Financial Fears Runneth Over

Jan 22 10:23 2009 Michael Lombardi Print This Article


Well...number 44 isn't starting out lucky.

Yesterday,Guest Posting while Barack Obama became the 44th President of the United States, the Dow Jones Industrial Average had its worst Inauguration Day in over 100 years. On Obama's first day, the Dow Jones collapsed four percent.

The world's most watched stock market index closed yesterday at 7,949. In the last 12 years, the Dow Jones has only been under the 8,000 level during these periods: 1997 to 1999, 2001 to 2003 and late 2008 to today. Looking at a 12-year chart of the Dow Jones, the 8,000 level has acted as good support during those years -- whenever the Dow Jones got close to 8,000, the index jumped back like an elastic band.

Will the Dow snap back again?

The world's richest man, billionaire Warren Buffett, sure seems to think stocks are a bargain. He's been investing heavily in banks. And the second richest man, Carlos Slim, is buying into newspapers. But when you have $60.0 billion, isn't it worth it to bet 10% of your fortune just in case this is the market bottom? Imagine how many more billions you stand a chance at making if you are right.

Market pundits are telling us that if the Dow Jones breaks decisively below 7,000, the next stop is 5,000. That would be ominous.

But let's be the contrarian for a moment. If we can see through all the gloom and doom, we recognize that the Dow Jones Industrial Average has a dividend yield of almost four percent. Since the beginning of the Dow Jones Industrial Average, the market has always bottomed out when the dividend yield on the Dow Jones reached six percent. But please keep this mind: the yield on stocks (and hence their value) has always been relative to the rate of interest paid on government treasuries. Right now, the Dow Jones yield is 10 times that of a U.S. Government one-year T-bill! We've never had the Dow Jones dividend yield at 10 times what an investor can get on a T-bill.

Fear has taken over greed in the market place. And just as greed goes too far when things are booming, fear is going too far as the economy sinks. In fact, fear runneth over, as Shakespeare might say.

Yes, the economy is undergoing a cleansing and purging after years of greed and overabundance. To level-headed economists, this is an economic correction. And to this economist, boy, are some stocks starting to look very attractive.

Profit Confidential

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About Article Author

Michael Lombardi
Michael Lombardi

Michael Lombardi, CFP, MBA, bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely,  taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management.

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