New Values, New Prices!

It seems at times I'm headed in one direction and suddenly I find myself in a place I had not planned on being. This blog is such a case. As I was reviewing some historic information on the DJIA (started in 1896, the only original stock still in the Average is GE) I began looking at rates of return. I was surprised when I saw a quote from Warren Buffett, commenting on the 5.3% compounded average of the DJIA over the 20th Century, "a wonderful century." This got me wondering about the current compounding rate of the DJIA. It took me awhile to get together all the information I wanted to study but, in summary, the compound average growth rate seems about right. Back at the beginning of 1973, the DJIA was about 1,051.70. If you took that and compounded it at 5.3% you would have a current DJIA of 7,247.44. This seemed familiar and indeed, the DJIA closed on November 20, 2008 at 7,552 and on March 9, 2009 it closed at 6,547, both new lows at the time. At the close of business yesterday, June 23, 2009, the DJIA closed at 8,322 which, based on my starting point, was a 5.7% compounded average. Still in the ballpark. I then used a different benchmark, the closing DJIA for July 1, 1989, which was 2,661. I arrived at this date very scientifically; my computer will only go back 20 years on daily charts. Using my 5.3% compound rate of return, I arrived at 7,662. If I used a rate of 5.7%, I got 8,297, which is very close to yesterday's close. Seemed like 5.7% was a reasonable return overall and compared well with the 5.3% for 100 years. Once I start these things I tend to get hooked, and this was no exception. I took the 1973 starting point of 1,051.70 and the close in October 2007 of 14,165. To get from my starting point to the end point you would have needed a compounded return of about 7.5%. If I used July 1, 1989 as the starting point, I’d need about an 8.4% compound rate of return to get to the October 2007 close. Averages need to be used over long periods of time to be worthwhile, and I'd say 20 years and 36+ years would be a good sample. They show me that the average of 5.3% was greatly exceeded when the stock market hit its high of 14, 165. You may be wondering what all of this means and I have to wonder myself. What I do know is that on June 15th and again on June 22nd we had 90+% down days within the NYSE Operating Companies. This is a very bearish sign when you get two of these within 30 days of each other, let alone 6 days. Usually, after a 90% down day, we see the market go up for 2-7 days. That was not the case following June 15th. Taking this all together, I wonder if the market is about to retrace its steps to the low points noted above of November 20th and March 9th. I also wonder if during a period of excessive leveraging in the markets, prices were raised beyond what was reasonable and perhaps now that we are going through a deleveraging period, we will get a clearer picture of what companies are really worth. We shall see what we shall see. Ed