DOW 10,000 : DÉJÀ VU ALL OVER AGAIN / BARRON´S ( RECOMMENDED READING )

Thursday, October 15, 2009

UP AND DOWN WALL STREET DAILY

Dow 10,000: Déjà vu All Over Again

By RANDALL W. FORSYTH

Instead of partying like it's 1999, investors are more paupers than princes after a decade of nil returns.

THOSE DOW 10,000 BASEBALL CAPS must be getting pretty worn by now.

First passed out on the New York Stock Exchange floor back in March 1999, when the Dow Jones Industrial Average initially passed what then seemed like the "magic" 10,000 mark, those caps could have been doffed once again Wednesday for the first time in just over a year.

The stock market surely is entitled to celebrate rallying more than 50% off its March lows and regaining the levels of a year ago. So, cheers and bottoms up!

But from a longer-term perspective, investors have more headaches than highs. Not only is the Dow still well below its peak of 14,000 touched in mid-2007, just as the credit crisis began to erupt, the blue-chip average is now only back to where it stood back when we were partying like it was 1999.

Since then, however, it's been a doleful, purple reign of dreadful returns from equities. After crossing above and below the Dow 10,000 line with the bursting of the tech bubble, the long recovery to new highs and then the credit collapse, equity investors have been through a lost decade. A roller coaster winds up where it started, even with gut-wrenching rises and falls in between.

According to Bianco Research's statistical roundup, the Dow Industrials have returned a princely 1.61% per annum over the 10 years to Sept. 30. Bonds, by contrast, returned about four times as much annually over that span, regardless of whether you were in governments, corporates, municipals or junk. Even cash would have been twice as good as stocks.

The place to be over the past decade was in emerging markets. Emerging-markets stocks returned 11.71% per annum while, interestingly, emerging-market bonds did even better, at 12.11% per year.

Round numbers may have no relevance (except to the media) but they do serve as handy mile markers. In that regard, Dow 10,000 could be analogous to what Dow 1,000 was a generation ago.

Back in 1966, the Industrials topped the millennium mark for the first time. Except for briefing excursions above 1000 in the mid-1970s, the Dow wouldn't decisively break into four figures until 1982.

Sure, there were huge trading rallies, such as the rebound off the lows below 600 after the devastating 1973-74 bear market. But, the Dow went nowhere for 16 years from the middle of the Swinging 'Sixties until the liftoff of the 'Eighties bull market.

As for Wednesday's activity, while the media focused on the DJIA, Dow Theory Letters' Richard Russell sagely pointed to the truly relevant Dow move—in the Dow Jones Transportation Average.

Writing in his latest Remarks to subscribers, the dean of Dow Theory notes the Transports closed Wednesday at 4045, above their recent high of 4014.16. "Thus, the Transports confirmed the new Industrial highs, and the secondary trend of the market is now decisively bullish," he writes, admitting the move surprised him.

But from a fundamental standpoint, the corporate-earnings numbers that have propelled the Dow past 10,000 have been "less amazing than meets the eye," according to Gluskin-Sheff's David Rosenberg. Citing a Wall Street Journal article, Rosenberg observes companies are being rewarded for beating their earnings estimates by cost cutting, so they're reluctant to reinvest profits in the business.

"This strategy is being deployed by so many firms that it is having a broad-based dampening effect on private aggregate demand and hence corporate revenues—enticing firms to take even more costs out of the system," he writes.

"All we know is that this process is not sustainable -- either pricing power/revenues improve, and there was certainly no sign of this in the just-released National Federation of Independent Business survey, or the $80-plus of [Standard & Poor's 500] earnings [per share] currently embedded in equity market valuations will have to be revisited, revised and reduced.

"It will be at that point -- and the timing is next to impossible, but it is a 'when', not an 'if' -- that the stock market embarks on its true corrective phase," Rosenberg concludes.

So, don't throw out those Dow 10,000 caps. You'll want them for the next rally, which is likely to begin from lower levels.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved