Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

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).

Where I’d Put My Money Now

By for Profit Confidential

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More

If the Economy Is Improving, Why Are Investors Pricing in a Slowdown?

By for Profit Confidential

U.S. Economy Slowing Down Here in 2014The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.

On the surface, the number—four percent growth—sounds great. But how serious should we take that gross domestic product (GDP) figure?

Firstly, I’d like to start by pointing out that the BEA often revises its GDP numbers downward. We saw this happen in the first quarter. First, we saw the BEA say the U.S. economy grew by 0.1% in the first quarter, then after a couple of revisions, they said the economy actually contracted 2.9% in the quarter.

I obviously expect the BEA to lower its initial second-quarter GDP numbers again.

But here’s what really worries me…

If the GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?

The chart below is of the 10-year U.S. Treasury, the so-called safe haven. Back in 2007 to 2009, investors ran to U.S. Treasuries as a safe haven. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism towards the economy.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

But since the beginning of this year, yields on the 10-year U.S. notes have declined 18%. This is despite the fact the biggest buyer of these bonds, the Federal Reserve, has stepped away from buying these Treasuries as its quantitative easing program comes to an end.

At the same time, we have the stock market finally starting to give in. So if the stock market is a … Read More

Alan’s Words of Wisdom for Stocks (He Was Right Last Time)

By for Profit Confidential

History Repeating Itself with This Stock MarketRemember Alan Greenspan? He was the chairman of the Federal Reserve from 1987 to 2006. Several media sources, including this one, blamed the sub-prime mortgage fiasco that led to the Credit Crisis of 2008 on the easy money policies under the leadership of Greenspan.

But the Credit Crisis aside, it is ironic but true that Greenspan has had a knack for calling stock market bubbles correctly.

For example, in December of 1996, while chairman of the Federal Reserve, Greenspan grew wary about the stock market. In a now famous speech called the “Challenge of Central Banking in a Democratic Society,” along with other observations on the value of stocks, Greenspan essentially argued that the rise in the stock market at that time wasn’t reflective of the poor economic conditions that prevailed.

Within two years of that speech, the stock market started to decline and stocks did not recover until 2006.

In an interview with Bloomberg a few days ago, Greenspan said, “the stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction.” (Source: “Greenspan Says Stocks to See ‘Significant Correction,’” Bloomberg, July 30, 2014.)

In the interview, Greenspan says long-term capital isn’t growing and as a result, productivity and the economic recovery will be in jeopardy.

Greenspan is out of the Federal Reserve. But the leader of the Fed today, Janet Yellen, also has reservations about the value of certain stocks. As I wrote on July 16, Yellen had been quoted saying tech stocks were priced “high relative to historical norms.” (See “How Many Warnings Can Read More

Why a Full-Blown Market Correction Should Be Expected

By for Profit Confidential

Investors Can't Overlook to Succeed in This MarketThe monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (GDP) growth is there to back it up.

Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it’s worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.

Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.

The risk of stocks selling off on the Federal Reserve’s actions is diminishing. The marketplace is well informed about the central bank’s intentions and it’s quite clear that Fed Chair Janet Yellen doesn’t want to do anything to “surprise” Wall Street.

I still view this market as one where institutional investors want to own the safest names. The economic data just isn’t strong enough for traditional mutual funds and pensions to be speculating.

This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.

Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.

Accordingly, anything … Read More

My Poor Italy

By for Profit Confidential

Why This Stock Market Will Fall Like a RockThis morning came the news that Italy, a country very close to my heart (just look at my last name) and the third-biggest economy in the eurozone, is back in recession.

And Germany, the biggest economy in Europe, saw factory orders in June drop by the most since 2011.

While the financial media has taken the focus off the eurozone over the past couple of years, I have continued to tell my readers about how bad conditions are there. I have the pleasure to travel to the eurozone several times a year. I can tell you first-hand how people there are suffering. Outside of Germany and the smaller, rich countries, jobs in the eurozone are extremely hard to find and wages are very soft.

The European Central Bank’s move to bringing its overnight deposit rate to negative is obviously not having its desired effect of getting banks there to lend out more money. Many eurozone banks are in serious financial trouble. You can’t force a bank to lend money to its customers if the bank is concerned about its own financial health.

With about half of the S&P 500 companies deriving revenue from Europe, it is no wonder American corporations are having trouble increasing revenue. Last week, the eurozone introduced wide-ranging sanctions against Russia because of the Ukraine situation. Russia is Germany’s largest trading partner in Europe—obviously, eurozone companies will feel the pain of the sanctions imposed on Russia.

In the U.S., we were already dealing with an overpriced stock market—a market characterized by heaving corporate insider selling, too much bullishness among stock advisors, the VIX Index saying investors … Read More

« Older Entries

The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

In fact, we are predicting this crash will be even more devastating than the 1929 crash…

…the ramifications of which will hit the economy and Americans deeper than anything we’ve ever seen.

Our 27-year-old research firm feels so strongly about this, we’ve just produced a video to warn investors called, “The Great Crash of 2014.”

In case you are not familiar with our research work on the stock market:

In late 2001, in the aftermath of 9/11, we told our clients to buy small-cap stocks. They rose about 100% after we made that call.

We were one of the first major advisors to turn bullish on gold.

Throughout 2002, we urged our readers to buy gold stocks; many of which doubled and even tripled in price.

In November of 2007, we started begging our customers to get out of the stock market. Shortly afterwards, it was widely recognized that October 2007 was the top for stocks.

We correctly predicted the crash in the stock market of 2008 and early 2009.

And in March of 2009, we started telling our readers to jump into small caps. The Russell 2000 gained about 175% from when we made that call in 2009 to today.

Many investors will find our next prediction hard to believe until they see all the proof we have to back it up.

Even if you don’t own stocks, what’s about to happen will affect you!

I urge you to be among the first to get our next major prediction.
See it here now in this just-released alarming video.

This is an entirely free service. No credit card required.

We hate spam as much as you do.
Check out our privacy policy.