Vol. 22, No. 5,514 - The American Reporter - September 7, 2016

by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Fla.
July 18, 2007
Market Mover

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BOCA RATON, Fla., July 17, 2007 -- The news media crowned a "new all-time high" - and the 14,000 milestone - on the Dow Jones Industrial Average (DJIA) today. Try to stifle your yawn.

It's probably a good time to review my own "Investing 101" philosophy.

As a surrogate for the broader stock market, global markets and economies, and even the U.S. economy the DJIA is a poor leading indicator and literally a shadow of its former self.

The "Dow" is the invention of smart editors and smarter marketers for the Wall Street Journal's parent, Dow Jones & Co., which is now a $60-a-share takeovver target of Rupert Murdoch, whose editors and marketers may be smarter still. When it was convenient to talk about the cloning of Rust Belt America, the Dow 30 "Industrials" were the irons and steels, automobiles and locomotives that moved a nation. In recent decades the Index has been doctored to conform with popular culture and to cull multi-year losers.

Before the recent boom cycle of natural resources and commodities, the largest private landowner in the world, International Paper, had fallen from analysts' grace, and languished in Dow doldrums. It was dropped from the index.

AT&T, in its various incarnations, is either in the Dow or out of the Dow, depending on the year and which Baby Bell merger is hottest. When Microsoft and Intel focused Wall Street "buzz" on the then-fledging NASDAQ instead of the blue-blooded New York Stock Exchange, these tech stocks suddenly were dubbed "industrial" stocks. This was great during the go-go tech years, but has helped make the DJIA an anachronistic relic of bygone days.

The S&P 500 and 100 Indices, the Russell 2000, and other baskets of stock seem to be a better reflection of where investors have risked their money and where they are heading in the future than the DJIA.

If one judged the "market" by the "Dow" you were basically dead in the water for the last six years. Dow 12,000 actually puts the "buy and hold" investor back even further, to chart patterns etched in 1999, nearly seven years ago.

I am not alone in writing earlier this year, and in previous years, that a Dow 15,000, or 20,000 or 25,000 in the next decade is a necessity rather than a pipe dream. Going back to August of 1987, the year of the last major "crash" to Dow 2722 to the present day, we have seen months and years in which Dow investors pulled their hair out waiting for the Godot of Wall Street. Normal historic growth rates should move the Dow and the broader indices ahead for the next few years.

The problem is international politics, spiked with interest rates.

Since Sept. 11, 2001, a number of money managers, myself included, are more likely to "pull the trigger" (excuse the pun), and take small and modest gains "off the table." Positions which used to be held for months and years may now be held for days and weeks.

Gains of four, five, or six per cent, locked in for a client in April, May or June, allow cautious portfolio managers to "go flat" with cash for long periods, knowing they had already "booked" gains which will likely beat Treasury rates and Certificates of Deposits. Given another terrorist attack on U.S. soil, mounting war deficits, and a pullback in equity markets could also make single-digit returns look excellent to the retail or institutional client.

Finally, the interest-rate puzzle could easily put the magical, mystical Dow back to 10,000 in short order.

To the amateur observer, interest rates certainly would not be shocking at, say, 30-year-fixed rate mortgages at seven, eight, or nine percent.

To the professional investment manager or monitor, "nothing climbs straight to the Moon."

Looking at the past two years and 16 (or more) Federal Reserve rate increases, history beckons perhaps a 50 per cent retrenchment in rates.

The mortgages are a handy layman's reference point:

Buy a long-term government or corporate, investment-grade bond for $100,000 at a time when those mortgages are seven per cent and hold it. In a few months or a year, if rates drop down to six percent, your bond is worth $112-113,000. I don't make the rules, I just relay market behavior. At this point, you can take your profit and pay the lowered capital gains tax and reinvest your money, do nothing, or in a tax-advantaged account such as an IRA, just smile and pour yourself an expensive drink.

By the same rule of thumb, a pullback to five-percent rates would price your bond at $124-126,000.

Obviously the converse is true. If rates continue to climb for a third year in a row, when you open your newspaper and see "No Points, To Qualifying Buyers, 30-Year-Fixed 8 Per Cent!", as the owner of those seven percent bonds, your $100,000 is now worth $87-88,000.

Got it? One full-point move (100 basis points) in interest rates moves investment-grade, long-term bonds 12 to 13 percent inversely (in the opposite direction).

My estimate is that soon, smart investors will join me in "over-weighted" quality government, agency, and corporate bonds in their portfolios. By the time Money Magazine, CNBC, Jim Cramer, and USA Today point out that total return in these bond markets could annualize at 10 percent or more for 2007.

When the "big money" moves to where we contrarians have been for months, I'll probably move money back to Dow stocks.

Editor's Note: This article and its title are adapted from one our prescient Finance Correspondent, Mark Scheinbaum, wrote for AR on May 10, 2006. Not much has changed...

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