E At 24,329 Price Of DJIA At 44 % Discount To Value Of 43,533

Summary

  • Re-balancing is slowing the price rise of DJIA while simultaneously boosting the bond market and the value of the DJIA.
  • Despite this the DJIA price should continue to rise and accelerate with the seasonal Santa Claus rally.
  • Flattening of the yield curve is more from falling long rates so it should not be interpreted as the portend of a recession.
  • Selling equities and buying bonds still seen as abject madness.   

Since the early 1970s the price of the DJIA has declined by a whopping 50% in response to exogenous variables only twice when the value of the DJIA was in line with its price first 1973 and then in 2008.

Both declines were caused by events that had been a long time fermenting. The first was OPEC 1 and the second the Community Reinvestment Act.

The CRA was started by President Carter, expanded by President Clinton and Mr. Obama when he was a community organizer and was compounded by Barney Frank and Christopher Dodd. The chickens came home to roost with Freddie and Fannie collapsing during the Obama Administration with the help of ACORN whose tutor had been Barrack Obama. This took place despite all the efforts of President G.W. Bush to get to grips with the shenanigans at Freddie and Fannie.

The excellent performance of equities this year has made them victims of their own success in so far as many pension portfolios among others are being re-balanced ahead of the year end. Whether by design, through trust indentures, or by desire, as seems to be the case with CALPERS’ announced intention to consider moving from a 50% equity weighting to 34%, the result is to push longer rates down.

The shift from equities into the highest-duration Treasuries is flattening the yield curve by forcing down the yields on long bonds. This, in conjunction with a continuing rise in dividends, are pushing up the dividend discount value of the DJIA to 43,533 which is spurring on the continuing price rise.

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I wrote this article myself. I do not hold any positions in the securities mentioned in this article and do do intend to take any positions in the next 72 hours. 

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Tony Hayes CFA 2 years ago Author's comment

Dear Readers,

This was published at 2.38 pm this afternoon. It is now 6.05 pm and no one has commented one way or another on the contents. I am looking for positive and negative criticism. Surely some one out there has questions.

Since May 5 2014 I have published 29 articles and had only 4 comments, which is most disheartening. TalkMarkets should be a sounding board for the exchange of ideas but this seems to me to be just a one way street of good research which I have made available free to all. It would be nice to here from you in return.

Should you think that my efforts are just BS then let me know but I would like to hear supporting arguments if that is your opinion.

Kind regards