The Corner

The Dow Jones Limbo Dance

Re my post below, an amazing number of readers responded to my plaint on where the Dow will bottom out. Unless I’m drunker than I remember, I don’t think I offered a free Lincoln Town Car, did I? Anyway, here are some of the numbers. Like Miss America, we’ll count them down in reverse order:

My model split the Dow into two periods. I used the Reagan era as an inflexion point. In other words, what did the Dow do in the era of ever-expanding government versus the time of Reagan. I then applied that to the Dow starting from 1980 and arrived at a number of where the Dow would be if Reagan lost in 1980. I came up with 6,300.

My friend netted out all the political stuff and used GDP as a guide. His number was 7,100. So, we split the difference and bet a buck on 6,700. But, that’s not fair to either of us or reality. The Tarpocalypse is here. So, we knocked off 1,000 points just for s**ts and giggles and agreed upon 6,100 as the natural floor to the Dow.

Too high. Down we go:

We are betting on whether or not the Dow will be above or below 5,000 on Memorial Day 2009.  Right now, all the action is under.

Memorial Day? Try St. Patrick’s:

I was hoping the bottom was 5,000.  Not sure anymore.  Obama offers no reason to be an investor at this point, other than the fact that you are already in the market and don’t want to bail out and take your losses, and because you still believe (at least for now) that in the long term, it goes up.

And lower:

My dad predicted last week with this going on that the bottom looks to be 4,000.

And lower:

The smartest branch manager I ever knew (three generations on Wall Street) had an axiom on stock prices … it also held true for indexes. It goes like this … “stocks that halve, will halve again.” That’s a minimum.  If the Dow high was close to 14,000 … we have now officially halved.

The bottom, by this calculation, will be @3,500.

Stocks that halve again can halve thrice:

You suggested 5,000 when the Dow is now at 6,800.  Piker.  I suggest 1,400.  In the Depression the Dow eventually fell by 90 percent to reach its low.  Obama seems determined to repeat that feat.

And we’re into three figures:

In my humble opinion, the DOW will test 1,000 (a pre-Reagan number) before it recovers.  Remember it’s a measure of confidence, and this administration inspires so very little of that (and so early in its reign too…)

And why stop there?

With all due respect, there is no magic floor below which the Dow will not sink.

As many have pointed out, the crisis is fundamentally based on an overestimation of value — the value of certain securities (credit default swaps, etc., and their purported collateral) that at one time had an accepted value, the current value of which is unknown.  When the government intercedes, it does many things, but importantly, it un-focuses the market on reestablishing what that “value” is.  The government’s policies add another layer (or five) of contingencies that must be taken into account in establishing a correct value.  The more the government gets involved, the more contingencies come into play, the longer it takes the market to determine what the value is.

Until sufficient time has passed after the government has stopped acting to allow the market to re-establish a value, there will be no floor.

I floated my 5,000 theory to a friend somewhat carelessly and said, “The Dow’ll bottom out at five.” The color drained from her face and I hastily assured her I meant 5K. You can’t take anything for granted these days.

And finally:

Forget the Dow, the S&P 500 is the only index that professionals and sentient humans track.

The prior low on the S&P 500 was 743, which has been taken out with reckless abandon over the past three days. The next level of technical support is reportedly 600 — I’d be surprised if we went straight down there because markets in my 30 years of experience just don’t go straight down, even if Jimmy Carter or Herbert Hoover are in the White House.

If anyone can do it, this budget-busting, raising-taxes-in-a-depression administration can do it, but I’m still betting against a linear no-up-days-ever stock-price collapse.

Mark Steyn is an international bestselling author, a Top 41 recording artist, and a leading Canadian human-rights activist.