pseudonym/investing

Is a Dow 4,000 possible?

Worst February since 1933 . . .

January 30, 2009, I posted this: "Many investors continue to lose in 2009; percentage losses year-to-date (through January 30, 2009) for Dow, -8.83%; NASDAQ, -6.40%; and S & P, -8.50%. Hardly a good start, especially considering the notion that as January goes, so goes the rest of the year. However, the historical record indicates that this is true only 50% of the time. So, with such 50-50 odds, fingers are crossed that over the course of 2009's remaining months we will see a net gain for the year overall. There was certainly already enough financial bloodletting in 2008, and, as a result, it may take years and years for many investors to make up that year's staggering loss . . ."

In the thirty-seven days since then the Dow, NASDAQ, and S&P 500 averages have continued to drop. Losses in February for the S&P 500 (-2.4%) and the NASDAQ (-1%) weren't too bad, but the Dow experienced it worst percentage drop (-11.72%) for a February since the year 1933. Now, howling in with March winds, are brutal losses for its first week with the Dow dropping 6.2%; the S&P 500, 7%; and the NASDAQ, 6.1%. All told, the averages are now down considerably for the year: Dow has lost 2149 points and the S&P 500, 220; for a loss of roughly the same--a whopping 24.5%; the NASDAQ point loss so far this year has been 283, for a somewhat better(?) loss of 18%.

This year's losses, coupled with 2008's, are literally mind-boggling. The three popular market averages now sit at 12-year lows, and most are forecast to move lower, even after any intervening bear market rallies that some expect soon. One of the top technical analysts in the business, Louise Yamada, warned this past Monday on CNBC Today, "The first targets are 6,000 in the Dow and 600 in the S&P and the second target, I hate to say it, could be 4,000 and 400."

Many investors have continued to hold their dwindling investments, some with the same risk allocation that they began 2008 with; hoping the market will go back up, if not to its most recent highs, at least to a high enough point that they may jump out entirely, or move into cash equivalents. According to Yamada, and probably hating to say this, too, "hope is not an investment strategy."

As a example of the sad state many investors currently find themselves in, consider a hypothetical one: an older person, nearing retirement age, who was invested in mutual funds that tracked the Dow average, whose investments totalled $300,000 at the beginning of 2008. In this case, the investor started 2009 with just $198,000, since the Dow lost 34% last year. Currently, only 67 days into 2009, this person finds their balance now stands at only $149,490, due to Dow's 24.5% loss to date. Therefore, their initial investment has lost 50% of its beginning value, and requires a 100% return on the remaining amount to get back to where they were at the end of 2007!

At the risk of stating what should be obvious to most by now, a 100% return ain't likely in the near term, and will more likely take multiple years--perhaps as many as ten, fifteen, or more--to obtain. Instead, the notion that "as January goes, so goes the rest of the year," may indeed end up being the case in 2009. Still, even so, let's "hope" that the overall loss for the year is less than what it currently is; and, moreover, that Yamada's second target of a Dow 4,000 never materializes.

From the page: "The tax hikes will generate lower growth and fewer revenues. Yes, the economy will recover. But Obama's rosy scenario of 4 percent recovery growth in the out years of his budget is not likely to occur. The combination of easy money from the Fed and below-potential economic growth is a prescription for stagflation. That's one of the messages of the falling stock market.

Essentially, the Obama economic policies represent a major Democratic party relapse into Great Society social spending and taxing. It is a return to the LBJ/Nixon era, and a move away from the Reagan/Clinton period. House Republicans, fortunately, are 90 days sober, as they are putting up a valiant fight to stop the big-government onslaught and move the GOP back to first principles.

Noteworthy up here on Wall Street, a great many Obama supporters -- especially hedge-fund types who voted for "change" -- are becoming disillusioned with the performances of Obama and Treasury man Geithner.

There is a growing sense of buyer's remorse.

Well then, do conservatives dare say: We told you so?"

The sense of buyer's remorse Kudlow refers to will intensify in coming months as the global economy continues to falter, and as the remainder of the POTUS' first 100 days dwindles to zero. At that point, remaining buyers of the administration's free-lunch-on-a-grand-scale plans will find them increasingly more difficult to defend.

[Even Senator Robert Byrd, a lifelong Democrat, appears to be suffering from a bout of buyer's remorse of late.]

From the page: "Global bond markets are calling the bluff of the US Federal Reserve."

Everyone should be paying attention to the global situation as closely as Evans-Pritchard is, as he's right on target the majority of the time.

Many in the U.S. are so busy pinning their hopes on the pending stimulus bill, along with the upcoming banking rescue (Part II), that they are missing the global picture. If the "big bang," or the "big fix," as it's being called, doesn't work for the banks, becoming, perhaps, the "big fizzle" instead, then watch for a stock market collapse to shortly follow.

This borrow-to-spend binge that the U.S. and others want to perpetuate ad infinitum just delays the future day of reckoning when this false economy, fueled by credit and debt, will have to be reconciled.

Better to swallow the bitter pill now than later, as things will only get worse with each coming week and month.

A dismal average return over the past ten years; why bother with the market? Perhaps bank CDs are worth considering instead, particularly now that the FDIC maximum insurance has been raised from $100,000 to $250,000. (However, do bear in mind that the new FDIC insurance maximum is temporary; it is scheduled to EXPIRE on December 31, 2009, if the higher limit is not extended.)

Update 01Jan2009: The "actual" performance of the S & P 500 index in 2008 turned out to be a loss of 38.49%.

[Source: econstats.com/eqty/eqea_mi_1.htm [econstats.com/eqty/eqea_mi_1.htm] ]

From the page: "The S&P is down more than 40 per cent so far this year, its worst fall since the Great Depression. Most analysts expect that the more than year-long recession will get worse before it gets better and investors are bracing themselves for more pain in 2009."

Investors--many nearing retirement age, or perhaps already retired--have seen their investments shrink by 40% in 2008 (the S & P 500 index average is down 41% as of yesterday). Even before this financial world of ours got good and screwed up like it is currently, it would usually take multiple years, maybe five or six, in more "normal" times (based on the S & P's overall average gain over time) to make up such a huge loss. Any hopes of offsetting this year's loss with an upcoming hefty gain in the short term are being rapidly deflated by economists and other analysts who see additional losses in 2009. Some forecasts I've seen are even predicting a 20-25% loss in 2009. Such dire forecasts, considering the fact that there is a global recession well underway presently, surely are unsettling to the many who have already seen their investments (for some--their life savings) reduced by almost half.

Grim days indeed . . .

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