnson JNJ 70 2005 65.48 6%
Exxon Mobil XOM 71.22 2006 65.45 8%
Boeing BA 89.59 2006 81.75 9%
Citigroup C 55 2000 50.08 9%
Altria MO 85 2006 75.56 11%
3M MMM 90 2004 74.00 18%
Caterpillar CAT 82.03 2006 65.28 20%
McDonalds MCD 50 1999 39.67 21%
JP Morgan JPM 65 2000 47.68 27%
Walt Disney DIS 44 2000 31.00 30%
Wal Mart WMT 70 1999 49.39 29%
American Int'l Group AIG 104 2000 66.69 36%
Honeywell HON 68 1999 41.90 38%
Alcoa AA 45 2001 27.05 40%
General Electric GE 61 2000 35.74 41%
IBM IBM 138 1999 81.68 41%
Pfizer PFE 50 1999 28.41 43%
Verizon VZ 68 1999 37.44 45%
AT&T T 60 1999 32.57 46%
Hewlett Packard HPQ 69 2000 37.42 46%
Home Depot HD 70 2000 36.85 47%
Coca-Cola KO 88 1998 44.56 49%
Dupont DD 85 1998 42.95 49%
Merck MRK 90 2000 42.00 53%
Microsoft MSFT 60 1999 27.36 54%
GM GM 94 2000 33.14 65%
Intel Corp INTC 76 2000 20.57 73%
Removed Components
International Paper IP 61 1997 34.70 43%
Eastman Kodak EK 92 1997 22.16 76%

(A note on methodology: While it is easy to find a stock's 52 week high, finding its all time high is a little more difficult. The way I did it was to pull up a ten-year chart of each of the Dow stocks on Big Charts and eyeball it. That is why you see a lot of round numbers for those old all time highs. While not exact, it is close enough for the purposes of this exercise.)

As I pointed out in my earlier article, Manipulation, if the Dow were to make a new high, it would be a phony new high, since adjusted for inflation, we are nowhere near the old highs. Using the Fed's very own CPI Inflation calculator (Thanks to George Ure at Urban Survival for keeping a handy link to this calculator right on his homepage) we find that we'd need a 13,817 Dow today to equal the 11,750 Dow of 2000. Put another way, today's Dow High of 11,754 is equal to only a Dow of 9,995 in 2000. Pfffttt - we didn't even make Dow 10K!

If you calculate the Dow using real money - gold - you find an even worse picture. Measured in Gold, today's Dow is equivalent to only about 5,100! Using an average gold price of $275 in 2000, we establish our year 2000 benchmark: 10,750/275= 39. Using today's gold price of $580, we have 10750/580=18.5 From 39 to 18.5 is a 52.5% drop, which is equivalent to only Dow 5K!

So is it really a new high? No. But please let me know if you hear any of this mentioned on the evening news tonight.

At the end of the day, the Dow was off its best levels, but still managed a new closing high of 11,727.34. There will be an ensuing media circus that will distract from any real issues or difficult topics going into the November elections, which I believe is the point. I know many out there will disagree with my analysis. In Manipulation, I put forth the idea that the Dow is being held up for political reasons prior to the election. I know that over the long term, markets cannot be successfully manipulated. However, for a few weeks, to make the economy look stronger than it is and to help the powers that be remain in power...

Whether you believe in this thesis or not, the stakes for Bush and the Republicans are very high in this coming election. The future of the country hangs in the balance, and the Republican party knows it. Should the Democrats win control of one or both houses of Congress and serious questioning about the Iraq War begins, there will be hell to pay. This is why Bush has given himself retroactive immunity for any war crimes he's committed with regards to the torture and mistreatment of US terror detainees.

And this is why I believe we will continue to see phony record Dow highs on the marchs toward election day - it is a major, empty distraction that should none-the-less makes people feel good. Unless they see through it. (What are we being distracted from? How about that Henry Kissenger is a secret advisor to the White House and wants to fight Vietnam all over again in the form or Iraq?) If they don't it will make voters less likely to rock the boat - or should I say, rock the vote - on election day.

I hope that I am wrong, but the stakes are so high that I would honestly be surprised if they weren't trying to keep the market up until election day.

In a previous article, I said that if the market makes new highs, I would go long the market. I have since changed my mind. The fundamentals do not support the optimism, and I believe it is dangerous to buy stocks at these levels.

See Part II - Update here

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I will be watching the market like a hawk in the run up to the election. If you would like to be notified in the future of more articles like this, please subscribe to my low volume announcement list

Turn off the TV and think!

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