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Five Things You Need to Know: Dow Investors Back to Even, Harmonic Convergence/Iconic Divergence, The Opposite of a Convoy, Lasting Wealth is a Matter of Timing, A Sudden Personal Expenditure


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Dow Investors Now Back to Even!

The Dow Jones Industrial Average closed at a record 11,727.34 on Tuesday, eclipsing the old record high set in January 2000 and allowing investors in the 30 stocks that comprise this iconic index who committed money in January 2000 to finally get back to even.

  • "It's been a grueling, roller-coaster 70 months," said one Dow investor speaking only on condition of anonymity.
  • "Finally, finally, I'm back to even. I think I'll buy a boat," he added.
  • In all seriousness, what is interesting about the Dow's new record is that it was achieved without a single stock yesterday hitting a new all-time high.
  • How can this happen?
  • Simple, the Dow is a price-weighted index. That means the components with the highest prices have the most influence over its movement; stocks such as Exxon Mobil (XOM) and Procter & Gamble (PG).

2. Harmonic Convergence/Iconic Divergence

With the Dow's all-time yesterday, financial news headlines engaged in a kind of harmonic convergence of bullishness overnight:

Dow revisits good old days - Houston Chronicle
Dow: Green light for record -

  • But what about the fact that only four stocks - Altria (MO), American Express (AXP), Exxon Mobil (XOM) and Procter & Gamble (PG) - have recorded all-time highs in the past three months... and not one Dow component recorded an all-time high coincident with the Dow yesterday?
  • Only 10 of the Dow components are even at or above their levels in January 2000.
  • Is that some sort of iconic divergence?
  • Let's go back to January 2000, the last time the Dow recorded a record high, and see which of today's Dow components were joining the fray back in the "good old days."
  • Going back to January 2000, there were seven of today's Dow components that made all-time highs in January concurrent with the index, with still several more that made highs in November or December of 1999.
  • Then again, while all the "smart money" congratulates themselves on eyeing the Dow's record with a jaundiced eye, pointing out that the S&P 500 remains 12% below its all-time high, and the Nasdaq Composite remains a bitter 55% below its all-time high ("I am happy that it has now happened so that we can move onto something else," Liz Ann Sonders, chief investment strategist at Charles Schwab, told the New York Times), there is something to the Dow's allure as an icon of finance, isn't there?
  • After all, it's our oldest stock index (created in 1892) - at least in name (only one of the original components remains: General Electric).

3. What's the Opposite of a Convoy?

Heavy-duty truck maker Freightliner chief executive Chris Patterson tells The Oregonian truck orders are slowing and job cuts are looming.

  • Freightliner, North America's largest maker of commercial trucks, and a subsidiary of Daimler Chrysler, on Monday offered buyouts to its white-collar workforce, including 1,900 at its Portland headquarters.
  • The truck manufacturer is likely to lay off manufacturing workers at all of its North American plants in coming months, Patterson said.
  • "We're hearing accounts of trucks being parked for lack of freight, rather than a lack of drivers," Patterson told the newspaper.
  • Freightliner and other U.S. truck-makers are bracing for a possible 40 percent decline in 2007 new-truck orders thanks to new federal emissions standards for large-truck engines, according to The Oregonian.
  • Man, this is grim news. Layoffs looming. Trucks idled.
  • If only there was some business-minded entity out there that could place a giant order to keep the plant from closing.
  • Sure, it might not be enough to prevent laying off an entire shift, but if only some deep-pocketed entity not dependent on the economy would buy some trucks. But who? Who could it be?
  • A large shipping concern? No, too economic-sensitive.
  • What about a large furniture moving and transportation company? No, too closely tied to housing and the overall economy.
  • Wait! What about the government? They spend money regardless of what the economy does. It's a crazy idea, subsidizing a slowing heavy-duty truck manufacturing division of a slowing automotive company.... so crazy, in fact, that it just might work!
  • Congress recently appropriated $39 million next year for Freightliner-built military vehicles.

Keep on truckin'... literally.

4. Lasting Wealth is a Matter of Timing, Indeed

"Lasting Wealth is a Matter of Timing," is the title of a book written by John Sosnowy. Apparently, it was well read by homebuilding CEOs and executives who managed to unload nearly 5,000,000 shares of stock in July of last year, according to the USA Today.

  • In a dramatic understatement, the USA Today called the massive sales of stock by homebuilding executives "well-timed."
  • The stocks of the eight homebuilders looked at peaked on July 20, 2005 with a gain of 47% for the year.
  • As a group, the stocks are now about 40% below their 2005 peak.
  • Among the savvy homebuilding market-timers profiled in the USA Today were:
    - Chad Dreier, CEO of Ryland (RYL)
    Drier sold stock on January 21, 2005 and by April of this year had managed to unload $38.3 million dollars worth of RYL stock. According to the newspaper, Drier on a company conference call in July 2005 noted, "We're on track for another record-breaking year."
    - Robert Toll, CEO of Toll Bros. (TOL)
    Toll's nimble market-timing skills resulted in sales of $110.1 million of stock in February 2005 and another $134.1 million more through four sales by July 2005. Even while selling with both hands and a wheelbarrow to squeeze that much TOLL stock through the eye of the stock market's needle, however, Toll did find time to say in a February 7, 2005 conference call that, "Although demand is not as strong as it was one year ago or two, most of our markets remain fundamentally healthy."
  • Of course, there's nothing illegal with CEOs cashing in on company stock. Todd Henderson, professor at the University of Chicago Law School, told the newspaper that because CEOs' wealth is concentrated in company stock it is prudent to diversify.
  • As well, he said, CEOs sometimes need to raise cash to pay for sudden personal expenses. (see Number 4, below).

5. A Sudden Personal Expenditure

Look, Mr. Nosey Nate, being a big-time corporate CEO with all the pressures and headaches of managing a huge multi-billion dollar Fortune 500 business is no picnic. What if you run into a sudden personal expenditure!?

  • Although corporate CEOs make a decent salary which can cover some of your sudden personal expenditures, you just never know when a sudden personal expenditure could crop up forcing you to sell some of your personal stake in company stock.
  • And the questions!
  • What if people think you are simply cashing out of the business?
  • What if shareholders think you suddenly don't have confidence in the company's ability to grow profits?
  • Will it affect your next bonus?
  • And don't even get us started on the taxes.
  • As Todd Henderson, professor at the University of Chicago Law School, mentioned in today's USA Today, there are a lot of reasons a CEO may need to dump sell company stock, not the least of which is a sudden personal expenditure.
  • Let's take, oh, I don't know, how about Robert Toll, CEO of Toll Brothers, for example?
  • In 2005, Toll took home $50.2 million in total compensation, according to Forbes.
  • Now, I know what you are thinking. How in God's name can a CEO survive on $50.2 million dollars in the event of some kind of sudden personal expenditure!?
  • Sure enough, Toll was apparently forced to sell about $250 million in stock last year, probably due to a sudden personal expenditure.

Sudden, unforseen personal jet repair expenditures can be costly!

No positions in stocks mentioned.

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