What to make of today's market drop?

Credit Markets to Stock Investors: Calm Down

Excerpt:

So why are stocks falling?

The difference between the two asset classes this week may in part reflect stocks’ more exuberant start to the year.

Equity markets drew record inflows and the S&P 500 rose 5.6% in January, its biggest monthly gain since March 2016. Since the beginning of the year credit spreads on both the euro and dollar iBoxx corporate indexes have declined by roughly 0.1 percentage point. “All of the discussion at the moment that is negative about the equity market, none of it is about the economics, it’s all about those valuations and ratios,” Mr. McAlpine said. I

nvestors have been debating whether U.S. stocks look expensive, and what valuation should be used to measure that. The S&P 500’s 12-month rolling price to earnings ratio, a popular valuation measure, reached 23.4 in January, its highest level since 2002.

But not everyone believes that the message from corporate debt markets is the correct one. On Monday, S&P Global Ratings warned that the global proportion of highly leveraged companies, with a debt to earnings ratio above five to one, has risen by 5 percentage points since 2007, to 37%. Higher debt levels leave companies vulnerable to unexpected fast increases in interest rates, which would make it more costly to pay off their debt.

Comment: So what is Jim doing? Today I bought 6 shares of DUK. Source of above 

Cramer calls the stock market's nearly 1600-point plunge a 'flash crash' — it just 'broke again' https://t.co/sgZoGA5e0X via @YahooFinance

— James Peet (@jrpeet) February 5, 2018

Here’s a selection of some factoids from the day’s move, from The Wall Street Journal’s Market Data Group https://t.co/ZJ81WRE2Om

— The Wall Street Journal (@WSJ) February 5, 2018

Black Monday 1987 turned out to be a #nothingburgerhttps://t.co/AS51B7axRF

So will today$DJIA pic.twitter.com/YDpZW0nHDe

— James Peet (@jrpeet) February 5, 2018

Local investment experts not alarmed by steep market declines https://t.co/Ol2Vk5wQTp

— James Peet (@jrpeet) February 6, 2018

The Day After:

1,000 point swing in #DJIA todayhttps://t.co/3fcfJpxtbX pic.twitter.com/VPT7eYs8yK

— James Peet (@jrpeet) February 6, 2018

The DOW at 20,000

Dow ends at 20,000—marks 2nd-fastest run to a milestone run in history

Excerpt:

The Dow Jones Industrial Average on Wednesday closed above the psychologically significant threshold of 20,000. Finishing at the level represents a milestone for the blue-chip gauge and highlights a relatively speedy path higher for the stock market in the wake of Donald Trump’s election win in November. The Dow DJIA, is up about 9.5% since Trump’s Nov. 8 election victory, the S&P 500 index SPX, has gained nearly 7%, while the Nasdaq Composite Index COMP, has advanced roughly 9% during that period.

Comment:

• What do I think? Investors like Trump! The run-up from 19,000 to 20,000 is the Trump effect
• Will it go higher? I don't know. Generally stock prices go up as the underlying earnings go up. I'm skeptical of emotional buying. 
• On previous milestones. See this Wiki list and the chart below.
• When I was in college, the DOW had not breached 1,000 (I graduated in '71)
• Kathee and I started investing (in 401Ks) in '93 and '94

- Dow tops 20,000
- Asia stocks extend rally
- Yen fluctuates
- Oil back above $53https://t.co/gbqFXqR5Se pic.twitter.com/RhKWFRfagp

— Bloomberg (@business) January 26, 2017

Update: Here's a comparison of Dow 10,000 and Dow 20,000

Historically, the stock market tends to gain about 7% annually, inclusive of dividend reinvestment. This means the major stock indexes tend to double in value about once every decade, and that the natural trend of high-quality stocks over the long-term is to head higher. Of course, sometimes it takes longer than others for major indexes to hit arbitrary milestones. It took the Dow only three years and five months to head from 5,000 to 10,000. However, it took more than 17 years for the Dow to move from 10,000 to 20,000. Once again, these are arbitrary figures I'm using for illustrative purposes only, but if you'd have bought stocks at regular intervals over the past 17-plus years, chances are that your average buy in would have you up in excess of the 100% return in the Dow between March 29, 1999, and Jan. 25, 2017. Focusing too much on the Dow Jones's achievement also overlooks the inherent flaw of the Dow: its focus on price instead of market cap weighting.

The DOW at 19,000

Dow closes above 19,000 for first time in its 120-year history

Excerpt:

Get out the Dow 19,000 rally caps. The Dow Jones industrial average, arguably the world's best-known stock market gauge, closed above the 19,000 barrier Tuesday for the first time in its 120-year history.

For the second straight day, all four major U.S. stock indexes touched new record high territory. The Dow jumped 67.18 points, or 0.4%, to close at a record high of 19,023.87, according to preliminary calculations. T

he Standard & Poor's 500 index closed above 2200 for the first time ever as it rose 4.76 points, or 0.2%, to 2202.94.

The Nasdaq composite rose 0.3%, to an all-time closing high of 5386.35 and the Russell 2000 gained 0.9% to 1334.27, its thirteenth straight session of gains.

The assault on Dow 19,000 has taken nearly two years, or 700 calendar days, since it took out the 18,000 barrier back on Dec. 23, 2014. It was the slowest climb from one 1,000-point milestone to the next since taking nearly six years to climb from 14,000 in July 2007 to 15,000 in May 2013. (That long drought, of course, coincided with the Great Recession and the worst stock market decline since the Great Depression.)

Comment: Way back when I was working on my BBA at the University of Cincinnati, the DOW had not yet breached 1,000 (milestone reached November 14, 1972). I graduated in June 1971. More: Dow 19000! But 1,000 Points Ain’t What It Used to Be

Sure, the Dow Jones Industrial Average just closed above 19000 for the first time. But it did it by rising just 5.6% over about the past two years, ever since it first pierced 18000 in December 2014. That means it took almost 500 trading days to achieve the latest 1000-point milestone, the seventh-longest stretch of time between such round-number marks. The 16000, 17000 and 18000 Dow record were all shattered in fewer than 160 trading sessions after the previous 1,000-point level was first reached. And simple math shows that each 1,000-point rise is less impressive than the last. The march from 17000 to 18000 was good for a 5.9% gain, for example, while the climb from 10000 to 11000 equated to a 10% rise. Put the two measures together, and the latest 1,000-point climb was the result of average gains of about 0.01% each trading day. The last three round-number records were set after average moves of more than 0.04% each day.

Here’s when we’ll see Dow 20,000, according to one chart expert https://t.co/VhCAjzJvW5 via @tradingnation

— CNBC (@CNBC) November 23, 2016

Despite all the hoopla, the S&P 500 has achieved only a “very minor break to new highs.”

Here's why: https://t.co/FzWBqyI1oM pic.twitter.com/MKKXCxHPaI

— MarketWatch (@MarketWatch) November 26, 2016

The trailing 12-month P/E ratio for $SPX is 20.1. https://t.co/u361qpGrkV pic.twitter.com/ARplaY65Uv

— FactSet (@FactSet) November 26, 2016

Two Views on the Dow: Stocks "the last-place finishers in an ugly contest"

Dow 20,000 is pretty likely: WSJ Editor-in-Chief Gerard Baker

Excerpt:

Yahoo Finance asked Baker what his predictions were for the market in the future, Dow 20,000 perhaps? His response: “Will the Dow hit 20,000? I’d say that’s probably pretty likely. I’m not going to say when that will happen." But he thinks it will happen "as long as the right circumstances are in place for the U.S., such as strong and deep capital markets, entrepreneurial spirit and a relatively low tax environment.”

Dow 17,000 is on the wrong side of history

Excerpt:

Today’s bull market is the fourth biggest since the 1929 crash after stocks have nearly tripled since the financial-crisis low set in early 2009. But more than any modern bull market, this one stands alone in that it’s squarely out of step with economic growth. It’s being driven higher by just a few wealthy participants and traders who have tacitly, perhaps even unknowingly, agreed to drive prices higher. The main reason for that is two-fold. First, low interest rates have made other investments unattractive. The 10-year U.S. Treasury is yielding only 2.58%. Inflation is running at an annual rate of 2%. That makes corporate bonds, certificates of deposit (which yield less than T-bills) and other fixed-income products largely a losing proposition. Those who have been buying bonds have been doing so for safety. Second, the investing public isn’t really buying stocks. A study by the Pew Research Center, published in May, found stock ownership by households is shrinking, at 45%, down from more than 65% in 2002. Even with the Dow Jones Industrial Average DJIA reaching the 17,000 milestone, investors are leaving stock mutual funds, not buying them. This series of circumstances is unique. Unlike central bankers’ response to the Great Depression, the Federal Reserve has embraced Keynesian economics and flooded the economy with dollars on a scale never seen before. The Fed’s balance sheet has more than quadrupled to $4.3 trillion since 2008. In short, stocks have become more attractive not because of a surging economy or strengthening corporate profits, but because they are the last-place finishers in an ugly contest. That’s a significant difference with boom markets of the past.

Comment: The second article has it right

When stocks are at "Highest Level Ever" ....

S&P 500 hits new record high; financials lead

Comment: When stocks are at "Highest Level Ever" ....

This image comes to mind ...

Image source w article

IPhone 5 madness, Apple and the Dow Jones Industrial Average

First of all I wish I had more than one measly share of Apple. But I have one! (Kathee bought it for me for my birthday). News today that Apple hits it's record high. I suspect it will go higher. There's a link between the news of Apple's record high and the IPhone 5: Apple stops taking iPhone 5 orders after less than 8 hours, suggesting feverish demand.

 Jim Peet and the IPhone: I wish I had one. But I cannot justify it to myself for several reasons: 1.) I don't need it; 2.) I have a dumb flip phone provided by the company and it meets my needs (I'm not a talkative person!); 3.) And I am Mr. Frugal right now.

 My take on the IPhone 5 is that there is no competing device close to touching it. Not RIM (Blackberry)! Not Nokia (Windows 8)! Not an Android device (but close 2nd).

 And my take on Apple is that at $ 700 it is still a reasonably priced stock. Why I don't have more Apple? Elementary: I can't afford it.

 Now the other Apple news is that someone has calculated that the Dow would be above 15,000 if Apple had been added to the Dow in 2009.

 Now the Dow news: UnitedHealth to replace Kraft in Dow 30. Here's the press release:

 Excerpt:

The index change was prompted by Kraft Foods’ plan to spin-off its North American grocery business, to be named Kraft Foods Group, Inc. on Oct. 1, 2012. Following the spin-off, Kraft Foods Inc. will be renamed Mondelez International, Inc. The Dow Jones Averages Index Committee believes that Mondelez’s reduced market capitalization and projected lower percentage of revenue generated from the U.S. makes the company less representative of the U.S. Large Cap market space.

UnitedHealth Group, headquartered in Minnetonka, MN, is a diversified health care services company that provides health care coverage and benefits services to tens of millions of individuals across the U.S., and information and technology-enabled health services.

The Index Committee believes the addition of UnitedHealth Group brings added health care diversification to the Dow Jones Industrial Average, and reflects the growing importance of health care spending in the U.S. economy. The changes won’t cause any disruption in the level of the Index. The divisor used to calculate the DJIA from its components’ prices on their respective home exchanges will be changed prior to the opening on September 24. This procedure prevents any distortion in the DJIA’s reflection of the U.S. stock market.

Comment: In my own view the S&P 500 index is a more valuable indicator of the US stock market. It's not often cited but should be. Another valuable index is the Nasdaq Composite. A good way to invest in the NASDAQ is the PowerShares QQQ™. It is formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock®", is an exchange-traded fund based on the Nasdaq-100 Index®. QQQ is a way to buy Apple because Apple makes up 20% of the QQQ. More on the QQQ holdings here:

SPY (also known as SPDR S&P 500 ETF) is the easiest way to invest in the S & P 500.

Dow at 20,000 in 12-18 months

Next stop: Dow 20,000

Excerpt:

But over the next 12 to 18 months I expect to see Dow 20,000

Comment: I don't see it that way but the article is interesting. I see the Dow at 16,000 in 4 years. Now at 12,276. My investments basically track closely to the Dow so 16,000 would be a 30% gain or just shy of 8% per year. I'd be happy with that!

A "B" instead of an "M"

Stock Selloff May Have Been Triggered by a Trader Error

Excerpt:

In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points before paring those losses—all apparently due to a trader error.

According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble, a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff.)

Sources tell CNBC the erroneous trade may have been made at Citigroup.

Comment: Interesting

Clean up the ^DJI

Throw Citi and BofA out of the Dow!

Excerpt:

If a company was one of the 30 considered to be an important barometer of the U.S. economy, you'd think that it would have to be a relatively stable firm.

''''

Now that Citigroup (C, Fortune 500) appears to be shrinking itself from a "financial supermarket" to a "financial convenience store," and Bank of America (BAC, Fortune 500) is receiving another $20 billion from Treasury Secretary Henry Paulson to ensure that Merrill Lynch doesn't torpedo the firm's balance sheet, I'm not sure that either is worthy of being included in the Dow anymore.

...

With this in mind, who could replace Citi and BofA if they are both shown the door? (For now, I'll give up on the notion that GM will be booted anytime soon for a foreign automaker like Toyota.)

Getting rid of these two would mean that there are only two financials left in the Dow: JPMorgan Chase and American Express. So it's likely that at one replacement should be another financial firm.

I'd suggest Wells Fargo (WFC, Fortune 500). Sure, its stock has also taken a huge beating in the past few weeks, plunging 37.5% just this year alone. Wells also is a recipient of $25 billion in TARP funds, and it is taking a huge risk with its Wachovia acquisition.

...

And I also recently argued that General Motors (GM, Fortune 500), which had to get a $13.4 billion loan from the federal government last month to avoid bankruptcy, should be kicked out of the Dow.

Drop GM and C from DJIA

Kick GM out of the Dow...now!

Excerpt:

General Motors has a market capitalization of less than $2 billion. The stock, which now trades for a little under $3 a share, hit a 70-year low of $1.70 on Thursday morning before recovering a bit.

Normally, when a blue-chip company sinks to such depths of despair, it gets tossed from the S&P 500. But not only is GM (GM, Fortune 500) still a member of that index, it remains a component of the granddaddy of market barometers: the venerable Dow Jones Industrial average.

Why? Or in the words of mid-'90s self-help guru Susan Powter, "Stop the insanity!" The editors of The Wall Street Journal and Dow Jones Indexes, who decide who's in and who's out of the Dow, soon have to come to grips with reality and remove GM from the DJIA.

Comment: WFC should replace C. DJIA components