Wednesday, September 3, 2008

Wall Street: Dazed and Confused

Things are still getting back to normal on Wall Street, where investors and traders are beginning to come to grips with the realities of the 21st century economy.

America isn't what it used to be. At least not what it was just ten years ago, when jobs were plentiful, profits were soaring and dotcoms were popping up all over the place. It was a wonderful time, the 90s. So much has changed since then.

On this day in 1998, the Dow closed at 7682.22, the NASDAQ at 1571.86. The explosive and final phase of the bubble was still more than a year away. Just 18 months later, both indices would peak and subsequently collapse, with the NASDAQ, the home of the "new economy" stocks, taking the brunt of investors' wrath.

Here we are, though, 10 years out, and things just don't seem that much better. Take a look at where we closed today.

Dow 11,532.88 +15.96; NASDAQ 2,333.73 +15.51; S&P 500 1,274.98 -2.59; NYSE Composite 8,269.25 -27.72

Are Dow and NASDAQ stocks really worth nearly 50% more than they were in 1998? Probably not. Their earnings certainly don't justify that kind of valuation. They are priced that way for a number of reasons, none of them simple, but two of them obvious. The value of the dollar in relation to other currencies has fallen dramatically since then and inflation has shrunk the value of the dollar in the US by as much as 30% during that time. You can still buy a lot of good things for a buck in the US. A McDonald's double cheeseburger, and all the things you can find in the thousands of "dollar stores" which dot strip malls across the country.

But stocks? No. A dollar will not buy you a share of any "good" company. Not those listed on the NASDAQ and certainly not one of the Dow's blue chips.

But all that is about to change. $100 will buy you 100 double cheeseburgers, enough to feed a family of four for more than a week. With that same $100, you can buy more than a share of any Dow stock, except one: IBM, currently in the $118 range. Now a share or two or three of stock won't feed anybody for any length of time, but it may be worth more in the future.

Ah, the future. That's the ticket. IBM was selling for $121 per share 10 years ago, and it split 2-for-1 in 1999, so it's worth a little more, but you have twice as much of it and you would have raked in 10 years of dividends to boot. A good deal, I guess. How about Citigroup? On this day in 1998 it closed at $41.13. Today it ended at 19.61. But it split twice, 3 for 2 and 4 for 3. So you have almost twice as much, even though it's worth more than half less. Not so good.

Coca-cola? No splits, but in 1998, it was at $61.80 per share. Today, 51.66. Less, despite the dividends. There are many more just like that and worse.

The point is that the averages and indices aren't telling the whole story. As a country, we are worse off than ten years ago, in many ways, but especially financially. Wall Street just continues to exist in denial, but soon, almost all stocks will be worth less than they were ten years ago. Adjusted for inflation, it will be even worse. It's economic reality.

And McDonald's will sell triple cheeseburgers for a buck.

On the day, advancing issues led decliners slightly, 3209-2975. New lows expanded their edge over new highs, 234-107. This is a bit of a sign that another deep plunge is on the way. We'll know more tomorrow and even more on Friday. In fact, Friday is shaping up to be one of those ugly 250-point loss days.

Oil continued to slide, losing 36 cents to $109.35. The metals continue to do their part to contribute to the burgeoning worldwide deflation. Gold lost another $2.30, to $808.20. Silver fell 20 cents, to $12.95. Both should be markedly lower in coming months.

Of course, as oil continues to dip, motorists are getting a little relief at the pumps. The average price of a gallon of gas was $3.68 as of Sept. 1, off from its peak of $4.12 in July. Now, since oil was $145 then and a shade under $110 now, how much should a gallon of gas cost. Using the ratio of 2.5 cents per gallon of gas for every $1 in the price of a barrel of crude, gas should cost $3.25 per gallon, or 87 cents less. It's not even close. How come?

Well, even if oil drops below $90 per barrel, gas will still cost more than it should because the oil companies have to keep making obscene profits.

John McCain promised.

NYSE Volume 1,208,861,000
NASDAQ Volume 2,115,416,000

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