The Go-Go Aughts?

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Dow Jones Industrial Average only 35 points away from (nominal) record high.

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  1. If things are going well, shouldn’t the stock market always be at a record high?

  2. In real terms it’s not even close

  3. Garth—Good point, amended post to reflect it.

  4. I thought the Gnomes were sharp getting gasoline down before the election, but this just icing on the cake. Well done Gnomes. Well done.

    PS: watch the buy program at 3:00. 11 and 3 every day.

  5. Is there a standard way to calculate the real value of a stock market index? Do you use the CPI or the GDP deflator?

  6. some points (disclosure: i trade stock index futures for a living)…

    “If things are going well, shouldn’t the stock market always be at a record high”

    No. markets move in cycles, as they should. the market is always in a process of price discovery. it rotates around value on different time frames, and will move to new value when that is recognized

    also, the Dow Jones is not “the market”. it;’s an index of 30 stocks. it’s somewhat of a proxy for supply/demand, but still… the DJIA is near these highs. the nasdaq otoh, is WELL off its highs. the transports set ALL time highs recently. the amex composite has been on a frigging tear for 5 year. the russell was doing insane until oil plunged, and since it has a lot of oil stocks, it also took a hit, etc.

    take a look at a 10 yr chart of amex composite, DJIA, S&P 500, Nasdaq Composite, QQQQ, the Transports, the Utilities, and the Russell

    it’s called “divergence”

  7. I think your point that the DJIA or NASDAQ is not the market is something that causes a lot of people to oppose private social security accounts of market indices who otherwise might be open to the idea of actually owning their own retirement money. A lot of people look and see that the Dow has been net stagnant since 2000 or that the NASDAQ has lost more than half its value since 2000 and think that the “market” will result in you losing all your savings in old age, while if you really do diversify your account so you only have market risk and grow at something like the GDP growth, absent an asteroid hitting the Earth, your retirement savings will grow rather respectably.

  8. Herrick. And only Herrick. I’m keeping my gaze perfectly level.

    As someone who opposes private Social Security accounts, I think you misunderstand the objection.

    You wrote, “A lot of people look and see that the Dow has been net stagnant since 2000 or that the NASDAQ has lost more than half its value since 2000 and think that the “market” will result in you losing all your savings in old age, while if you really do diversify your account so you only have market risk and grow at something like the GDP growth, absent an asteroid hitting the Earth, your retirement savings will grow rather respectably.”

    The “you” in that paragraph is plural. In the aggregate, that is true, and I realize that. But with private accounts, people won’t reap the aggregate return. There will be winners, and losers. There will be some body of people who have abysmal luck. 1% of the pool of retired people in this country in 20 years will be three quarters of a million people.

    Having a diversified retirement portfolio is important. There are many axes along which you should diversify; among them is the high growth/high risk vs. low growth/low risk axis. Social Security provides the lowest risk imaginable. For the unluckiest segment of the retiring population – let’s say they number 200,000 people – the elimination of the most rock solid retirement fund imagineable (the American Social Security system) would mean having something, and having nothing.

  9. Question for those who know more about investing than I do:

    Isn’t it a bit suspect to consider the price of a security as having any great significance without considering the volume of shares or portion of the company’s total ownership that were traded at that price? If 10,000 shares of some company’s stock were exchanged at $45/share on some day, seems like it doesn’t follow that 100,000 or 1,000,000 shares would have changed hands at the same price.

  10. Laursen, volume has merit. Generally speaking (for example) a retracement in price on light volume is seen as a pullback buying opportunity, whereas high volume indicates selling pressure and possibly a breakout to the downside (this is grossly simplified, but you get the point).

    Price tends to rotate around value. The markets reject unfair prices. High prices tempt sellers, and low prices tempt buyers, so that price develops horizontally and balances – until it breaks out on reassessment of value/inbalance in supply/demand curve. It is certainly true that if the entire float (tradeable shares) of AAPL (Apple computer) for some bizarre reason ALL decided to sell at noon today, that the hyoooge volume of sell orders would push the price down. the volume would literally “eat up” many short term traders stop loss orders (orders to sell triggered by a significant drop in price) which would further exacerbate downside move. BUT. AMong other things, over 50% of trading is program and institutional basket trading, etc. As soon as these traders saw the price of AAPL dropping precipitously their limit buy orders would suck up some liquidity cause nothing had changed fundamentally with the book value, just a panic selloff. the market then self-corrects.

    But selling can, given sufficient momentum (volume and speed of order flow) result in more panic selling. See for example, the fat fingered trader on the Nikkei who dumped it several hundred points based on one fat fingered trade. It recovered the next day.

    But yes, in general volume at a price, and/or time at a price is important. that indicates that this price level is “facilitating trade” and is thus a price that is deemed fair by both sellers and buyers.

    on the other hand, a price level that sees little volume/time @ price is regarded as less fair, which is why it didnh’t facilitate as much trade.

    or something…

  11. the elimination of the most rock solid retirement fund imagineable (the American Social Security system)

    Ha ha ha…did you think you could slip that one in there, joe? There’s nothing “rock solid” about a Ponzi scheme.

    The specific proposal of having an index of “safe” companies in which you are forced to invest (in order to diversify Social Security) makes me cringe: it really would be the merger of State and Corporation. And there’s no way such an index would be immune to politicking; and you would have to do all the right things to be the company that makes it on “the list”.

    No thanks; Social Security reform should come in one form: gradually reducing the amounts that people are forced to contribute to FICA.

  12. Joe, diversification means DIVERSIFICATION. it doesn’t mean just buying a basket of nasdaq stox, or even a S&P index fund (solely). it means something like the wilshire (entire stock universe) and of course not fully invested in stocks, but a ratio of stocks/bonds/cash/commodities/reit’s, etc.

    sure, it’s not a “sure thing”. neither is SS. a very high %age of social security contributors receive negative return. iow, they put in thousands and thousands of dollars over their career, then die before they get benefits, and get NOTHING. that would be the equivalent of every single investment made in a diversified account going to ZERO.

    which is better? lol

    at least with a privatized retirement system, a beneficiary gets your assets.

    social security sux. and of course,a dirty secret is that some minorities (specifically african americans) disproportionately pay far more into SS for each dollar that they get back vs. other demographic groups. that’s an established statistic.

    also, everybody wanks about the market crash of 29. yea, 29 sucked if you were heavily margined, as many bucket shop “investors” were, whereas these funds use ZERO margin/leverage.

    second of all, if you dollar cost averaged, through the late 20’s into the 30’s, etc. you did not suffer the massive wealth depletion didthat all the high risk traders did.

    please explain how you can have an “unlucky” segment when people are invested in broadly diversified retirement vehicles. we are not talking VERT and ENE here.

  13. Ayn Randian,

    “Ha ha ha…did you think you could slip that one in there, joe? There’s nothing “rock solid” about a Ponzi scheme.”

    Not a single Social Security recipient, in the 80 years of the program’s existence, have ever gotten a penny less that they were scheduled to receive. Engage in all the name calling you want, that’s pretty rock solid.

    whit, I know what diversification means, thanks.

    Having something as unipeachably reliable as Social Security in your basket means you can be a little more aggressive with the rest, because you’ve got the most solid foundation on the globe.

    ” a very high %age of social security contributors receive negative return.” Numbers? Citations? “A very high percentage?” I guess we don’t have to worry about the program’s fiscal health, if there are so many people whose contributions outweigh their return. Oh, wait, that’s not true, because you made that up.

  14. joe, are u disputing that MILLIONS of people die before they are eligible and thus receive nothing from SS? are u seriously asking for a citation for that?

    get real. if i die tomorrow, i get exactly ZERO return from social security. actually, i get negative return, because i have put many thousands into it. So, it would be a negative return. do u need a citation to understand this?

    Furthermore, i know tons of cops and firefighters who work for agencies that were allowed to “opt out” of social security. they are doing just fine.

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