Dow 11,000: Opportunity or Threat?

By Anand Chokkavelu, CFA 

October 11, 2010 

An admission: I'm a long-term buy and hold investor who knows better, but I still check my portfolio roughly 15.4 times a day. More often when the stock market's surging.

With the Dow at 11,000, Yahoo! Finance loves me. But as we all know (or should know), 11,000 is just a number. It should not spur any rash trading one way or the other.

To make the most of this arbitrary market event, I asked three of my fellow analysts for some advice for individual investors at these stock price levels.

Morgan Housel, Fool contributor: These milestones are generally meaningless, but I still think the market at these levels provides more opportunity than threat. The S&P 500 is on track to earn about $83 this year, and an estimated $94 next year. With the index at 1,165, I don't know where the overvaluation anxiety comes from. We're talking broad market multiples of 12-14, which should qualify as somewhere between cheap and reasonable -- with room for error. At the individual company level, high-quality companies like Microsoft (Nasdaq: MSFT)and Procter & Gamble (NYSE: PG) trade at valuations that shouldn't make sense to rational people.

My feeling is that the market's surge since the lows of March 2009 simply has many investors asking, "how is this increase justified?" They see a 70% market increase at a time when the economy looks like a cesspool, and it just feels wrong. But focusing only on the increase is misleading. The important question to ask is, "was the depth of the market crash justified to begin with?" I don't think it was. Look, corporate profits are at an all-time high. Nominal GDP is at an all-time high. Personal spending is at an all-time high. The long-term drivers of the stock market aren't doing as bad as some imagine.

Alex Dumortier, CFA, Fool contributor: Yes, last week the Dow crossed 11,000 for the first time since early May; however, it would be very difficult to argue that higher stock prices are now an opportunity for anyone who is a net buyer of stocks -- which I expect is almost everyone reading this.

Still, I will say that the blue-chip Dow index represents almost certainly a better opportunity than the broader market S&P 500, as the following table suggests:

Fund	P/E Multiple	Dividend Yield	3-5 Year EPS Growth
SPDR S&P 500 (NYSE: SPY)	13.8	1.89%	10.7%
SPDR DJIA ETF (NYSE: DIA)	13.2	2.69%	9.1%

Source: State Street Global Advisors website.

At a cheaper multiple, I'll take the extra 80 basis points in dividend yield of the Dow ETF over the 160 basis point advantage in estimated earnings growth for the S&P 500 ETF any day of the week -- something about birds, hands, and bushes.

Investors who have the time and the ability can earn yet better returns from stockpicking and, given the underpricing of high-quality companies, the Dow components make a good shortlist from which to begin one's search (legendary investor John Paulson likes and owns at least three).

Matt Koppenheffer, Fool contributor: I don't pay a whole lot of attention to the Dow. The index contains all of 30 stocks, and it's really tough to get a good feel for what's going on in the massive U.S. market based on that small number.

Past that, it's meaningless to focus in on a number like 10,000, 11,000, or even 111,000. It looks nice in newspaper headlines, but the price level of an index is only noteworthy when looked at in the context of the profits produced by the companies in the index.

When I focus in on something more meaningful -- like the S&P 500's current price-to-earnings ratio of 16.6 -- I'd say that it's hard to peg the overall market as being particularly cheap or expensive. But I consider myself a stock-picker and I'd say that there are certainly opportunities for investors to find great individual stock opportunities in this market.

The great thing is that a lot of the market's current opportunities are high-quality, dividend-paying, blue chips. Intel's (Nasdaq: INTC) stock, for example, is currently sitting at a forward P/E of just 10.6 and is paying a 3.2% dividend. Chevron (NYSE: CVX) has a forward P/E below 10 and a 3.4% dividend. It doesn't take a whole lot of brain busting to figure out that these are top-notch companies, so when I see these kinds of valuations, I'm all over them.

http://www.fool.com/investing/general/2010/10/11/dow-11000-opportunity-or-threat.aspx?source=irasitlnk0000001&lidx=5

Stocks and interest rates tumbled overnight as investors around the world took a bleaker view of the US economy.

Offshore overnight

Stocks and interest rates tumbled overnight as investors around the world took a bleaker view of the US economy.

The Dow Jones industrial average fell 265 points, its biggest drop in six weeks, and all the major indices fell more than 2 per cent.

The yield on the Treasury's 10-year note fell to its lowest level since March 2009 as investors worried about the economyand avoiding stocks sought the safety of government securities.

Companies across a wide range of industries dropped.

Only 442 stocks rose on the New York Stock Exchange, while 2627 fell, a sign that investors expect all businesses to suffer if the economy continues to weaken.

Investor gloom deepened a day after the Federal Reserve said it would begin buying government bonds as a way to stimulate the economy.

News of slower industrial growth in China and a disappointing economic indicator in Japan helped send stocks plunging first in Asia, then in Europe and the US.

Investors got more bad news after trading ended in the US Cisco Systems Inc's revenue in the company's latest quarter fell short of analysts' expectations.

When markets settled, the Dow had dropped 265.42, or 2.5 per cent, at 10,378.83, its largest slide since it fell 268.22 on June 29.

The Standard & Poor's 500 index fell 31.59, or 2.8 per cent, to 1089.47, slipping below 1100, a key psychological level.

Falling and holding below that level could lead to more selling as computer-driven trading sets in.

The Nasdaq composite index fell 68.54, or 3.01 per cent, to 2208.63.

The Nasdaq tends to have the biggest losses when stocks are falling sharply because many of its component companies are smaller businesses that struggle the most in a weak economy.

Trading volume was fairly light on the NYSE at 1.2 billion shares.

Trading has been particularly slow, even by summer standards in recent days as uncertainty about the economy led many investors to exit the market completely.

Low volume also can exaggerate swings in the market.

The Chicago Board Options Exchange's Volatility Index rose 3.02, or 13.5 per cent, to 25.39.

The VIX is known as the market's fear gauge because a rise signals traders are expecting more drops in stocks.

European stock markets closed sharply lower on Wednesday after the US Federal Reserve warned that the US recovery was stalling and that it would take fresh stimulus measures to get it back on track.

Dealers said the warning only confirmed what many had feared after recent disappointing data, especially last week's worse-than-expected employment report, which stoked growing fears of a double-dip recession.

Data earlier on Wednesday also showed a marked slowdown in the Chinese economy, hitting sentiment badly in Asia and compounding fears that one of the world's growth engines might not be able to drag its peers forward.

At the same time, a Bank of England growth downgrade for the British economy added to the negative tone and offset recent strong eurozone figures.

Second quarter German growth figures, due on Friday and which are expected to be very good, will be closely examined for any sign of approaching weakness.

In London, the FTSE 100 index of leading shares closed down 131.2 points, or 2.44 per cent at 5245.21 points.

The German DAX lost 132.18 points, or 2.10 per cent, to 6154.07 and in France, the CAC 40 tumbled 102.29 points, or 2.74 per cent, to 3628.29.

How we fared yesterday

Australian shares joined a global retreat, dropping the most in nine weeks, as worries about the global economy outweighed a bumper profit result from the Commonwealth Bank. Banks, miners and information stocks led falls.

The benchmark S&P/ASX200 Index ended the day down 85.2 points, or 1.9 per cent, at 4455.5 points, while the broader All Ordinaries Index had fallen 83.3 points, or 1.8 per cent, to 4479.5 points.

Commodities

World oil prices fell sharply in line with tumbling global equity markets as investors set aside a positive International Energy Agency report on demand.

New York's main contract, light sweet crude for September, dropped $US2.23 to end the day at $US78.02.

London's Brent North Sea crude for delivery in September sank $US1.96 to $US77.64 a barrel.

News of falling US oil reserves and increased demand worldwide did little to push prices higher.

The US government reported on Wednesday that crude inventories fell by three million barrels last week to 355 million barrels.

Earlier, the Paris-based International Energy Agency raised its estimate for world oil demand this year by 80,000 barrels per day, and for next year by 50,000, on the basis that the global economy grows 4.5 per cent this year and 4.3 per cent in 2011.

The revised figures mean total demand this year would rise 1.8 million barrels per day or 2.2 per cent to 86.6 million. It would then rise by 1.3 million barrels per day or 1.5 per cent to 87.9 million next year, according to the IEA.

Economic recovery is pushing up estimates of oil demand this year and next, but there are dangers to growth in advanced nations and some emerging countries, the IEA added.

The IEA is the oil strategy and monitoring arm of the 31-member Organisation for Economic Co-operation and Development.

December gold was the only key metal to rise in overnight trading, closing up $US1.20 at $US1199.20 per fine ounce.

September silver closed down 25.6 US cents at $US17.902 per fine ounce, and September copper fell 5.85 US cents to $US3.2540 per pound.

October platinum fell $US16.40 to $US1,520.60, and September palladium also fell, by $US5.90 to $US464.70.

AAP, with BusinessDay

http://www.smh.com.au/business/markets/stocks-set-to-dive-on-offshore-plunge-20100812-1203b.html

DJIA during September 11, 2001

http://en.wikipedia.org/wiki/Economic_effects_arising_from_the_September_11_attacks

Average Daily Volume of DJIA over the Decades

Investors flee stocks in global sell-off

Investors fled the US and European stockmarkets in a sell-off triggered by a wave of increasing alarm over the global economic outlook.

The Dow Jones Industrial Average fell 268.22 points, or 2.7 per cent, to finish at 9870.30. The Standard & Poor's 500 Index dropped 33.33 points, or 3.1 per cent, to close at 1041.24. The Nasdaq Composite Index slid 85.47 points, or 3.85 per cent, to end at 2135.18.

All but one stock in the S&P 500 ended lower as escalating doubts about the stability of Europe's banks roiled markets once again.

"The day started with overseas - China - that was bad," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "Then it got banged out with the consumer confidence and it all just kind of went from there."

The S&P 500 had tumbled below its 2010 intraday low of 1040.78 during the session, which analysts said could ignite further declines. The index closed at its lowest level since October 30, breaking its closing low for the year at 1050.47 - another bearish signal for markets.

"Everybody is talking about 1040, that it is the do-all, end-all, blow it up, end of the world, blood on the streets level. The market crashes, the S&P goes to 900," said Marc Pado, US market strategist at Cantor Fitzgerald & in San Francisco.

Economically sensitive sectors such as materials, industrials and financials were among the hardest hit.

Boeing slid 6.3 per cent to $US63.04 and Caterpillar shed 5.5 per cent to $US60.85. Diversified manufacturer 3M, which raised its second-quarter sales outlook last night, was not immune to the selling pressure, dipping 0.6 per cent to $US78.49.

Fears about the strength of the banking system surfaced again, with investors worried about a potential liquidity shortfall of more than 100 billion euros in the financial system as European banks repay 442 billion euros in emergency loans on Thursday.

The KBW Bank index fell 4.4 per cent and broke its 200-day moving average today at 48.00, which it had made a stand at last Thursday and Friday.

"The break of the 200-day moving average fueled more selling. Technically, this is another sign of weakness in the financials," said Elliot Spar, option market strategist at Stifel Nicolaus in Shrewsbury, New Jersey.

The CBOE volatility index, known as Wall Street's fear gauge, surged 22 percent to a session high of 35.39, its highest level since early June, in a sign more volatility could be in the offing. [ID:nN29161109]

Earlier in the day, the Conference Board corrected its leading economic index for China to an April gain of 0.3 per cent from a previously reported rise of 1.7 per cent, a sharp revision that undermined confidence in China's ability to sustain strong growth.

The correction prompted investors to turn against riskier assets, adding to a global sell-off. The Shanghai Composite Index fell 4.3 per cent to end at a 14-month low.

US consumer confidence dropped sharply in June, after rising for three months, on worries about the labor market, according to a report from the Conference Board. The news heightened fears of an economic slowdown after a recent spate of weak data from the housing and job markets.

‘‘Already under solid pressure amid the backdrop of lingering euro-area financial market concerns and a steep downward revision in a piece of Chinese economic data, global equity markets have extended losses following a much larger-than-expected drop in US consumer confidence,’’ analysts at Charles Schwab & Co said in a report.

About 11.38 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.

Declining stocks outnumbered advancing ones on the New York Stock Exchange by 2,831 to 259, while on the Nasdaq, there were 2,393 declining stocks and only 279 advancers.

Reuters, AFP

Wall Street Slips and Then Recovers

By CHRISTINE HAUSER
Published: May 25, 2010


Wall Street traveled a long way on Tuesday, but the journey was circular.

Uncertainty in Europe and Asia spilled over into the American market Tuesday, pushing stocks lower for most of the day and stirring concerns that the debt crisis could stall a recovery.

The Dow tumbled at the opening and languished below 10,000 until the last half hour, when shares staged a comeback. At one point, the major indexes were down more than 2 percent losses.

The Dow ended mostly flat, down 0.2 percent, or 22.82 points, at 10,043.75. The Standard & Poor’s 500-stock index was 0.38 points, 0.04 percent, higher at 1,074.03. The Nasdaq slipped 2.60 points, or 0.1 percent, at 2,210.95.

The drop followed equity markets in Asia and Europe, where most major markets were down at least 2 percent.

As investors had feared for months, the uncertainty over the sovereign debt crisis in Europe exacerbated concerns about the health of the global economy.

“If there was a doubt about it, there isn’t any more,” said Marc Chandler, the global head of currency strategy for Brown Brothers Harriman & Company.

“The European debt crisis is not simply a Greek phenomenon,” he said in a research note.

Fiscal troubles have circulated in Greece, reached Spain, where the central bank has taken over a failing lender, and hit home in Portugal, which has taken steps to make cuts. The government in Italy was also announcing spending cuts.

Germany, which last week banned some forms of financial market speculation in banning naked short-selling, went further Tuesday, proposing a law that would broaden restrictions on instruments investors use to bet against stocks, bonds and currencies.

As the American markets tumbled, investors fled equities for the relative safety of United States securities, pushing the benchmark 10-year Treasury note lower to 3.14 percent, its lowest level in a year.

The president of the St. Louis Federal Reserve Bank, James B. Bullard, said in a speech in London that he did not think the current situation would lead to a repeat of the financial crisis seen after the collapse of Lehman Brothers in 2008.

The United States “may actually be an unwitting beneficiary of the crisis in Europe, much as it was during the Asian currency crisis of the late 1990s.”

“This is because of the flight to safety effect that pushes yields lower in the U.S.,” he said. “Of course the U.S. also has its own fiscal problems that must be directly addressed in a timely manner if the nation is to maintain credibility in international financial markets.”

He also addressed concerns that the crisis could lead to a recession, saying it would probably fall short of becoming “a worldwide recessionary shock,” partly because governments are working to contain the risks. “In most cases,” Mr. Bullard said, “there is little reason to think that such events by themselves have the power to trigger global recessions.”

“Of course, it is always possible that ‘this time will be different’ and maybe it will be,” he said

There were also renewed tensions on the Korean Peninsula.

President Lee Myung-bak of South Korea said Tuesday that he would redesignate North Korea as his country’s archenemy, as the South Korean and American militaries announced plans for major naval exercises.

Asian indexes closed lower as a result.

Adrian Cronje, chief investment officer of Balentine, said however, that problems on the Korean peninsula aside, the fiscal troubles in Europe were overriding confidence.

Mr. Cronje said markets needed more than the nearly $1 trillion European support package to restore confidence. Instead, he said, investors are looking for a credible plan for sustainable public finances in Europe.

“What is happening now is people are starting to wake up to the fact that this stands a chance of derailing the robust economy,” Mr. Cronje said.

The euro continued to weaken on Tuesday, falling to $1.2347 from $1.2371 late Monday.

“The fundamental fallout of all this is an increasing risk of recession again in the U.S. and global economies,” said Allen Sinai, president and chief global economist of Decision Economics Inc.

“The way the U.S. is getting hit at the moment is sneaking in via the stock market. It is like water flooding the house; water seeps, finds a way.”

Domestic economic indicators were watched closely for any sign that events in the Euro-zone were having an impact on the United States, said James O’Sullivan, chief economist for MF Global.

The Standard & Poor’s/Case-Shiller 20-city home price index released Tuesday showed a 0.5 percent drop in March compared to February, a sign that the housing market was weakening despite low mortgage rates and government tax credits.

But more important than the March housing statistics were more current figures showing consumer confidence rose this month, Mr. Sullivan said,

The Conference Board index of consumer confidence rose to 63.3 in May, from 57.7 in April, according to a report released Tuesday.

“The decent rise in U.S. consumer confidence in May suggests that the turmoil in financial markets and lower house prices have yet to have an impact on the real economy,” said Paul Dales, United States economist for Capital Economics.

Interbank lending is coming under increasing pressure. Conditions in the credit markets deteriorated further on Tuesday, with the London interbank offered rate, or Libor, for three-month dollar loans rising for a 12th consecutive day, to 0.53625 percent from 0.50969 percent Monday. It was the Libor’s highest rate since late July 2009.

Bettina Wassener, David Jolly and Sewell Chan contributed reporting.

http://www.nytimes.com/2010/05/26/business/26markets.html?src=me&ref=business