The 1929 & 2007 Bear Market Race to The Bottom Week 123 of 149
DJIA & Market Volume
DJIA’s Dividend Payout & Yield Considerations
Mark J. Lundeen
19 February 2010
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Below is my BEV chart for the Bear Race.
The DJIA had its best week since last November, (Wk 108). Well during Bull Market, there are bad weeks, and in Bear Markets there are good weeks. Until the Bulls force me to relocate my text box, I’m not impressed. And if Doctor Bernanke and Secretary Geithner force me to move that Text Box; I’m going to be really upset with them! There is absolutely no reason for the DJIA to be that high with the problems the Financial World currently has. But they never listen to me.
Below is the DJIA Volatility’s 5 Day M/A & BEV Chart
The DJIA is up this week with a slight decline in daily Volatility. But so what? I do find it interesting how in the Summer of 2007, there were several peaks and valleys in Volatility, starting in March of 2007, just prior to the DJIA’s October top. We can always learn something from studying the past, but past performance is no guarantee of what is to come. But still; this could be seismographic evidence of Market Magma rising.
I haven’t shown the next Chart for months! If Market Volatility was all I was following, this Chart would tell us the Bear left town a long time ago. And you know what? He has!
Well after all, 2010 is an Election Year, and the â€œPolicy Makersâ€ like things looking as normal as they can make it. They’ve succeeded as far as the DJIA’s Volatility is concerned! But as I’ve noted below, in my section on Market Volume, there are signs of official-level monkey-shines going on at the New York Stock Exchange. Like any forensic investigator can tell you, there are some things that just can’t be hidden.
No word on this from my agents in Manhattan. It seems that PETA has refused them a lawyer, so they’re still enjoying the hospitality of Major Bloomberg. I’ll let you know when he lets them out of the clink. Until then, we will just have to be satisfied with my charts.
Here is another interesting Chart I haven’t shown for a few months.
As I’ve said before, Market Volatility increases in declining markets, and declines in rising markets, it’s been that way for 110 years. But this pattern has been aggravated since the US Took the dollar off the Bretton Woods Gold Standard in 1971. This can’t be denied! When the Bear comes back, we’ll see his tracks first in my Volatility Charts.
Daily Volatility Statistics for Wk 123
DJIA% MoveDJIA 2%
Historical Daily Volatility is < 1.0% Source Dow Jones The Lundeen Bear Box and Step Sum is below. This is a change! The DJIA was up 3% this week with only an increase of 4 in its Step Sum, very nice! But will this trend last? For a few weeks or even a month or two: sure it could. But I'm still a long term Bear. From this point on, I think the current Bullish Correction, within our Greater Bear Market, is nearer its end than its beginning. Come on; it's been going on for a year now.Sometimes the smart position in the Stock Market is no position in the Stock Market. But 2010 is an election year, and Washington has all the money in the World to make the voters happy. Below is a 15 Year Chart of the DJIA and its Step Sum. It's just amazing that the #2 All-Time DJIA Bear Market went down 53% on only 25 Net Down Days! Well the DJIA and its Step Sum are now working together, at least they have been recently, and as we see below, the DJIA is bouncing back nicely after an 800 point correction. The Ball is on the Bull's side of the court. They cleared the failed bounce the DJIA had in early February, and now have only 300 points to go before they exceed the highs of 19 January. If the Bulls are really in control, those 300 points should be easy to find in the next few weeks. But I'm only watching this market for its entertainment value. I don't believe any of these prices are the result of a free market attempting to discover real prices. In other words, I'm assuming the â€œPolicy Makersâ€ are currently managing market expectations, on a day to day basis, via the changing valuation of the DJIA. This means that they don't want investors getting to Bullish, or to Bearish. They don't want to incite the Voters into doing something stupid that the â€œPolicy Makersâ€ will later regret. So, I find all of this a complete farce, but a very entertaining farce. We are living history here! Fifty years from now all of the shenanigans Washington pulled on the rest of the world will be taught in school. Including the bit where in 2013, 95% of Congress decided to take a prolonged 4 Year recess at Davos, Switzerland. They decided it was finally time to conduct an audit of the Gold that was formerly stored at Fort Knox. It's happened before. This is from the Bible. â€œWhere is that chief officer? Where is the one who took the revenue? Where is the officer in charge of the towers? You will see those arrogant people no more.â€ - Isaiah 33:18/19 New International Version (NIV) Bible Ya; you won't see them or the Gold they stole from us: â€œno more.â€ The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. When bearish, it falls. Think of the â€œStep Sumâ€ as the sum total of all the up and down price â€œstepsâ€ in a data series over time; an Advance Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that. DJIA & Market Volume In Weeks 75 & 99 of my Bear Market report, I covered the relationship between the DJIA and Stock Volume. This is only an update to those Reports. But to people who haven't read these reports, it might be worthwhile to read them, although a little review is in order for everyone. Bull and Bear Markets, since 1900 have been closely associated with Volume and Volatility Trends: § Increased Volatility is the Calling Card of the Bear § Increased Volume is the Calling Card of the Bull Remember, Market Prognostication is not a science, but more of an art. So we should expect periods when these two rules of thumb are not present in the Stock Market. However, over the course of a Bull or Bear Market, these rules should be clearly evident in the charts. I'm taking some charts from Wks 75 & 99 for my review. The chart below is for the DJIA and NYSE during the Great Depression. 1926-1934 Rising NYSE Volume is clearly evident during the Roaring 1920s. After the DJIA's 1929 BEV Terminal Zero (last all-time high), the DJIA declined with NYSE Volume. How hard is that to understand? I've frequently mentioned in the past, that the single best year in the history of the DJIA was from July 1932 to July 1933; the DJIA increased 163% in those 12 Months. But there was also a nasty -37% correction in February in 1933. The rise, fall, and then the rise again in the price of the DJIA from July 1932 to July 1933 is evident in the Volume Plot above. 1932-1966 The DJIA may have seen its single best year from July 1932-33, but the 1930s were hard markets to make money in. We see that NYSE's Volume found a bottom in 1942, along with a BEV -50% Bear Market Bottom. But for the next 24 years, the DJIA was to rise from its 1942 Bottom of 92.92, to 995.15 in 1966 for a gain of 1171%. This gain was supported with a tremendous increase in NYSE Volume. Using Charts from Wk 99, next are some examples for the DJIA using a 10 Day M/A of the DJIA's Volume. So the above charts are NYSE Volume with no Moving Average. The charts below use the DJIA's Volume with a 10 Day Moving Average. Moving averages are nice as they smooth out the day to day noise. 1950 to 1966 From 1950 to 1966, the DJIA saw a Bull Market as the Fed's â€œLiquidityâ€ flowed into the Stock Market. The effects of this flow of inflation can be seen in the rising DJIA's Blue Plot. But note also the effects on the DJIA's Volume. It too rose for these 15 years, as the DJIA increased from 200 to 1000. Oh about that Volume Spike in June 1962, that is one nice signal the Five Month DJIA Correction was over. In Barron's 08 June 1962 issue, which records this data spike, Eleanor Roosevelt claimed the resent market correction was a conspiracy by â€œBig Business.â€ J Paul Getty was buying more oil shares. Barron's, as it always did back then, had a front page editorial. Topic for 08 June 1962? One of these days Washington is going to bankrupt us. â€œBasically Sound? The US Should Beware of Easy Optimismâ€ Barron's warned its readers that deficits and trade imbalances do matter, and the basic problem with the American economy was the Red Ink in its trading with our partners. There was the record * 3.4 Billion Dollar * trade deficit in 1960, and things look worse for 1962!Gold was draining from the US Treasury. The US Dollar was under pressure in the currency markets. In 1962, these problems had been chronic for a decade already. I'm sure in 1962, no one at Barron's thought this would go on for another 48 years! What I wouldn't give for one of those old fashioned 3.4 Billion Dollar Trade deficits! 1964-1983 This is a very interesting period in market history. Note the Blue DJIA Plot is not a BEV Plot, but the DJIA itself. From 1966 to 1981, the DJIA tried 5 times to breach its 1000 line, and 5 times it failed. But as we know now, on the 6th try the DJIA made 1000 stick. The last DJIA closing below 1000 was last seen on 16 Dec 1982, with a closing price of 990.25. Note from 1966 to 1974, with each attempt on the 1000 line, the DJIA fell into successively lower lows until 1974, when the DJIA saw its first BEV -40% Bear since 1942. All during this time the DJIA's Volume was rising, but not by much. After the 1974 bottom, the DJIA's Volume increased dramatically over the next 8 years, resulting in a pattern of higher lows when the DJIA had price corrections. In August of 1982, the DJIA's Volume exploded, taking the DJIA above its 1000 line. 1979-1991 The relationship between the DJIA and Stock Volume began to break down during the Greenspan Fed. Notable in the chart below is the huge spike in DJIA's Volume during the Crash in October 1987. On Live TV, Doctor Greenspan promised â€œAmple Liquidityâ€ for the markets, and he delivered. But the 1987 Crash was unique in the history of the Stock Market. In 1987, all of the major Investment Banks began â€œProgram Tradingâ€, where computers (Black Box Programs) were fed information on when to buy and when to sell. Apparently these programs' parameters for selling were alike. On Monday 19 October 1987, Robots ruled Wall Street as selling thresholds were met, and mindless computerized selling in the Stock Market began. Wall Street's Robots took the DJIA down 19% in hours. And the lower the market went, the more the Robot Traders were programmed to sell. The Banks were all afraid to turn off their Robots, so the selling continued until the close of Trading. So maybe this spike in volume doesn't have Doctor Greenspan's fingerprints on it. Note how the Stock Market performed for the next few years. A rising DJIA as its Volume stayed static. This is one of those instances where the DJIA rose in spite of lackluster volume. Remember, you invest in the Stock Market, not in its volume. 1990-2000 The DJIA continued to increase, while its Volume lagged behind until 1997. After 97, the Stock Market Bull entered its Blow-Off Stage and Volume exploded. Why did Market Volume explode? Because the Stock Market became a public mania. Its easy riches lured in people who had no business in the Stock Market.In the late 1990s, Investors were assured that there were no 10 year period in the Stock Market where Investors, â€œwho bought and held stocks for the long termâ€ lost money. So with interest rates on savings single digit, the promise of double digit gains in the Stock Market of the 1990s, and the Real Estate Market 10 years later, proved to be fatal attractions to many people. Note the two vertical dashed lines in the Charts below. These spikes in Volume have Doctor Greenspan's fingerprints all over them. The old â€œGreenspan Putsâ€ as they use to say. The markets are rigged by the Government. Still, if people make a serious effort in educating themselves, good money can be made in the Stock Market. But one has to know when to be in it, and more importantly, when to BE OUT! Currently, my studies conclude that I want nothing to do with the General-Stock Market right now. The day will come when I will change my opinion, but right now Gold and Silver coins are compelling values in our Inflationary World. The alternative is collecting â€œrisk freeâ€ interest on bank deposits or in the debt markets. Today's yields on short term T-Debt are at Great Depression levels. This â€œRisk-Freeâ€ assumes that US Treasury Debt, and the US dollar are sound, which I don't believe they are. In my opinion, the only risk-free investment easily available to the public are Gold and Silver Coins. If you don't know where to purchase gold and silver, just get on GATA's Chris Powell's mailing list. You'll be informed on current events in the markets, and provided with a list of Gold and Silver Merchants who have supported GATA for years. 1998-2010 Since the 2000 DJIA Top, the relationship between the DJIA and its Volume, has changed beyond recognition. As the DJIA declines, its Volume has consistently increased. As the DJIA rises, it Volume has consistently declined. If this happened only once or twice, we could assume these violations in the Bull and Bear Market's Volume Protocol were merely a few of those inexplicable market anomalies. But it's been this way for 10 Years now! 2005-2010 This pattern has become extreme since the DJIA's October 2007's Terminal Zero (last all-time high). Market Volume and the DJIA were in sympathy with each other from 1900 to 2000 (100 Years), and then after 2000, everything changed. So we need to ask ourselves: what's changed? I believe the difference is, previous to 2000, the major players in the market had Market Risk to worry about. Smart money, like major investment companies purchase their stocks at market bottoms, not on the way down. They know that buying in a declining market is an effective technique of losing money. But take a moment and examine my charts from 2000-10 again; we see a repetitive pattern of significant Volume increases as the DJIA goes down, and then Volume backs off after the DJIA turns around. Logically, this pattern only makes sense if the big NY Financial Houses are using the Federal Reserves' Inflation to maintain the Stock Market's valuation within â€œPolicy'sâ€ designed parameters. When the market falls, measured amounts of â€œLiquidityâ€ are â€œInjectedâ€ directly into the Stock Market via the Big Banks. When the market reverses, it's a mission accomplished, and the spigot of â€œLiquidityâ€ is turned off. If this is true, and I'm sure it is, the spikes in the above Red Plot shows how much muscle the Fed had to use to make Mr Bear say Uncle. In Weeks 75 & 99, I have charts for 110 years of Market history. Is there anything historically comparable to what happened from August 2008 to March 2009 above? No there is not! The big players would never do this with their own money, so the Federal Government must be giving them our money to play this losing game. And the insiders know that if all goes wrong, Congress will bail them out again. Why wouldn't Congress bail them out? The money at risk is coming from the Government's monetary printing presses.Remember, 2010 is an Election Year. Politicians want a good Stock Market when it's reelection time. When the Stock Market breaks again, and it will, the upcoming Congressional Hearings should prove to be a real Dog and Pony Show. Someone has to take the rap, but who? Martha Steward" target="_blank">Martha Steward
took it in 2004 for a trumped-up charge of insider trading. I guess the Department of Justice showed her the error of her wicked ways! It will be interesting to see who takes it this time.
DJIA’s Dividend Payout & Yield Considerations
Robert Prechter of Elliot Wave Fame is predicting a DJIA Bottom of below 500.Here is a 7 minute Bloomberg Video from October 2007, at the top of the DJIA. The video is over 2 years old, but his points on the Stock Market are only more valid in 2010 than they were in 2007. When it comes to Gold however, Prechter has been a Bear since Gold was at $250 an ounce. No one is perfect.
Can the DJIA fall to 500? That would be a retracement of the entire move the DJIA has made since the 06 Dec 74, 577.60 Bottom! What is he thinking?! I don’t know what Mr. Prechter is thinking, but using the DJIA’s Dividend Yields as a Valuation Model, the DJIA could fall further than most â€œExpertsâ€ think possible today.
Let’s take a look at the DJIA’s Dividend Yield from 1925 to 2010. There was an old rule that investors should sell the Stock Market when the Dividend Yield on the DJIA was near 3%, and come back into the Market when the DJIA’s Yield rose above 6%. That rule, as we see below, was an extremely effective market timing system for decades. But, as usual, when Doctor Greenspan became Chairman of the Fed, the old rules of prudent investing only lost money.
The old rules worked because there are two methods of valuing the DJIA:
§ The Inflationary Expectation Model
§ The Dividend Yield Model
People would purchase stocks at a DJIA 6% Yield, because a 6% yield, with the promise of future capital gains, provided a superior source of income on capital, as one waited for the Bull Market to start. From 1925 to 1975, banks didn’t pay 6% on their savings accounts.
As the Bull Market progressed, the DJIA’s Yield would decrease. But who cared when the Inflationary Capital Gains more than made up for a smaller Yield. For 50 years, 3% on the DJIA proved to be a tipping point. A time to sell your stocks, take your capital gains and wait until the DJIA Dividend Yield again saw +6%. But in August 1987, when Doctor Greenspan became the New Sheriff in Town, all that changed as we can see in the chart above.
So how important are the DJIA’s Dividends and Yields? Well currently, as the Market is being valued by Inflationary Expectations, they’re not important at all. People see the DJIA’s current Yield of 2.70% and they’re not impressed. Should they be?In Week 123 of my Bear Market Report, buyers of Stocks are after bigger game: Capital Gains. The DJIA can do better than 2.70% in a single day, so what attraction does 2.70% a year have to people hooked on Inflationary Profits? None whatsoever!
But when Inflationary Gains become Deflationary Losses, as we saw in March 2009, the DJIA was Yielding 4.74% while 2 Year T-Bills were paying only 1.03%. That 3.74% split was no good for people who took the -53% loss in the DJIA from its October 2007 high. But there is always lots of money in the Fixed Income Markets that might be tempted to sell some bonds and buy good yielding stocks.As we all know now, that was an excellent trade!
But unlike Bonds, whose payout is fixed, and cannot be cut without defaulting, Stock Dividend Payouts are at the mercy of a company’s Profits. During times of Economic Stress, Dividends are reduced or eliminated, and since September 2008, the DJIA’s Payout has been reduced by 16%. Corporate America is currently under great strain. How bad can it get? Let’s look at the Great Depression, and see what happened to the DJIA’s Payout and Yield 78 years ago.
These relationships are mathematical; it’s simply not possible for the DJIA’s Valuation to rise, or even stay range-bound if its Payouts Decline as its Dividend Yield rises. Here is the DJIA’s Valuation formula.
DJIA’s Valuation = Dividend Payout
When the Stock Market is being valued by its Inflationary Expectation Model, investors ignore the Dividend Payout and Yield. The 11 January 2000 issue of Barron’s reported a DJIA Yield of 1.30%! To most investors in January of 2000, Dividends were only an irritation that made them fill out an additional line on their 1040 Income Tax Form. Had the DJIA doubled to 22,000, while maintaining a constant Payout, the Yield would have fallen to 0.65%. The Bulls of January 2000 would have rejoiced! They were only interested in the Inflationary Capital Gains Doctor Greenspan was Injecting into the Stock Market.
But there comes a point where values do matter. This is when money decouples from bovine fantasy, and jumps onboard economic reality. Such times are called Bear Markets. And Mr. Bear doesn’t care a whit about the Value of the DJIA. His only concerns are about the quality of the DJIA’s Dividend Payouts, and that those Payouts are priced properly. As we saw in the chart above, Mr Bear slashed the DJIA’s Dividend Payouts by 79%, and then repriced them from 3% in 1929, to 10.38% in July 1932. In the process the DJIA fell 89%, and resulted in much human suffering. But Mr Bear’s attitude has been rather clinical when it came to correcting the excesses of past Bull Markets. I expect more of the same when he goes to work in correcting the excesses of our current market
I started this segment with a prediction by Mr Prechter that the DJIA could fall below 500. Let’s take a look at the DJIA, as Mr Bear does, and see if what would happen to the DJIA, if the Payout and Yields trends of 1929-32 were repeated.
DJIA Dividend Yield and Payout
What if 2007-10 was a Repeat of 1929-32?
Barron’s IssueDJIA PriceYieldPayout02 Sept 1929380.36 3.31%$12.59 11 July 193241.23 10.38%$4.28 15 Oct 200714,093.20 2.06%$290.32 Unknown950.95 10.38%$98.71 My 950.95 DJIA Value is based on a 66% Reduction in the DJIA’s Dividend Payout, with a July 1932 Dividend Yield.
Graphic by Mark J. Lundeen
The results are not as bad as Mr Prechter predicts, but seeing the DJIA Valued below 1000 would be shocking to everyone; but Mr Bear may want more. After all, with the mess the Bulls left behind, there is so much work for him to do. In the 1930s, interest rates collapsed as the Yield of the DJIA soared. In a yield hungry environment, where savings returned less than 2%, the July 1932, 10% Yield on the DJIA was compelling!
But in 2010, with decades of Monetary Inflation and Fiscal Malfeasants hiding in American Government, Corporate and Personal balance sheets, we should not expect a collapse in future interest rates, or that the earnings on the DJIA will be predictable and stable.They haven’t been since US Politicians and Bankers intentionally took the US dollar off the Bretton Woods’ Gold Standard in August 1971. My BEV Chart shows the reality of the post Bretton Wood’s DJIA’s Earnings fluctuations.
It’s not just Greece that went to Wall Street to hide their liabilities!Wall Street has created a thriving derivatives market that has intentionally obfuscated accounting for the past two decades.
Most people are unaware that there exists a 600 Trillion Dollar OTC Derivatives Market created by Wall Street’s major â€œInvestmentâ€ Houses. These are Leveraged Junk Financial Instruments. Warren Buffet called them â€œWeapons of Mass Financial Destruction.â€ They were not sold directly to the public, but rather to the publics employers, insurance companies and pension funds. We know the names of some past purchasers of Wall Street’s â€œderivative productsâ€, the Government of Orange County, California, who in the mid 1990s went bankrupt because of derivative losses. And then
comes to my mind. Enron and their accountant Arthur Anderson went down. But as is so typical, Banks like JP Morgan who made these fraudulent deals possible, are always ignored by the US Justice Department and the Media.
We should suspect that many Enrons are currently listed on the major stock indexes, and Orange Counties in the Municipal Bond Market. With hundreds of trillions in notional value in the OTC Derivative Market hiding somewhere, there must be Companies whose financial obligations for payroll, capital re-investment and taxes will be overwhelmed. Dividend Payout for such companies will be the first line item to go to zero when these ticking time bombs detonate.
What will make them blow up? When Doctor Bernanke and Secretary Geithner lose control over asset valuations, currency and interest rates. These were the risks being hedged. And I note that all of these â€œRisksâ€ were * NOT * present in the global economy when the world was on a Gold Standard.
It would be wise to expect future yields for US Dollar Debt to explode, taking the DJIA’s Dividend Yield up with them. In such a situation, how high must the DJIA Dividend Yields rise to compete with Bonds when Capital Gains are only a pleasant memory, and Dividend Payout cuts a constant fear?
Looking at Barron’s Best and Medium Grade Bonds in December 2008, the lesser quality bonds had to half their price in a matter of weeks to produce a competitive yield with Bonds of higher quality.I don’t care to predict when, but I strongly suspect we will see the DJIA’s Dividend Yield soaring above Bond Yields.
Money knows no borders. The day is coming when the Political, Economic, and Corruption realities currently present, but largely ignored in the United States, are going to be priced into the valuation of American Financial Assets. American companies, such as the 30 listed in the DJIA, are going to have to compete with other nations, whose companies have better prospects because they operate in Economies with vastly less corruption & pettifogging government regulations.
Mr Prechter believes that to be competitive, the American Stock market must discount the DJIA to around 500. I think he’s on to something.
Mark J. Lundeen
19 February 2010
Dow Jones -40% Declines From 1885 to 2008 is the article inspiring this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my â€œBEV Chart.â€
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.