With
the ‘breaking news’ on Tuesday morning being the fact that the
Dow Jones Industrials had broken 13,000 for the first time since 2008, the
immediate spin from the majority of the mainstream press revolved around
‘see, its all better now’. Their
evidence for this ridiculous statement? The performance of 30 stocks and an
index that changes more than a flip-flopping politician during campaign
season.
And
exactly what is the justification for all the hoopla? Well, it seems we are
in fact back to the idiotic notion that the performance of the stock market
somehow represents the economy as a whole. Let’s take a look at some
things, shall we, and see if this really passes a rather simple, non-economic
test: common sense.
Share Volume
In
my firm’s now quarterly publication, we have studied price-volume divergences and convergences in great
detail. One thing has become very clear since the ‘end’ of the
crisis of 2008 and that is the fact that the ‘little’ guy is out
of this market for the most part. I pointed out many days where Citigroup and
Bank of America trading alone would be responsible for upwards of 60-75% of
the total trading volume on the New York Stock Exchange. Granted, there are other
exchanges, and this phenomenon existed in other places as well. How anyone
could say that the movement of the shares of two banks is somehow indicative
of the macroeconomic health of this nation is beyond ludicrous.
Here’s
a quick (both recent and random) example. On Monday, February 21, 2012, Bank
of America’s volume was around 355 million shares. Citigroup kicked in
another 23 million. Keep in mind Citigroup underwent a 10:1 reverse split in
March of 2011 to give the illusion that a nearly worthless stock was in fact
worth something. Still, let’s play out the example. These two accounted
for 378 million shares worth of volume on a day when total NYSE volume was
around 897 million shares. Those two companies accounted for 42% of NYSE
volume on what was a very unremarkable day in the markets.
Another
interesting phenomenon has been the general decline of volume in general. For
the longest time the DOW/S&P500 were making gains on weak volume days and
taking losses on days when volume was higher (P/V Divergence). Aside from the
fact that this type of action typically portrays a very unhealthy market, it
also showed a near complete lack of interest/conviction on the part of
buyers. Economic optimism was down the tubes (and still is, comparatively
speaking) and the unemployment rate was still going up. Not exactly prime ingredients for a
bull market.
Probably
the most interesting point that can be made about this whole situation is the
perception that the ‘market’ is the economy. Let’s take a
look at how things have changed. Decades ago, when America was primarily a
manufacturing power, it made a good deal of sense to have an
‘industrial index’, comprised of the biggest and most powerful of
the industrial companies. The logic at the time was simple. If the economy
was doing well, those companies were doing well, earnings
were going up, etc. It was an easy concept to follow. The health of the
economy as a whole and the industrial companies were fairly closely linked.
Sure, there were periodic dislocations as share markets are prone to quick
blow offs and bottoms, regardless of whatever else may be going on. But by
and large, it made sense to connect the health of the market with the health
of the economy.
Industrial Average – Really??
Fast
forward to today. 5 of the 30 components of the Dow Jones
‘Industrials’ average are either banks
or insurance companies. Nothing industrial there. 3 are essentially
retailers, and there are at least another 7 who are nothing more than
peddlers for goods made in China or some other place that only throws our
current account further out of kilter. So we can easily make the argument
that half of the ‘Industrials’ index is either anything but or
has absolutely nothing to do with American industrialism. It used to be
worse; AIG was a member of the Dow 30 until it disintegrated a few years back.
Which brings up another interesting point. Granted,
companies come and companies go, but there is a good deal of shape shifting
that has gone on over the years within the Dow Industrials
‘Index’. I don’t have the empirical data on what this
average would look like if it would have been left as it stood back in 2000,
but just taking a look at some of the companies taken out and some of the
ones added, it would seem to be a good bet that we might be talking 10,000
rather than 13,000.
Let’s
list some of the more recent changes. AIG was removed by 9/22/2008 after
absolutely crashing thanks to the now well-known scandal. By June 8, 2009,
Citigroup was gone, also a ‘victim’ of the great crisis of 2008.
These two were replaced by Kraft Foods and The Travelers Companies.
Ironically, Kraft is up over 50% since it was added. Guess what? So is
Travelers. AIG is essentially under Federal Reserve receivership, and
Citigroup is a mere shell of its prior self – let’s not forget
the aforementioned 1:10 reverse split. The point here is simple. Where would
the Dow ‘Industrials’ be if we hadn’t pulled AIG and
Citigroup and put in two much better performers? The answer is it really
doesn’t matter because the index, for the most part, is irrelevant
anyway. There are folks who have done a great deal of research and have come
up with all sorts of conclusions on the validity of the Industrials Average
in terms of where it should/would/could be and all that good stuff.
The
bottom line here is that when you turn on the evening news and they get to
the economy, the first thing you hear about is the stock market and you get
to see the Industrials, the NASDAQ, and the S&P500. There are either
green arrows or red ones. There might be a blurb about a jobs report or
consumer confidence or some other measure, but by and large the impression
most people seem to get is that as long as the ‘markets’ are
going up, things are well in the economy. While this notion wasn’t
exactly correct back in the day when we were still an industrial nation, it
certainly isn’t the case now. Especially when megabank computers
shaving pennies from each other constitutes such a large percentage of
‘investment’ activities.
Until Next Time,
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton &
Associates, LLC
Interested in what is going on in the markets and
the economy? Read Andy Sutton's weekly market and economic commentary 'My Two
Cents' - go to www.my2centsonline.com
