“A net 67 percent of asset allocators say that they are overweight global equities. This represents a significant further increase from January and December when a net 55 and 40 percent were overweight the asset class, respectively.” Emerging market investments dropped.

The DJIA is up 6% so far this year. Japan’s market is higher as are a number of markets in northern Europe and South America.  No large money manager wants to miss the chance to post strong first quarter results

There is a strong belief that as markets begin to increase institutions take large positions in equities and then abandon them to individual investors. The value of equities then begins to fall. The small investors take most of the losses. Things may be different this time around. The belief that stocks will continue to rise is widespread.

The value of equities could go up another 25% this year and continue the extraordinary run which began in March 2009. Or, there could be a sharp sell-off. Institutions seem ready to stay the course in equities and take the risk the market has not topped. If investing in the stock market is just gambling as some people say, the smart money has bet on another year of extraordinary improvement.

Douglas A. McIntyre

Very sharp stock market drops in the 1930s, followed by rebounds, are a reason that some years from that period make this list. The market rose 38% in 1935. It had, however, fallen 17% in 1929,  34% in 1930, and 52% in 1931. The 1935 rally was not so significant when put into that context. Economic cataclysms often distort equity values significantly, producing broad market gyrations that do not reflect economic reality.

It would be tempting, but simplistic, to say that the DJIA now faces the “law of large numbers,” which should prevent it from changing by significant amounts since it is near an all-time high. The DJIA peaked at 14,000  in October 2007 and will close 2010 at  about 11,600.  According to this assumption it would be  unlikely for the index to rise to 14,000 quickly or plunge by thousands of points.  Swings of this magnitude are almost unheard of.

It may be wrong to assume that the “law of large numbers”, applies to the Dow, actually. The DJIA rose from 6,600 in March 2009 to 11,200 in April of this year, an improvement of 68% in just over twelve months. The percentage movements in the DJIA sometimes have little to do with the raw number at which the index trades.

One of the most frequently cited reasons for the movement of the Dow is that traders bid the price of the index up or down based on their predictions about the economy six month in the future.  Some of the rebound rallies in the Depression sent wrong signals if that is true. It seems unlikely that the tremendous rally which ended this spring was an accurate predictor of the economy today, based on the current level of unemployment, slow GDP growth, and a deeply troubled housing market.

24/7 Wall St. obtained data on GDP growth from measuringworth.com, unemployment and CPI data from the Bureau of Labor,  Statistics, and historical Dow Jones prices from econstats.com. These are the ten greatest stock market years of the last century.

1915
Dow Jones Change: 81.7%
Dow Jones Close: 99.15
Real GDP Change: 13.87%
Unemployment:  8.5%
CPI Annual Change: 1%

Construction began on the Lincoln Memorial, Albert Einstein developed his theory of general relativity, and Alexander Graham Bell conducted the first successful transcontinental call. The Dow Jones increased more than 80% in a single year, the largest increase in the last century.

1919
Dow Jones Change: 30.5%
Dow Jones Close: 107.23
Real GDP Change: 0.8%
Unemployment: 1.4%
CPI Annual Change: 14.6%

Unemployment was only 1.4% for the year, one of the lowest rates during the 20th century. Rotary dial telephones were invented, and the Eighteenth Amendment made the sale of alcohol illegal in the United States. Prohibition began, and so did daylight savings time.

1928
Dow Jones Change: 48.2%
Dow Jones Close: 300.00
Real GDP Change: 6.05%
Unemployment: 4.2%
CPI Annual Change: -1.7%

In 1928, the roaring 20’s peaked, and the stock market hit new highs, nearly doubling over the course of the year. The Dow ended the year at 300.00, a level it would not reach again for 30 years. Herbert Hoover was elected, Penicillin was discovered, and Amelia Earhart flew across the Atlantic ocean.

1933
Dow Jones Change: 66.7%
Dow Jones Close: 99.90
Real GDP Change: 10.89%
Unemployment: 25.2%
CPI Annual Change: -5.1%

Following the end of the Great Depression, the United States economy improved significantly in 1933.  Franklin D. Roosevelt proposed New Deal programs, many of which would propel the country into recovery.  The Dow Jones increased a whopping 66.7%, up from the previous year’s close of 59.00.

There are very few reasons for the market to stay down and many of reasons for it to advance.

Some pessimists about the long position of the market argue that it had no business moving from 6,700 early last March to over 11,200 a few days ago. Under normal circumstances, that would be a fair assertion. but the US economy has emerged from the worst recession in eight decades and reasonable GDP growth has begun. The talk of a double dip recession, still fairly loud 60 days ago has nearly ceased.

The market is currently under siege to a large extent due to the fear that the credit problems in Greece could move to other weak economies in the region, particularly Spain and Portugal. This in turn would increase the amount of any bailout to salvage the Eurozone alliance from the $140 billion over three years going to Greece to perhaps a trillion for all three countries. But, as many economists have said, Spain is not Greece, and its immediate needs to raise money by issuing more sovereign debt is less than Greece’s. The more specific concern, of course, is that deep worries about the future of Spain and Portugal will make it impossible for them to raise money at any reasonable interest rates. But, if their problems are not acute and the global credit markets are revived after the settlement of the Greek debt problem, the flow of capital will adjust to take into account the poor but not desperate troubles of Spain and Portugal. They will be able to tap the capital markets although it will certainly be at a cost higher than they would like.

The other concern about the Eurozone, at least for the US, is that rolling defaults of sovereign debt in Europe will crush American banks balance sheets. But, none of the big financial firms in the US have disclosed any significant problems which means that they may not exist. And, at worst, some of the TARP money would have to be redeployed to temporarily prop up the system. The American taxpayer will be no worse off than he was a year ago. Banks have divested themselves of enough toxic assets that a blow from a drop in the value of European paper would not be deadly.

The most important worry about Europe is that it is such a large market for US exports. But, even if the prospects of Greece, Spain, and Portugal fall apart, France and especially Germany will still have stable economies. They are also economies that happen to house commercial banks that will require bailouts of their own. That process, even if it causes recession-like symptoms, will not obliterate the rate at which American goods are imported; it will merely slow it. The rise in US exports to China and India will not completely offset trouble with Europe, but it will certainly cushion the effects.

In America, the economic health of the country has recovered as well as many optimists said it would. With the exception of stubborn unemployment, housing, retail sales, consumer spending, business activity, and manufacturing and capital goods activities have recovered quickly, particularly give the depth of the recession less than two years ago. These improvements can no longer be considered a mirage. Their upward movement may be unsteady, but it is powerful.

Earnings is the first quarter were generally as good as expected and there were signs of unanticipated rapid improvement in industries like tech and automotive. Companies have cut enough of their workforces that productivity continues to rise, up 3.6% in the first quarter. Productivity may allow firms to enjoy improved profits but, corporate America cannot squeeze blood out of a stone. The jobless rate is likely to improve in the second half of the year. The process will take several years to complete, but the economy is unlikely to be in recession in the mean time.

The earnings season is like the football season is now. Players have to return to camp shortly after the Super Bowl. Large US companies will start to signal their second quarter results again at the end of June. There are many reasons that those figures will improve and few for them to deteriorate. Consumer and business spending are not surging  but they are quietly improving.

The contagion problem could cause the nations in Europe to go completely to pieces and send the Continent into a prolonged and scaring recession just as a brutal one is ending. That means that Germany, France, Switzerland, and the Scandinavian nations have no chance to wall themselves off from the three or weak companies in their midst. The remedy of breaking up the Eurozone is not an ideal one, but a banding together of the five or six strongest economies in the region would represent a formidable economic force which would include some of the largest banks in the world–a network of firms that with government support could keep credit moving in the region’s system.

The US economy is improving inexorably while it might not be as quickly as the government or those out of work would like. Part of Europe many be cancerous, but that does not mean that the entire region will become diseased

The American markets will go higher because the financial and economic forces behind them have improved so much over the last year.

Douglas A. McIntyre

A new Gallup poll shows that many Americans have regained their faith in the market. The research shows that “The 22% of Americans who now say stocks or mutual funds constitute the best long-term investment is up from 15% a year ago.” That number is still relatively low. Oddly enough many people still think that real estate is a better long-term investment than stocks. That would seem counterintuitive based on the sharp drop in real estate and the low likelihood that it will recover any times soon.

The renewed faith in the markets is actually relatively isolated to the more wealthy. That is not terribly surprising because most equities are helped by people with high incomes. They have seen their investment slide and then recover. Many people with incomes below $30,000 never held stocks at all, so their suspicions of the markets may be based more on what they read and have heard rather than their own investments.

The divide in stock market perceptions is also based, in large part, on levels of education. Those with a positive attitude toward equities tend to be college graduates.

Institutions have already returned to the markets. For the last year, it has given them good return especially investments in magacap tech and bank stocks and funds that simply play the indexes.

The well-to-do investors have decided to follow the “smart money” back into the market. That may be happening just before the market tops, as it often does.

Douglas A. McIntyre

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Some traders speculate that the market has run too far, too fast.

If employment starts to pick up, housing improves, and corporate earnings continue to rocket in the second quarter, the precedents set by 2007 tops could disappear as the market breaks through them.  Douglas A. McIntyre

Chart from The Chart Store.

The real stability in the Dow and the period when individual and institutional investors made fortunes was between October 2006 and June 2008.  It will take a similar period with the DJIA above 12,000 for most people and firms to make back the hundreds of billions of dollars that they lost in the crash that bottomed last March.

The pieces are in place for the DJIA to hit 12,000 and to stay above that for some time.The P/E ratio of the S&P 500 stocks was around 20 from 2002 to 2008. As prices rose and profits fell, that PE number jumped to over 100 briefly and was over 60 for three quarters in late 2008 and 2009. Based on analysts forecasts, the P/E of the S&P has returned to its earlier levels. Earnings for most large companies are expected to recover this year and next as sales rise and expenses remain relatively low.

Stock prices are also being helped by the record amounts for cash which the biggest companies have on their balance sheets. When these amounts are backed out, P/E ratios on their actual operating figures fall sharply making share prices unusually cheap. As the companies pay out dividends and buy back shares, stock prices become even more attractive.

The economic recovery may indeed bring another long period of market prosperity. The DJIA has approached the 11,000 level and retreated several times over the last three months. It current assault failed yesterday. Perhaps the market is wary of admitting the economy is recovering. If stocks become overbought and GDP falters, the sell-off will be violent.

Millions of Americans have nest eggs and retirement funds that they had in 2006 and many institutional and mutual funds have asset bases well shy of where they were that same year. The market “recovery” is still a long way off.

Douglas A. McIntyre

The Dow closed 10,545 and the Nikkei at 10,546.

Douglas A. McIntyre

• Bank of America (NYSE: BAC) and Chevron (NYSE: CVX) are being added into the index.
• Altria (NYSE: MO) and Honeywell (NYSE: HON) are being removed from the list.   

There will probably be some criticism here for "changing an index to populist trends."  The DJIA is also a price-weighted index, although this will not result in massive changes to the index components elsewhere.  We’ll follow up with more if we make any serious determinations:

• Deletes: HON $57.83; MO $73.09
• Adds: BAC $42.16; CVX $79.26

It is interesting that despite the problems in the financial sector that the DJIA chose to include bank of America.  Perhaps that is a solid vote of confidence if there ever was one. Interestingly enough, Chevron used to be a component and was replaced in the 1990′s.

Honeywell is a bit of a surprise.  But Altria is actually not that surprising when you consider that it completely unloaded Kraft Foods (NYSE: KFT), is about to unload Phillip Morris International as a separate unit, and will probably retire quite a bit of stock in a share buyback.

As large as the DJIA is for "the market," it is far smaller in index weightings for money managers than the S&P 500 Index, and this will not have any direct impact on their weightings in the S&P 500 index.

Jon C. Ogg
February 11, 2008

On Wednesday, we have two more DJIA components posting earnings:

• Altria (NYSE: MO) will post  earnings for Big Tobacco.  First Call has estimates at $0.97 EPS and $9.19 Billion in revenues.  If it offers 2008 guidance, the estimates are $4.74 EPS on $39.6+ Billion in revenues. What we are most interested is this spin-off of Phillip Morris International.  This has been in the works for longer than we care to think about, but we literally be on the doorstep of the formal spin-off plan.  Also after the spin-off and after the remaining cases in Florida are quantified, we’ll also get to see what may end up being a huge share buyback.  We aren’t banking on a 100% certainty that we’ll these answers after tomorrow’s earnings, but these are perhaps the only real issues we care about.
• Merck (NYSE: MRK) is expected to show earnings also.  First Call has estimates pegged at $0.74 EPS on almost $6.3 Billion in revenues. As the problems that have risen are not ‘backward looking’ we haven’t seen estimate changes on Q4-2007.  But estimates have started coming down mildly for 2008 with consensus now at $3.37 EPS on $24.76 Billion in revenues.  This report is going to watched much harder than before because of the Vytorin problems that surfaced last week and since shares are down almost 20% in just over two-weeks.

On Thursday, we’ll see the mega-consumer products giant Proctor & Gamble (NYSE: PG) report earnings.  It is hard to imagine that it will be able to avoid making the comments about higher raw materials costs, although the company has managed its earnings rather well so far.  First Call has estimates at $0.97 EPS on roughly $21.25 Billion in revenues.  If the company follows suit with other big multi-nationals and offers 2008 guidance, those estimates are $3.49 EPS & $82.15 Billion in revenues for fiscal June-2008 and $3.92 EPS & $87.25 Billion in revenues for fiscal June-2009.

On Friday we get to see earnings from the most valuable company in the U.S. measured by market cap.  ExxonMobil Corp. (NYSE: XOM) is expected to post $1.95 EPS.  Revenues are not projected as commonplace as earnings but the estimate we saw was over $114 Billion.  The company does not usually offer guidance but it does discuss how higher oil prices affect its costs along with its revenues.  Estimates have risen ahead of earnings in recent weeks, although we’d caution that Exxon does not have any solid history of late in beating earnings despite our pain at the pump and all the price-fixing accusations from the public and from critics.

Jon C. Ogg
January 29, 2008

The good news is that there are many stocks and many sectors that hold up and it is becoming ever easier by the day for Joe Q. Public to learn to profit from the market slides too.  We just covered a whole spate of ETF’s (OUR FULL ETF INDEX HERE) and you can see the bear market ETF’s to own, and these will also be the ones that many trade during a recession.  We would caution that with many already writing about a bear market or a recession that the worst may have already been seen.  Investors who buy when everyone else feels miserable usually win in time.  247WallSt.com has come up with many lists for traders and investors for 2008.

Investors have been fond of Defensive Stocks in companies such as food, beverages, tobacco, consumer products, and the like.  We have our own index where we cover Value Stocks and trends affecting individual stocks that are geared toward value investors.  We noted "The Four Safest Stocks in the World" this last week, and we even came up with a list of value stocks from defensive stocks for the first part of 2008.

We also gave our own targets and opinions on the components of the Dogs of the Dow for 2008 to show which ones are challenged to do better and which ones may be the sleepers.  Does it make sense that Home Deport (NYSE: HD) is UP FOR 2008?  We outlined it as "Bad times at companies feel like they will last forever just like in the economy, but history dictates that they always recover.  After Q1 or Q2 this could end up being one of the surprise sleepers of 2008."

We also created a list of iconic US companies that may not exist at the end of 2008. Some may not even make it halfway through the year. Not all of these will go out of business, as some may be auctioned off in pieces and others may be bought.

Turnaround stocks (FULL INDEX HERE) are perhaps some of the best opportunities.  Whether you are in good times or bad times there are many companies that just don’t make the grade and have difficulty in generating any growth or any consistent earnings.  Catching the right one will be exponentially rewarding, but because these are troubled you have to be aware that some will completely bite the dust.  We broke these up groups as well and came up with a basic industry list that has yet to turn the ship around.

First and foremost, we came up with a list of stocks that could double in 2008.  This is not a safe list for the faint of heart, because the set-up for a double is very difficult for established companies and there are usually extreme circumstances that have to be in place.  Companies like E*Trade (NASDAQ: ETFC), Palm (NASDAQ: PALM), SIRIUS Satellite radio (NASDAQ: SIRI), Level 3 Communications (NASDAQ: LVLT) and more are on this one.  FULL LIST HERE.  When we did this big list and evaluated out screening of more than 100 companies, there were actually many more stocks that also fit the bill.  Keep in mind that something bad happened along the way for these shares to have been bettered enough where the stock could double. On this other list were companies like Capstone Turbine (NASDAQ: CPST), Qwest Communications (NYSE: Q), Travelzoo (NASDAQ:TZOO) and more. FULL SECOND LIST HERE.

247WallSt.com has also noted some of Jim Cramer’s 2007 calls that still show some pertinence in 2008, and many are still active calls of his.  Cramer also recently outlined many overlooked or oversold tech stocks that he thinks have an uncommon value here.

Most of these come under review regularly in our weekly subscriber letter in "10 Stocks Under $10" which is exactly what it describes: ten low-priced stocks under $10 where we make bullish or bearish analysis as to what is good or what is bad about these.  We call some candidates for exponential growth and some where we think the companies are likely doomed.  247WallSt.com even produced a list of stocks whose volatility and values could cause the shares to FALL 50%.  Some of these already have or are close to it.

Lastly, we have a list of potential management changes.  We have a list of CEO’s that we have designated as CEO’s WHO NEED TO GO.  This is not only over share prices, because many companies do well while their stock doesn’t.  These CEO’s have done heinous jobs usually with a key event or series of events under their watch that has rendered them (and their company) useless.  We even gave a handicap of what sort of rally the stock might see if these managers left.

Jon C. Ogg
January 27, 2008