Once in a while, the mainstream media comes along with an article that’s so astounding in its clarity and incisiveness that we’re simply left dumbstruck. Generally, we don’t expect a great deal from them. And it’s true, they’re often more reliable as contrarian indicators of what’s ‘in’ and ‘out’ in the investment world. What they parrot about is often on the verge of falling off a cliff – and what they roundly ridicule is about ready to soar.
And that’s precisely what we saw earlier this week, when a fellow named Chuck Jaffe over at MarketWatch, an extraordinarily popular financial website, spoke an “absolute truth” about the Dow Jones Industrial Average… without even realizing it.
We place “absolute truth” in quotation marks because Mr. Jaffe, as a purveyor of well-washed information to the unwashed masses, can be relied upon to provide the truth via irony. Not his own verbal, intended irony, however – rather what’s termed ‘dramatic irony’, as we’ll attempt to describe below.
We reproduce a brief selection of the daffy one’s article here, with the hope that you’ll place today’s lesson very near your heart.
The article addresses Apple Inc. (NASDAQ:AAPL) replacing AT&T (NYSE:T) on the Dow.
And what his words revealed is a skeleton key for a savvy investor…
Have a look for yourself –
The Dow is the celebrity number of the financial world, not the meaningful one. As I noted in October and December, the hype right now — and yes, I know I am contributing to it, but like the rest of the media I have a job to do — simply shows why it’s time to stop discussing the Dow as if the index actually matters. The Dow is filled with current and classic beauties, but the real news that represents what is happening in the market is in a much broader cross-section of what’s happening now. Adding Apple doesn’t change that.
The Dow is important to people because it’s what they know, the staple of every market-oriented website, every radio station market update, every newspaper’s daily business section, and the centerpiece of the 20 seconds of coverage that every national newscast guarantees the investing world each day.
But that’s precisely what makes it a celebrity index. A celebrity is someone who is famous, mostly, for being known. It’s the Kardashian sisters, who you may have heard of and be curious about, but who don’t appear to have any particular talent.
So well said, Dr. Chuck. So well said.
But the essential problem with the man’s analysis is two-fold. First, the Dow is as representative of the broad market as the S&P 500 – as we proved in our previous article here.
And it will be all the more now that Apple (AAPL) has been added.
But that’s a minor point.
The deeper truth found in Chuck’s words is that the Dow is a celebrity index. The FAR deeper truth – a truth not mentioned by Mr. Jaffe – is that today we live in a celebrity world.
And that makes all the difference.
You see, the truth does not matter anymore.
At least, it doesn’t matter in the investment world.
Image is everything.
Popularity. Fame. Renown. That is what everyone seeks today. For those who haven’t already achieved it, being associated with the popular kids is a snazzy second best.
We report all of this as a lament, of course. But that doesn’t make it any less true.
So when Mr. Jaffe says it’s time to stop paying attention to the Dow because it’s so ‘celebrity’, he’s perfectly out of step with reality.
AAPL and Mr. Jaffe’s Stumble
We’ve said this a hundred times and we’re going to say it again –
In a market that’s powered by an excess of liquidity, economic numbers mean little and corporate earnings even less. When Wall Street knows there’s cash enough out there to drive prices higher, that’s exactly what Wall Street will attempt to do.
And it will continue to funnel funds into those very stocks that it knows can absorb the hype. Which stocks are those? None other than un-representative and silly celebrity stocks – those found on the DJIA.
Wall Street will expand earnings multiples and raise target prices until, like at the end of every bull market, it senses that the cash is drying up.
Then it will be every man for himself.
So in the end, Mr. Jaffe will be right.
The economy will contract, the broader market indexes like the S&P 500 and the Wilshire 5000 will dump. But that silly old fool of an index, the Dow, will keep on going higher. And no one will pay any attention to the breakdown that’s occurring all around them.
Nor, perhaps, should they.
Investors who want to make money should be buying the Dow now. They should be happy that Apple’s been added to it. And they should know that the inclusion of AAPL is going to juice that index far higher and faster than can be appreciated by the vast boatload of financial journalists, who don’t appear to have any particular talent.
The hype just got bigger.
An Apple (AAPL) today helps keep reality away.
Buy it. And share your thoughts on Dow celebrities below.
We figure up to 10% of your portfolio in the longest dated, deep-in-the-money Dow CALLs you can find.
Many happy returns,
Matt McAbby, Normandy Research