Dow at 10,000 or 7,500 or 3,333

The S&P500 creeped up 1.5% last week.  Volume was very light when compared to the average weekly volume over the course of the year.  And the VIX, or fear, index dropped for the week, even though the long-term basing pattern (that began in the summer) was maintained.

The economic data were mixed.  Retail sales fell 1.5% for the month, but not as much as expected.  Business inventories fell more than expected.  Core and headline CPI was higher than expected; both came in at 0.2% vs. the 0.1% consensus.  Weekly claims were 514,000 but the prior week’s claims were revised higher.  The Empire State Manufacturing survey was better than expected, but the Philly Fed Survey was worse.  Industrial Production was stronger.  And consumer sentiment fell unexpectedly.

Last week, the Dow Jones Industrial Average crossed back over the 10,000 level last week.  Because the public loves the Dow as a measure of the stock market’s strength, the mainstream media touted this event.

But here are a few caveats.

The first time the Dow crossed above the 10,000 level was in 1999.  On a nominal basis, the Dow has gone nowhere in 10 years.

Then consider the depreciation of the dollar (against a basket of other currencies in the DXY index).  The U.S. dollar has lost about 25% of its value since 1999.  That means that on a constant dollar basis, the Dow’s 10,000 is actually equivalent to about 7,500.  Not so hot.

But what’s really frightening is today’s Dow value expressed in terms of ounces of gold.  In 1999, the Dow at 10,000 converted to about 30 ounces of gold.  Today, the Dow at 10,000 converts to only about 10 ounces of gold.  That’s a whopping 66% loss in gold terms, or the Dow at 3,333.  Ouch.

Finally, consider the other macro and policy factors.  Today’s unemployment at almost 10% is expected to rise and stay near 25 year highs for all of 2010.  So consumer spending is falling, which will put continuing pressure on corporate sales and profits.  Consumer, corporate and government debt loads are at record highs and must contract.  Consumer and corporate debt has already started to drop; federal government debt is still growing but is approaching the breaking point.  All this credit contraction will also put pressure on corporate sales and profits.  And monetary stimulus is about to decline; the Fed’s Treasury purchase program (quantitative easing) will end next week. 

Put it all together and you get a set of competing scripts where the stock market (and Wall Street) is saying one thing, yet the real economy (and Main Street) is saying something totally different.  

Very soon, we will learn which one of these scripts is representing the truth and which is misleading.

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