Dow Jones Industrials Power-Up Above 11,000

by John M. Curtis
(310) 204-8700

Copyright October 8, 2010
All Rights Reserved.                                

            Slapping the bears in the snout, the Dow Jones Industrial average rocketed above the elusive 11,000 ceiling for the first time since May 3 when the market took an all-too-familiar nosedive.  When you consider major investors held or took longer positions when the U.S. economy received mixed jobs report where private employers added only 64,000 private sector jobs in September, things are looking up.  While there’s little to cheer about, the nation’s unemployment rate held at 9.6%, despite losing 95,000 government census-type jobs.  Major stock indexes, including the S & P and Nasdaq also rose, anticipating more aggressive action by the Federal Reserve to stimulate the economy.  If the Fed begins buying treasuries, it will drive down interest rates helping to stimulate the economy.  As the Dow continues to rise, worries about a double-dip recession diminish.

              Despite all the hand-wringing about the economy, unemployment is often a lagging economic indicator.  Rising stock indexes are the best barometer of an improving economy and jobs’ picture.  When markets rise, they fatten the stock accounts of publicly traded companies, enabling an expansion of private sector payrolls.  It’s beyond ironic that today’s attacks by the Tea Party on “big government” completely ignore how many private sector companies rely on government contracting.  Most defense contractors, oil companies, private security firms, education consulting companies, etc., depend heavily for payrolls on government contracting. Shrinking government directly affects private sector job development.  Without government contracting, many private sector companies and universities wouldn’t have the resources to hire personnel and expand existing payrolls.

             Rising stock markets provide the stability and liquidity to enable publicly traded companies to begin expanding payrolls.  A weak jobs’ report gives the Fed added incentive to buy up treasuries and drive down interest rates.  It gives the Fed “the window of opportunity to take action,” said Jason Pride, director of investment strategy at Philadelphia-based wealth management firm, Glenmede.  When President Barack Obama signed the financial overhaul bill into law July 21, 2010, he attempted to prevent another market collapse resulting in nation’s financial institutions running out of cash.  Since 2008 financial crash, the Fed has infused over $13 trillion into the U.S. economy, despite Congress only approving only $1.5 trillion in bailouts under former President George W. Bush and Obama.  While bears still worry about another crash or double-dip recession the bulls are off and running.

             Bank of America announced Oct. 6 that they would suspend mortgage foreclosures around the country.  Foreclosures and bank-owned real estate have driven down real estate values and robbed homeowners of the needed cash to spur the economy.  BofA bought Countrywide Financial Corp.  Jan. 11, 2008 for a measly $4 billion with an estimated $38.1 billion in debt.   Such a move by then BoA President Ken Lewis together with his purchase of Merrill Lynch Sept. 2008 with liabilities of $18.1 billion, sent BofA into a tailspin, eventually driving its stock to under $3 a share in March 2009.  Since climbing out of its hole, BofA closed Oct. 7 at $13 a share.  If markets continue to rise, publicly traded companies, Like BofA have a new lease on life.  Without a rising stock market, the economy—and indeed unemployment picture—has little chance of any sustained rebound.

             Market-makers like New York-based Goldman Sachs have kept their paws off the sell button, keeping short-selling hedge and private equity funds from pushing markets over a cliff.  Despite bad economic news, allowing markets to rise builds confidence with individual and institutional investors.  Before markets plunged in 2009, the Dow reached its all-time high of 14,154 Oct. 9, 2007, just before the derivatives’ market crashed, taking down the U.S. housing market.  When banks ran out of cash, they began canceling consumers’ home equity lines, paralyzing homeowners’ liquidity, causing the current mortgage default and foreclosure crisis.  Instead of taking responsibility for risky derivative investing, banks blamed bad mortgages for taking down the markets.  Most financial institutions ran of out cash because of bad derivative investing, not faulty residential loans.

             Hittting 11,000 was a good omen for the stock market, climbing the slow path back to a stable and growing economy.  Keeping hedge and private equity funds from short selling should enable the Dow, S&P and Nasdaq to continue to rise, generating needed capital for publicly traded companies to expand payrolls.  Given a positive earnings picture, current rising markets could build momentum, ending 2010 closer to 12,000, the same level seen in 2000 before the dot-com bubble burst, driving markets to decade-long lows.  “If we see positive earnings, and projections for the fourth quarter are fairly decent, that should play positively,” said Florida-based Carole Peck Financial Center, expecting markets to rise through year’s end.  More stimulus from the Fed and positive earnings could propel U.S. markets to increase consumer demand, grow GDP and add jobs

About the Author  

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.