|
Dow index breaks 11 000 barrier { January 10 2006 } Original Source Link: (May no longer be active)
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/01/10/BUGIEGKP5K1.DTLhttp://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/01/10/BUGIEGKP5K1.DTL
Dow index breaks 11,000 barrier
- Kathleen Pender
Tuesday, January 10, 2006
Posting a fifth straight day of gains, the Dow Jones industrial average rose 52.59 points Monday to at 11,011.90 -- its first close above 11,000 since June 7, 2001.
While that was an important psychological barrier to cross, the Dow average remains 711 points, or 6 percent, below its all-time high, set almost five years ago.
After gaining only 1.7 percent (including dividends) in all of 2005, the Dow has already risen 294.4 points or 2.7 percent this very young year.
Stocks got a jump start on Jan. 3, when the Federal Reserve released the minutes of its Dec. 13 meeting of the rate-setting committee. The minutes suggested, to many traders, that the Fed may stop raising short-term interest rates sooner than previously expected.
A dearth of bad news, combined with the investment of year-end bonuses, pushed the market higher last week.
Some Dow watchers say the real breakthrough came on Friday, when the industrial average eclipsed 10,940.55. That was where the Dow closed on March 4, 2005, and had marked the highest close since the current bull market began in October 2002.
In a bull market, you like to see major indexes hitting higher highs, says Richard Moroney, editor of Dow Theory Forecasts.
Other market measures -- including the Standard & Poor's 500 index and the Dow Jones transportation average -- had already been hitting new highs for this market cycle. But until Monday, the Dow had refused to go along.
In another bullish sign, the New York Stock Exchange advance/decline line -- which measures the number of stocks going up versus the number going down -- also hit a new high for this cycle on Friday, according to Ned Davis Research.
"Most institutional investors don't follow the Dow. They focus on other indices," says Ed Clissold, a senior global analyst with Ned Davis.
One problem with the Dow is that it tracks just 30 very large companies, hardly a representative sample of the entire market.
And while most indexes are weighted by each component company's market value, the Dow is weighted by each company's stock price, which -- by itself -- tells you little about a company's value.
Despite those shortcomings, the Dow has been around longer than any other stock index and can tell you a lot about what is happening in corporate America.
Take a look at the chart, which ranks the performance of the 30 Dow stocks since the last time the average closed above 11,000, in June 2001.
The Dow's biggest mover was the world's biggest name in earth-moving and construction equipment, Caterpillar.
The company has benefited from strong economic growth, especially in emerging countries like China, and from surging commodity prices, which have fueled demand for mining equipment, says Morningstar analyst Scott Burns.
It is also benefiting from the housing boom and should get a boost from Katrina rebuilding.
Caterpillar can barely keep up with demand and has been able to pass along price increases to its customers. Thanks to its enormous size and economies of scale, a big increase in revenues translates into an even bigger increase on the bottom line, says Burns.
Although he admires the company, he wouldn't buy the stock today because it's too expensive.
A lack of pricing power helps explain why companies like General Motors, Verizon and AT&T (formerly SBC Communications) are among the Dow's worst performers over the past four years, says Moroney.
To compete with Toyota and Honda, General Motors has had to offer bigger discounts. But its pension and health care costs "makes it harder to price competitively," says Moroney. "At the same time, you had a spike in fuel prices that pushed people out of heavy-duty trucks, where Ford and GM were making most of their money," he adds.
"Verizon and SBC are great examples of companies that were thought to have unassailable market positions. Technology changed that pretty quickly. Now those companies are in dogfights to maintain the markets they have, much less grow."
Four and a half years ago, drugmakers like Merck and Pfizer were Wall Street darlings. Since then, they have lost more than a third of their value.
Both companies are beset by lawsuits -- Merck over Vioxx and Pfizer, to a lesser extent, over Celebrex -- and a desperate need to come up with new blockbuster drugs.
"They're running on a treadmill. They need to get new products to market faster than old products are losing patent protection," says Moroney.
Four and a half years ago, Altria (formerly Philip Morris) was also facing life-threatening lawsuits over its cigarettes. Some recent court victories have reduced the company's perceived legal risk, allowing its stock price to recover. It is the Dow's second-biggest gainer since June 2001.
Asked which Dow stock he would buy today, Moroney picked McDonald's.
"It's an efficiency, cash-flow story," he says. "Their corporate culture was always grow, grow, grow. Eventually, they woke up, realized they were destroying value. Now they're taking cash, giving it back to investors through dividends and stock buybacks."
Neil Hennessy, a portfolio manager with Hennessy funds, says the Dow's passage through 11,000 will set the stage for bigger returns this year. (Two of Hennessy's funds invest at least half their money in Dow stocks).
"This 11,000 is a very important number psychologically," he says. "Once it gets past 11,000, it will get to 12,000," he predicts.
"If you look at the underlying fundamentals, you have low inflation, low interest rates," he says. He expects corporate profits will increase 10 to 15 percent this year over last, and corporations have "over $2 trillion in cash on their balance sheets."
And prices appear reasonable.
According to Ned Davis Research, the last time the Dow was at 11,000, the average stock in the index was trading at 23.6 trailing earnings. Today, it's trading at 19.3 times earnings.
|
|
