Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA) is a weighted index representing the stock price action of 30 of the largest U.S. corporations. The world’s most widely followed stock market index, the DJIA was created on May 26, 1896 by Charles Dow and Edward Jones. When it was first launched, the Dow Jones stood at 40.94.
The DJIA is calculated by taking the average price of the listed stocks and dividing that figure by a number called the divisor. The divisor is there to take into account stock splits and mergers, and it changes frequently.
Much broader U.S. stock market indexes have since been created, including the S&P 500 index (which monitors the stock prices of the top 500 U.S. corporations); and the Wilshire 5000 (an index based on the market capitalization of 4,100 stocks actively traded in the U.S.).
The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the DJIA as an indicator of economic activity. If the index is hitting new highs, economic activity can be expected to be brisk in the next six months. Comparatively, if the index is falling to new lows, poor economic times could lie ahead. When news sources declare the markets up or down, they are generally referring to the DJIA.
What does it take to get included on the DJIA? There are no specific rules for inclusion; rather, there is a set of broad guidelines that require large, respected, substantial enterprises that represent a significant portion of the economic activity in the United States.
When the DJIA was launched, the index comprised 12 industrial companies.
Most of the original companies listed on the Dow are still in existence, though, after 100 years, not necessarily in the same form. Early industrial companies included: American Cotton Oil, American Tobacco, Chicago Gas, Tennessee Coal Iron and RR, U.S. Leather, and United States Rubber. The only component still trading in its original form and currently on the DJIA is General Electric Company (NYSE/GE).
In 1916, the DJIA was updated to 20 stocks. Some of the new companies included: American Beet Sugar, American Locomotive, Goodrich, Republic Iron & Steel, Studebaker, Westinghouse, and The Western Union Company (NYSE/WU).
The DJIA reached its current 30 components in 1928. The 30 companies occasionally changed to adapt to the evolving market.
During the stock market crash of 1929, the DJIA lost nearly 90% of its peak value, and would not surpass that (inflation-adjusted) peak again until 1954.
The Dow first passed the 1,000 mark in November 1972; it crossed 10,000 for the first time on March 29, 1999. This growth trend would extend into the 1990s. At the turn of the millennium, the average began to level off near 10,500.
On October 9, 2007, the DJIA peaked at 14,165. This was followed by the 2008 financial crisis. On March 9, 2009, the Dow Jones index hit bottom at 6,547, or 55% below its October 2007 high.
After March 9, 2009, the Dow Jones began another bull run after investors, for better or for worse, accepted that the Federal Government and Quantitative Easing had stopped another Great Depression.
Since May 26, 1896, the Dow Jones list of companies has been reconfigured 49 times. Most recently, Kraft Foods Group, Inc. (NASDAQ/KRFT) was removed from the list in favor of UnitedHealth Group Incorporated (NYSE/UNH).
A broader index than the name implies, the most recent configuration of the DJIA includes: Bank of America Corporation (NYSE/BAC), Caterpillar Inc. (NYSE/CAT), E.I. du Pont de Nemours and Company (NYSE/DD), Exxon Mobile Corporation (NYSE/XOM), JPMorgan Chase & Co. (NYSE/JPM), International Business Machines Corporation (NYSE/IBM), Microsoft Corporation (NASDAQ/MSFT), The Procter & Gamble Company (NYSE/PG), Wal-Mart Stores, Inc. (NYSE/WMT), and The Walt Disney Company (NYSE/DIS).
There are several ways in which investors can trade the bull and bear markets on the DJIA. Several equities are designed to trade at par with or on the inverse of the DJIA. Investors can also purchase futures and options through the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE).
Indian Government to Banks: Stop Telling People to Buy Gold
By Michael Lombardi, MBA for Profit Confidential
India, the biggest consumer of gold bullion, is witnessing over-the-top demand—to the point where the government is trying to curb demand.
The Finance Minister of India said last week, “Banks have a role to play in dampening the enthusiasm for gold. I think the RBI [Reserve Bank of India] has advised banks that they should not sell gold coins.” He added, “I would urge all banks to please advise their branches that they should not encourage their customers to invest in or buy gold.” (Source: “P. Chidambaram hints banks likely to stop gold coin sales to curb demand,” The Indian Express, June 7, 2013.)
The appetite for gold bullion by Indian consumers has forced its government to increase the import tax on the yellow metal to eight percent—it has increased this tax rate twice in the past six months!
But the Indian economy isn’t the only one experiencing a surge in gold demand.
The acting director of the U.S. Mint, Richard Peterson, was quoted last week saying, “Demand [for gold bullion] right now is unprecedented…” (Source: “US bullion coin demand still at unprecedented levels-US Mint Chief,” Reuters, June 5, 2013.)
Looking at the sales of gold bullion coins from the U.S. Mint, demand has more than doubled. In the first five months of this year ending in May, the U.S. Mint sold 572,000 ounces of gold bullion in coins. In the same period a year ago, the Mint sold only 283,500 ounces of gold bullion. (Source: The United States Mint web site, last accessed June 7, 2013.)
Dear reader, the numbers are speaking louder than the words. Even … Read More
Japan Resorts to Buying ETFs and REITs to Prop Up Stock Market; Will Fed Eventually Do the Same?
By Michael Lombardi, MBA for Profit Confidential
The Japanese economy is a prime example of what happens when central bank–infused “economic growth” crumbles.
Quantitative easing may have been needed in the U.S. economy when the financial system was on the verge of collapse, but artificially low interest rates and vast amounts of paper money printing could be creating major troubles for our future, just like it did in the Japanese economy.
The Bank of Japan and the Japanese government have taken a strong stance on bringing economic growth to the Japanese economy. The Bank of Japan has taken the concept of quantitative easing to a new level, and it plans to continue increasing the country’s money supply. Similar to what’s happening here in America, the Bank of Japan is printing new money to buy government bonds. Japan’s central bank has become heavily involved in the stock market of the Japanese economy by buying units in exchange-traded funds (ETFs) and real estate investment trusts (REITs).
Sadly, the outcomes of this rigorous quantitative easing are dismal. The Japanese economy isn’t improving. Rather, the currency of the country has become a major victim, and the stock market in the Japanese economy is bursting.
Take a look at the chart below, which shows the value of the Japanese yen (black line) declining continuously, while the stock market is rising and bursting (red/black line).
Chart courtesy of www.StockCharts.com
On May 23, the stock market in the Japanese economy took a turn downward; since then, it has been declining quickly.
When I look at this, it makes me question the stability of the key stock indices here in the U.S. economy. The … Read More
Stock Market Rally Fizzles as 2Q13 Corporate Earnings Growth Fades
By Michael Lombardi, MBA for Profit Confidential
The stock market is down 500 points in just over a week…does this mean the Dow Jones Industrial Average has finally topped out?
Corporate earnings are weak; we know that. So far for the second quarter of 2013, more than 80% of the companies in the S&P 500 that have issued their corporate earnings guidance have provided a negative outlook. (Source: FactSet, May 31, 2013.)
Yes, the key stock indices have gotten ahead of themselves. In the first two months of the second quarter, the S&P 500 increased five percent; but as that was happening, earnings estimates for the quarter dropped by 3.4%!
At the end of March, analysts expected the S&P 500 companies to register an increase of 4.4% in their corporate earnings for the second quarter; now that number has dropped to a paltry 1.3%. (Source: FactSet, May 31, 2013.)
In the first quarter of 2013, companies in the key stock indices struggled with revenue growth. Only 46% of the S&P 500 companies recorded revenues above estimates for the first quarter, while the average for the last four quarters was 52%.
But there are further threats to corporate earnings. Demand is weak in the U.S. economy, as the American consumer is still under pressure—he or she is typically working at a job that pays the minimum wage (that’s where most of our jobs growth has been since the Great Recession ended), while the costs of basic necessities continue to rise in an environment where the government says there is no inflation.
I remain skeptical of the rise in the key stock indices, as they aren’t moving in line … Read More
Best Explanation on the Fake Housing Market Recovery I’ve Seen
By Michael Lombardi, MBA for Profit Confidential
The average American Joe isn’t participating in the U.S. housing market. As a matter of fact, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investors purchased 69% of “damaged” properties in April 2013, while first-time home buyers accounted for only 16% of “damaged” purchases.
It is very well documented in these pages how home prices in the U.S. economy are being driven upward by institutional investors. Affirming my stance on the U.S. housing market, Suzanne Mistretta, an analyst at Fitch Rating Services, was quoted this week as saying, “The [housing price] growth is being propelled by institutional money… The question is how much the change in prices really reflects the market demand, rather than one-off market shifts that may not be around in a couple of years.” (Source: Popper, N., “Behind the Rise in House Prices, Wall Street Buyers,” New York Times Dealbook, June 3, 2013.)
Major financial institutions like The Blackstone Group L.P. (NYSE/BX) have become major buyers in the U.S. housing market. Blackstone has spent more than $4.0 billion for 24,000 homes in the U.S. housing market that it plans to rent out.
Rising prices on homes in various pockets of the U.S. housing market are a direct result of large institutional investors buying in.
Take Atlanta, for example. Blackstone bought 1,400 properties worth more than $100 million in Atlanta last year. (Source: Bloomberg, April 25, 2013.) And what happened to prices for homes in Atlanta? According to CoreLogic, a housing data compiler, home prices in Atlanta increased 12.4% in the 12-month period ended February 2013, compared to a 10.2% increase in the overall U.S. housing … Read More
It’s Official: NYSE Margin Debt Hit New Record, Surpasses 2007
By Michael Lombardi, MBA for Profit Confidential
Is it just me, or have investors completely abandoned the concept of risk and reward?
The reality of the situation is that the key stock indices are treading in shark-infested waters and the risks are piling up daily. I see bearish signals all over, but the theme among investors, even conservative investors, continues to be “keep buying.”
It’s official…
Margin debt—that’s the amount of money borrowed to purchase stocks—on the New York Stock Exchange (NYSE) reached its all-time high in April. Margin debt on the NYSE registered at $384.3 billion as the key stock indices hit new record-highs. (Source: New York Stock Exchange web site, last accessed May 29, 2013.) The highest margin debt ever reached prior to this was in July of 2007, when it stood just above $381.0 billion. At that time, just like today, the key stock indices were near their peaks and “buy now before it’s too late” was the prominent theme of the day
Looking ahead, corporate earnings, which ultimately drive the direction of the key stock indices, don’t look so good. So far, 106 companies in key stock indices like the S&P 500 have provided their corporate earnings outlooks for the second quarter, and more than 80% of them have issued earnings outlooks that are negative! Corporate earnings growth for the second quarter is now projected to be only 1.4%—and the estimate keeps going down! (Source: FactSet, May 28, 2013.)
And this chart doesn’t look good either:
Chart courtesy of www.StockCharts.com
The above chart shows the performance of the S&P 500 utilities stocks through an exchange-traded fund (ETF) called the Utilities Select Sector SPDR … Read More
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