After a rapid crash in 2008 to just over 6,400 on Inauguration Day 2009, the Dow Jones Industrial Average has nearly doubled, reaching 12,286 with intraday trading bringing it even higher.
In fact, the 52 week low was 9,614, and the high, 12,286. Yesterday, following the resignation of President Hosni Mubarak of Egypt, the market closed at 12,273, up 43.97 from the open.
While this meteoric rise may seem glorious for profit taking, it may well be the result of manipulated management by the Federal Reserve, intent on supporting the position that recovery is well underway. Meanwhile, in-depth analysis of US companies comprising the Dow Industrials shows that most did not produce greater revenues from US based sales and operations, but from operations and sales abroad. Further, most of them, if not all, cut jobs in the United States, producing greater yields but not greater profits, but better money management and by overall cost cutting.
This form of voodoo accounting shows considerably better yields to investors, but ultimately, may leave these companies vulnerable to all sorts of problems from hostile takeover targets to collapse if overseas markets dry up suddenly.
Meanwhile, a weakened dollar makes sales overseas easier for companies, and more costly for American companies to buy from overseas. Oddly, this was the same sort of thing that the 1930 Smoot-Hawley Act did which helped cause the Depression.
We are poised for a correction, but political uncertainty in 2011, the outcome of regime change in Egypt and other factors may weigh heavily on the Dow over the coming months. Before we reach a crisis point, the Dow may rise above it’s 2007 peak, exceeding 14,500. But when it crashes, and no government bail-outs are forthcoming, we may be in for a bumpy ride, with the risk that the United States Government itself may be forced into bankruptcy.
Is the Dow reaching such heights so fast such a good thing? Probably not, as it may not be sustainable or valued properly. Where should it be today? Probably in the range between 8,700 and 9,600, to be more fairly priced. Don’t be surprised if we see a drop so rapid and severe that its bottom may be below 6,000, if confidence in the markets is eroded.