MAY 2013

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DOW JONES INDUSTRIAL AVERAGE IS FLYING HIGH, YET THE ECONOMY IS STAGNATING?

In the last few years, the Dow has been climbing up almost consistently, breaking new highs. The highest level of around 14,165 points made just before the financial crisis recorded back in the year 2007 is finally surpassed. In the last few weeks alone, the Dow has reached a new historic high, and it keeps breaking and creating new highs ever since.

The article on investing in the stock market that we wrote previously and its conclusions is again consistently supported by these new additional data. No matter what, even if you buy the market at the very peak, you are guaranteed to make money, at the most within 7 years, if not earlier. In this case, if you have bought the market at the peak in 2007, you would be making your money back in just five years, plus a tidy profit. This is despite one of the worst economic crisis ever to hit the US and the world. Learn to invest in good companies (not in those companies selling things that you do not understand), and do not be terrified because statistics is on your side.

At the same time, gold hoarders are finally convulsing in their seats, after being hit with the steepest dive of gold price in memorable history. Should gold is used as circulating currency, the economy would have crashed massively from the panic selling (dropped more than 20+% in two days). Luckily for gold hoarders, a new batch of willing buyers, are now coming back into the market. These new buyers have cash with them, derived from their years of hard work. If the economy was not performing well in the past few years, these people would have little money with them to buy all of those dumped gold. Some fanatical gold hoarders, despite seeing a massive drop in their holding, decided to use whatever cash they have left and buy more of the same thing. They have so much of the shiny metal, that they have almost none in good quality assets. Again, they can only keep on buying thanks to the good economic performance of the rest of the world; otherwise, they would have no cash to absorb the massive selling themselves. If that occurs, everyone would be dumping and the price might have crashed 50% or more. Well, as long as the economy of the world performs, the price of gold may not go down that much. To predict where gold’s price is heading and what dictates the price of gold, check out the chapter “Another Take At Gold” in Book 3 of the 259 Trillion Vs 5 Trillion series.

Now, let us go back to our current article, where we are writing about why the DJIA is reaching new highs even when the economy of the United States is just barely chugging along. Many doom and gloom naysayers are saying that the stock market is in a big bubble, blah this and blah that as usual. In this article on the DJIA and the economy, we would like to show a simple explanation as to why the DJIA is soaring, but the US economy in general is not.

The following graph shows that indeed, the perception of many people on the street, as well as economists and investors on Wall Street that there is a disentanglement going on between the performance of the Dow and the economy in general is actually quite accurate.

May2013 Illustration 01

The graph above shows that once the brunt of the crisis on the financial markets are gone, and the economy in general stabilizes, the DJIA would start its regular but long march upward, as it always do. For a rather short period of only two years (from January 2010 until early April 2013), the Dow climbed by 29%, while for the general economy, only a measly 4.7%. The upward march of the Dow is almost seven times faster than the growth in the general economy (in this case, we use the GDP data published by the Fed, and the latest Q1-2013 data is an estimate).

If the Dow is performing so well, why wouldn’t the economy itself performs similarly? After all, the Dow is supposed to be the economic bellwether, filled with great and legendary American companies such as General Electric and Wal-Mart. If these companies announced big jump in their revenue and profit, why wouldn’t the economy jumped the same way? Are they faking it and is it a “bubble” yet again? As investors made gobs of money in the markets, the general population who are not investing their hard-earned money, is felt left out. [At the very same time, those who were compelled to buy gold as investments, found out that the shiny metal is simply just that; a piece of shiny metal that cannot generate anything for them. Those who were holding gold for the past two years would receive nothing at the end of the two years unlike stocks, and further, they would realize a large loss in their holding right now after the recent large decline. They would have to wait for a long time to realize any profit whatsoever. The last time the gold craze stopped, it took the “victims” twenty long years to unload their gold to the next unsuspecting victims.]

In this article, we will show one significant reason why the Dow went up faster than the general economy. Throughout this article, we may refer to the Dow as if it is ‘the’ stock market and the abbreviate DJIA (Dow Jones Industrial Average) as the index for the 30 very large companies in the market. Sometimes the companies are called the Dow30, which means they are part of the index.

It is important to understand the components of the Dow30, as to why they are great companies and what their roles are in our lives. Collectively, the Dow30 generated a combined revenue of 3.1 trillion dollars in 2012. Their collective market value would reach a gigantic 4.3 trillion dollars. If each working American owns an equal share of the Dow30 companies, their holding market value would translate to $36,000 each. Just thirty companies in total (out of six thousand public companies), yet their combined size is immense. We took the pain to analyze each of the Dow30 companies, to reveal many interesting facts about these large corporations, who employed millions of people. All of our data hereafter is obtained from the annual reports and SEC filings of each of the Dow30 companies. We also collected interesting facts from these annual reports and presented them here (we thanked these companies for their comprehensive annual reports and other filings, plus the many interesting special publications on energy saving, water use reduction, future plans and predictions etc. We took no credit in their magnificent presentation and congratulate them for jobs well done).

THE BIG BOYS CLUB – LIST OF THE DOW30 COMPANIES

The following is the list of the Dow30 companies. To find out more about them and their line of business, click the links.

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