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18 marzo 2003

Do Stocks Have Life After War?

Summary

"Stocks hardly ever go down three years in a row!" This phenomenon, coupled with a serious misreading of some important economic trends then afoot, were among the key elements of what bulls used to extol the virtues of heavy stock ownership at the beginning of 2002.

Historically, there have not been many instances in which the bellwether measures decline three consecutive calendar years, although last year's outcome indeed added another to the count. There have been far fewer in which they have declined four years in a row -- as in only once from 1900 forward, the 1929-32 period. Yet, in recent weeks, it has become increasingly common to hear pundits talk about the "probability" that the 2000-03 period will mark the second.

Although I remain staunchly in the secular bear camp regarding the equity market, I continue to think there remains a strong possibility that ending the year in the red will not be 2003's fate. Obviously, what life stocks have during and after war with Iraq will tell the tale.
_____

Foreword

I want this missive to be as freestanding as possible, a vehicle for getting some specific views on the table and getting a good deal of relevant data into the hands of readers. On the other hand, I have no intention of trying to achieve an all-inclusive document. Nor can it be, considering how fluid the geopolitical situation is at the moment. Thus, there are several areas I will simply touch on here, with the intention of turning these into adjunct pieces over the next few weeks.

All together, there are 13 tables that supplement this missive. Four are interspersed with the text. The nine others appear in the table appendix that follows the text portion. These are referenced in the text.
_____

Onward

For many weeks now, I've contended that the growing uncertainty over when military action against Iraq would begin -- or even if it would begin -- was taking a large and growing toll on the US economy. In turn, this was serving to damage the stock market in a major way.

On March 11th [2003], I wrote:

"The coming US/Iraq 'encounter' has turned into a predictable UN fiasco. However, one way or the other, I strongly suspect the United States will extricate itself from this third-world buffoonery within in a matter of a few days."

And this is almost exactly how things have unfolded. Developments over the last few days in particular have made clear that war is close at hand, especially so the events of Sunday and yesterday -- the Azores summit and the end of the attempt at a diplomatic settlement at the United Nations, respectively. In last night's address to the nation, President Bush left open the obvious out for Saddam, but one I doubt will be taken.

It is entirely possible the stock market will not like the course of US military operations against Iraq when they commence, or what comes thereafter. It is the "thereafter" that promises to configure much differently than the last time around. But at least one thing will have lifted in a material way. The uncertainty that creates the fear of the unknown will finally have turned into something much more assessable -- one way or the other! It is a sense that such a climate is now close at hand that has put some wind at the stock market's back. (Table 1 in the appendix breaks out the configuration of "Desert Shield"/"Desert Storm" in 1990-91.)

Significant and Growing Frustration

Over the last several weeks, I have sensed a very sizable and growing frustration on the part of stock investors. And this frustration has been shared by investors on both sides of the ledger -- bulls and bears. A few weeks ago, I opined that there was little to no hope for any material improvement in stock prices until Iraq was resolved. Until recently, not only was there no improvement, but the market continued to sell off. By early to mid last week, prices were challenging last October's lows, set on 10/9/02.

Concurrently, the economy has been muddling through a great deal of concerns about Iraq, as well as suffering the consequences of an exceptionally cold, snowy winter in much of the country. The longer Iraq overhangs the national psyche, the more damage it will do to economic activity.

And the source of the frustration among stock investors is easy enough to see and understand. Over almost the last eight months, net, net, neither bulls nor bears have much to show for what has taken place. The stock market's discounting function has become materially contracted, with the market looking out weeks instead of the several quarters or more that has been the historical norm. But it is increasingly likely this stalemate is drawing to a close. When it does, one of the two sides will benefit measurably -- at least for a while.

Using my seven-measure tracking group, here's what the situation looked like through yesterday's close over various key periods.

----------------------------------------------
SELECTED STOCK-MARKET MEASURES
-- VALUES ON KEY DATES
(Listed in Alphabetical Order)
----------------------------------------------


03/17 03/12 03/11 12/31 10/09 07/24
2003 2003 2003 2002 2002 2002
Close Low Close Close Close Low
----------------------------------------------
DJIA 8142 7417 7524 8342 7286 7533
NAS 100 1077 947 959 984 807 869
NYSE Comp.* 4784 4419 4500 5000 4452 4550
Russ. 2000 365 343 347 383 327 354
S&P 500 863 789 801 880 777 776
Val. Line 246 228 232 264 220 249
Wil. 5000 8163 7503 7610 8343 7343 7397
----------------------------------------------
% CHANGE TO 03/17 CLOSE FROM:
-----------------------------
03/12 03/11 12/31 10/09 07/24
Low Close Close Close Low
----------------------------------------------
DJIA +9.8 +8.2 -2.4 +11.7 +8.1
NAS 100 +13.7 +12.3 +9.5 +33.5 +23.9
NYSE Comp.* +8.3 +6.3 -4.3 +7.5 +5.1
Russ. 2000 +6.4 +5.2 -4.7 +11.6 +3.1
S&P 500 +9.4 +7.7 -1.9 +11.1 +11.2
Val. Line +7.9 +6.0 -6.8 +11.8 -1.2
Wilsh. 5000 +9.2 +7.3 -2.2 +11.2 +10.4
----------------------------------------------
Average +9.2 +7.6 -1.8 +14.1 +8.7
Median +8.8 +7.3 -2.4 +11.6 +8.1
----------------------------------------------
*7/24 value is close on 7/23.
----------------------------------------------
In past work, I've put forth the idea that the entire July through October period might very well have represented a complex bottoming pattern from which the equity market would launch a counter-trend rally of significant magnitude and duration. As the above numbers indicate, the rally of recent days has again put the tracking group well above those lows.

Something else worthy of occasional scrutiny is the progress of the bear market to date. It is nearing its third anniversary for the S&P 500 and the NASDAQ 100, with the DJIA having celebrated its in mid January.
---------------------------------------------------
BEAR-MARKET PARAMETERS TO DATE -- DJIA, S&P 500,
NASDAQ 100 (Updated Through the Close on 03/17/03)
---------------------------------------------------
2000 - 2003 Closing Prices
--------------------------
High/Date Low/Date/Change
----------------- -----------------------
DJIA 11722.98 01/14/00 7286.27 10/09/02 -37.8%
S&P 500 1527.46 03/24/00 776.96 10/09/02 -49.1%
NASDAQ 100 4704.73 03/27/00 804.64 10/07/02 -82.9%
---------------------------------------------------
2000 - 2003 Intraday Prices
---------------------------
High/Date Low/Date/Change
----------------- -----------------------
DJIA 11750.28 01/14/00 7197.49 10/10/02 -38.7%
S&P 500 1553.11 03/24/00 768.63 10/10/02 -50.5%
NASDAQ 100 4781.19 03/27/00 795.25 10/08/02 -83.4%
---------------------------------------------------
Versus Versus
Closing Intraday
------------- -------------
03/17/03 Close High Low High Low
---------------------------------------------------
DJIA 8141.92 -30.5% +11.7% -30.7% +13.1%
S&P 500 862.79 -43.5% +11.0% -44.4% +12.3%
NASDAQ 100 1077.01 -77.1% +33.8% -77.5% +35.4%
---------------------------------------------------
Brief Comments on the Very Short Run

Tables 2 through 5 in the appendix (values calculated through last Friday's close) give a decent indication of how oversold, on balance, the stock market had become during the last few months. Thus, the axiomatic "spark-in-a-tinderbox" conditions were in place to launch the magnitude of rally stocks have experienced from last Wednesday's lows (3/12) through yesterday. Through yesterday's close, my tracking group rose more than 9%, on average, from those lows.

In addition, I have a strong hunch the "tape-breakers" from the hedge-fund world were out in full force last week, doing what they could to "help" the market to new lows. In the process, at least some of these folks probably shorted right into the lows, which left no margin for error were the market to turn against them -- which it did! Of course, the scramble to then cover shorts has helped measurably in fueling the rally.

Please also note (Table 5) that the three bellwether measures shown in that table (DJIA, NASDAQ Composite and S&P 500) were in favorable positions vis a vis key moving averages.

A "Secular" Bear I Remain

Despite the bullish comments made so far, and others that will be made later, I remain staunchly in the secular-bear camp. When I put myself there a good while back, it was a lonely place. It is not so lonely any longer. (As an aside, I do not try to be a contrarian merely for the sake of being one, but it is a place that often provides much comfort!)

Because of the acute market excesses that were put in place during the bubble's creation, I simply do not see a quick unwinding process. In fact, as matters currently stand, I believe it is easy to envision a bear phase that has years yet to run -- maybe many years. However, if this is so, there will be many rallies and subsequent sell-offs of significance along the way. Which, in turn, means that to prosper in such an environment, analysts and investors will have to do something that psychologically is not easy to do. To wit: they must be able periodically to reverse their thinking from a bearish stance to a bullish one.

"As matters currently stand, I believe it is easy to envision a bear phase that has years yet to run -- maybe many years." Just what does this mean?

I am not certain what this means, but I do sense that something like a repeat of the 1965-82 episode is possible. Table 6 breaks out that period, with the DJIA as the benchmark.

When you peruse those numbers, you will note that the Dow finished 1965 at about 969. A long time later -- 8/12/82 -- the industrial average closed at about 777, or 19.8% below where it had been at the end of 1965. However, in between, the Dow closed as high as 1,051.70 (1/11/73), and as low as 577.60 (12/6/74). So, someone buying the DJIA at the end of 1965 and holding the same position as of 8/12/82 had roughly a 20% loss, offset by dividends.

At the end of 1965, the Dow's dividend yield was a bit under 3%. And dividends did grow significantly over the next 17 years (from an aggregate of $28.61 as of 12/31/65 to $54.14 as of 12/31/82). However, during virtually all this period, the risk-free rate -- the yield on 90-day T-Bills -- was anywhere from higher to much higher. In turn, the sharp rise in T-Bill rates in progress was a function of the sharp rise in inflation rates that had also begun -- the consequence of Lyndon Johnson's "guns and butter" (concurrent Vietnam war and "Great Society" expenditures).

But How Can Stocks Rise from Current Levels of Valuation?

Before getting into a possible answer to the above question, let's look at some data on the economy, inflation and interest rates from a key period during the 1970s, juxtaposed to the end of last year.
-----------------------------------------------------
GROSS DOMESTIC PRODUCT, INFLATION, INTEREST
RATES AND STOCK RETURNS -- AS OF YEAR-END 1973
THROUGH YEAR-END 1977 AND AS OF 12/2002
-----------------------------------------------------
---------- As of 12/31 (%) ---------
1973 1974 1975 1976 1977 / 2002
------------------------------------
GDP[1] 4.0 -2.1 2.6 4.6 5.0 / 2.9
=====================================================
CPI[2] 8.9 12.1 7.1 5.0 6.7 / 2.4
PPI[3] 11.5 18.5 6.6 3.8 6.9 / 1.2
=====================================================
90-Day CD[4] 9.27 9.23 6.03 4.67 6.71 / 1.34
90-Day T-Bill[5] 7.59 7.28 5.52 4.40 6.16 / 1.19
10-Yr. Treas.[6] 6.74 7.43 8.00 6.87 7.69 / 4.03
20-Yr. Treas.[6] 7.29 7.91 8.23 7.30 7.87 / 5.01
30-Yr. Mtg.[7] 8.54 9.62 9.10 8.79 8.96 / 6.05
=====================================================
DJIA[8] -16.6 -27.6 +38.3 +17.9 -17.3 /-16.8
S&P 500[8] -17.4 -29.7 +31.5 +19.1 -11.5 /-23.4
-----------------------------------------------------
[ 1]Q4/Q4, 1996 chained dollars.
[ 2]December/December, all urban, all items.
[ 3]December/December, finished goods.
[ 4]90-day maturity, secondary market rates for av-
erage of business days in December of year shown.
[ 5]Coupon-equivalent yield of secondary market rates
for average of business days in December of year
shown.
[ 6]Constant maturity rate for average of business
days in December of year shown.
[ 7]Conventional 30-year, average contract on commit-
ments for fixed-rate first mortgages.
[ 8]Annual return, excluding contribution from div-
idends.
-----------------------------------------------------
As mentioned a moment ago, inflation began an ominous up-tick in the mid to late 1960s; it never looked back during most of the 1970s. Adding to the problems in the '70s were the oil-price shocks, having their genesis in the Mideast oil embargo resulting from the Arab-Israeli "Yom Kippur" war of 1973.

There were other depressants, too. The problems with the presidency of Richard Nixon certainly was one of them. This was followed not long afterwards by the Carter years, and President Carter's total inability to come to grips with the economic, inflation and foreign-policy problems confronting his administration.

Carter also had serious trouble with his key economic people. Under a cloud of scandal, OMB Director Bert Lance was forced to resign in the fall of 1977. Interestingly, a portion of the scandal involved none other than Indonesian businessman Mochtar Ridady, the "shadowy" figure who would play a prominent role in some of the Clinton scandals years later.

There was also trouble with G. William Miller, Carter's choice as Federal Reserve chairman. Because of America's serious economic malaise and the impact it was having on the world economy, foreign central bankers put increasing pressure on the US to have Miller step aside. Which Miller did in March of 1978, only to have Carter "compound the felony," so to speak. In July 1979, Carter nominated Miller to be Treasury secretary.

The "Carter malaise" was a profound one! During the last full month of his presidency, here is what the inflation and interest-rate scorecard looked like:
        Consumer Price Index       12.4%
Producer Price Index 11.7%
90-Day Cert. of Deposit 18.65%
90-Day Treasury Bill 16.11%
10-Year Treasury Note 12.84%
20-Year Treasury Bond 12.49%
30-Year Conv. Mortgage 14.79%
High, persistent and escalating inflation drives up interest rates. Eventually, this deadly duo drives down and keeps down stock valuations, as was the condition persisting through all but the very early 1970s. The following table tells much of this tale.
---------------------------------------------------
THE RELATIONSHIP OF INFLATION,
INTEREST RATES AND THE DJIA'S PRICE-
EARNINGS RATIO OVER SELECTED PERIODS
---------------------------------------------------
CPI PPI 90-Day 10-Year
[1] [2] T-Bill T-Note DJIA P/E
(%) (%) Yield[3] Yield Ratio[4]
----------------------------------------
03/14/02 2.6 3.5 1.12% 3.70% 20.3
---------------------------------------------------
12/31/02 2.4 1.2 1.19% 4.03% 21.5
10/09/02* 2.0 0.7 1.55% 3.57% 18.8
12/31/01 1.5 -1.7 1.70% 5.09% 27.1
12/31/00 3.4 3.5 5.85% 5.24% 22.2
01/14/00# 2.8 2.6 5.39% 6.66% 24.6
12/31/99 2.7 3.0 5.27% 6.28% 24.1
===================================================
12/31/83 3.8 0.5 9.21% 11.83% 17.5
12/31/82 3.8 3.6 8.10% 10.54% 116.0
12/31/81 8.9 7.1 11.15% 13.72% 7.7
12/31/80 12.4 11.7 16.11% 12.84% 7.9
12/31/79 13.3 12.9 12.41% 10.39% 6.8
12/31/78 9.0 9.1 9.29% 9.01% 7.1
12/31/77 6.7 6.9 6.16% 7.69% 9.3
12/31/76 5.0 3.8 4.40% 6.87% 10.4
12/31/75 7.1 6.6 5.52% 8.00% 11.2
12/31/74 12.1 18.5 7.28% 7.43% 6.2
12/31/73 8.9 11.5 7.59% 6.74% 9.9
12/31/72 3.4 3.9 5.14% 6.36% 15.2
---------------------------------------------------
[1]Year/year, all urban, all items.
[2]Year/year, finished goods.
[3]Coupon-equivalent yield.
[4]DJIA price/earnings ratio calculated on re-
ported trailing four-quarter earnings as of
or closest to date shown.
*Lowest DJIA close during bear market to date.
#Record DJIA close and beginning of bear market.
---------------------------------------------------
Table 7 breaks out a broader-based examination of DJIA valuations. The periods covered are 1972-83, inclusive, and 1999-3/14/03, inclusive. And within the context of the balance of this discussion, you will want to peruse Tables 8 and 9. These are, respectively: a comparison of the Dow's P-E ratio with Treasury yields; and a look at the behavior of DJIA earnings during the current cycle, around the time of the last recession, and around the time of the 1987 stock-market crash.

So Where Do Higher Stock Prices Come From?

I've made very clear my view that the stock market will remain mired in a secular-bear episode for a long time to come. But here is something to ponder.

When the DJIA made its cycle low of about 578 in December of 1974, that overall bear market still had the better part of eight years to run. And as some of the prior text and a number of the tables supporting this missive clearly show, there were lots of fundamental reasons why that bear episode was far from over. Still, in 1975, the Dow rose a stunning 38.3%. In 1976, the industrial average added another 17.9%, for a cumulative two-year return of 63.1%. Was the market discounting the much better times ahead? Hardly, since much of what was ahead was actually worse than what had already taken place!

Indeed, as the tables show, there was a small respite from inflation that took place in 1975 and 1976, if you can define a year-over-year CPI of 7.1% and 5.0% a "respite." In turn, this temporary diminution brought Treasury yields down a bit during those two years, although the decline was to levels that would be considered ghastly by current standards.

But this is exactly the point at present -- the relationship between stock prices and interest rates is arguably the most favorable it has been in a long, long time. And although I am looking for some rise in rates as this year progresses, the overall relationship should remain favorable.

As Table 8 shows, the relationship between the Dow's P-E ratio and the yield on the 10-year T-Note (expressed in the table as an imputed P-E) was quite favorable during most of the 1970s. This was primarily the result of Dow earnings that were capitalized at single-digit multiples during much of the period.

The killer was what was available back then as the "risk-free" rate -- the yield on the 90-day T-Bill. As of year-end during the 1972-79 period, the lowest T-Bill yield was 4.40% (1976), but this still exceeded by 32 basis points the DJIA's dividend yield.

By comparison, as of last Friday, the respective ratios of the 10-year yield to Dow multiple and the T-Bill yield to Dow yield were 0.75 and 0.46, respectively. This indicates that based on interest-rate relationships alone, the Dow has some headroom.

Of course, stock prices do not live on interest-rate relationships alone. Earnings are exceedingly important, too, and in this respect, while reported earnings probably have troughed (at least for a while), the current economic climate is not at all conducive for significant earnings growth anytime soon. But the emphasis here should be on "current."

I will soon be updating some of my work on the outlook for the economy. However, I'll opine here that the prospects for the second half of 2003 are probably not as dour as has crept into some of Wall Street's recent thinking, which has become highly contracted because of war concerns. Moreover, the winter will soon be history, although the problems associated with seasonally adjusting economic data relating to this year's rugged winter and last year's mild one won't be. But in this regard, some of this statistical static is very likely to add at least a modicum of artificial gusto to the numbers we will be seeing later in the year. During this year's earlier months, the phenomenon is likely penalizing the data.

Many, many companies have now adjusted operations such that various cost curves are in much better shape than in past periods. Therefore, a legitimate pickup in top-line business could be materially magnified on their way to the bottom line. There is also be the matter of some lower effective tax rates, and there will surely be some companies with operating losses that will be filing amended tax returns and receiving eventual refunds that will help cash flow a bit.

In conclusion, I certainly am not suggesting that stocks have commenced anything approaching a 1975/76-like move. On the other hand, with some lucky bounces of the proverbial ball -- the imminent war and its aftermath being absolutely key examples -- equity prices could still turn in a year that is surprisingly decent, at least relative to the expectations that were apparent as of early last week.

Constant vigilance is always important. In the current environment, it is obligatory!
_____

Table Appendix
        TABLE 1.
--------------------------------------------------
A CHRONOLOGY OF THE MAJOR EVENTS SURROUNDING
OPERATIONS DESERT SHIELD/DESERT STORM -- 1990-91
--------------------------------------------------
Year/
Date Event
--------------------------------------------------
1990
07/16 Saddam accuses Kuwait of overproducing oil,
as well as "stealing" oil from the Rumailia
Oil Field.
07/25 April Glaspie, US Ambassador to Iraq,
communicates to Saddam the view the Iraq/
Kuwait dispute is an Arab affair, not one
involving the United States.
08/02 Iraq invades Kuwait.
08/08 Iraq annexes Kuwait, declaring it Iraq's
"19th province."
08/09 The UN declares Iraq's annexation invalid.
1991
01/16 The air war against Iraq starts on 1/17 at
2:38 AM local time, or on 1/16 at 6:38 PM
Eastern time.
02/27 President Bush declares a cease fire,
effective midnight Kuwait time.
03/03 Iraq formally accepts the cease fire terms.
--------------------------------------------------


THE BEHAVIOR OF THE DJIA
AROUND THE ABOVE EVENTS
-------------------------
Year/
Date DJIA Close Index
-------------------------
1990
07/16 2,999.80 100.00
-------------------------
07/25 2,930.90 97.70
08/01 2,899.30 96.65
08/02 2,864.60 95.49
09/27 2,427.50 80.92
10/08 2,523.80 84.13
10/11 2,365.10 78.84
12/26 2,637.10 87.91
-----
1991
01/09 2,470.30 82.35
01/15 2,490.60 83.03
01/16 2,508.90 83.64
01/31 2,736.40 91.22
02/15 2,934.70 97.83
02/27 2,889.10 96.31
02/28 2,882.20 96.08
03/04 2,914.10 97.14
03/06 2,973.30 99.12
03/15 2,948.30 98.28
-------------------------



TABLE 2.
----------------------------------------------------
NEW YORK STOCK EXCHANGE BREADTH MEASURES
----------------------------------------------------
Volume* Issues 52-Week
---------------- -------------- --------------
Week "A" "B" "A" "B" A/ H/
Ended Total Advan. B/A Adv. Decl. A+B High Low H+L
----------------------------------------------------
2003
03/14 7.462 3.411 0.46 7713 8563 0.47 248 971 0.20
03/07 6.341 2.663 0.42 7502 8615 0.47 370 678 0.35
02/28 6.629 3.340 0.50 8283 7853 0.51 265 452 0.37
02/21#4.802 2.697 0.56 7364 5585 0.57 150 212 0.41
02/14 6.601 3.012 0.46 7578 8636 0.47 160 670 0.19
02/07 6.706 2.129 0.32 6758 9446 0.42 260 383 0.40
01/31 7.483 3.555 0.48 8052 8218 0.50 249 366 0.41
01/24#6.090 2.046 0.34 5080 8006 0.39 330 213 0.61
01/17 6.941 2.907 0.42 7803 8533 0.48 485 85 0.85
01/10 7.412 4.297 0.58 9011 7490 0.55 565 71 0.89
01/03#4.461 2.899 0.65 8156 4794 0.63 214 72 0.75
2002
12/27#3.030 1.146 0.38 6112 6559 0.48 197 113 0.64
12/20 7.018 3.406 0.49 8310 7940 0.51 201 201 0.50
12/13 6.247 2.639 0.42 7705 8410 0.48 181 135 0.57
12/06 7.013 2.784 0.40 7886 8210 0.49 163 163 0.67
11/29#5.049 2.694 0.53 7166 5635 0.56 139 74 0.65
11/22 7.762 4.587 0.59 9022 7138 0.56 165 147 0.53
11/15 6.788 3.984 0.58 8675 7391 0.54 113 216 0.34
11/08 7.492 3.682 0.49 8161 7893 0.51 117 130 0.47
11/01 7.234 3.731 0.52 8944 7116 0.56 122 216 0.36
10/25 7.555 4.282 0.57 8621 7412 0.54 109 358 0.36
10/18 7.801 4.533 0.58 8672 7440 0.54 129 412 0.24
10/11 9.218 4.926 0.53 7294 8953 0.45 113 2087 0.05
10/04 8.655 3.021 0.35 6906 9283 0.43 339 1156 0.23
----------------------------------------------------
*Billions of shares. #Four-day trading week.
----------------------------------------------------



TABLE 3.
---------------------------------------------------
THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/09/02 THROUGH 03/14/03
---------------------------------------------------
Date CBOE Options S&P 500
or Put/Call Ratios -------------------
Week CBOE ---------------- From
Ended VIX* All Equity Index Close Prior Cum.
---------------------------------------------------
2003
03/14 36.33 0.70 0.58 1.04 833.3 +4.1% 107.29
---------------------------------------------------
03/11 38.08 0.81 0.66 1.12 800.7 -3.4% 103.09
---------------------------------------------------
03/07 35.65 0.75 0.64 1.02 828.9 -1.5% 106.72
02/28 34.15 0.59 0.50 0.88 841.2 -0.8% 108.30
02/21 34.14 0.85 0.74 1.23 848.2 +1.6% 109.21
02/14 37.10 0.98 0.79 1.41 834.9 +0.6% 107.49
02/07 38.80 0.94 0.70 1.54 829.7 -3.0% 106.82
01/31 35.78 0.84 0.67 1.34 855.7 -0.7% 110.17
01/24 35.77 0.83 0.64 1.35 861.4 -4.5% 110.91
01/17 28.68 0.82 0.74 1.27 901.8 -2.8% 116.11
01/10 27.13 0.75 0.58 1.35 927.6 +2.1% 119.43
01/03 27.98 0.76 0.70 0.98 908.6 +3.8% 116.98
2002
12/27 34.15 0.96 0.78 1.40 875.4 -2.3% 112.71
12/20 31.47 0.88 0.68 1.90 895.8 +0.7% 115.33
12/13 32.12 0.87 0.67 1.50 889.5 -2.5% 114.52
12/06 32.68 0.91 0.74 1.32 912.2 -2.6% 117.45
11/29 31.08 0.62 0.47 1.13 936.3 +0.6% 120.55
11/22 26.73 0.70 0.60 1.04 930.6 -0.9% 119.81
---------------------------------------------------
11/27@ 30.84 0.67 0.53 1.22 938.9 +3.2% 120.88
---------------------------------------------------
11/15 30.83 0.57 0.44 1.38 909.8 +1.7% 117.14
11/08 33.56 1.05 0.88 1.64 894.7 -0.7% 115.19
11/01 33.98 0.71 0.56 1.27 901.0 +0.4% 116.00
10/25 36.27 0.77 0.65 1.20 897.7 +1.5% 115.58
10/18 39.82 0.68 0.58 1.18 884.4 +5.9% 113.87
10/11 43.44 0.93 0.71 1.53 835.3 +7.5% 107.54
---------------------------------------------------
10/09# 49.48 0.92 0.79 1.26 776.7 --> = 100.00
---------------------------------------------------
*2003 VIX highs and lows through 3/14: high =
41.16 (3/12), low = 26.19 (1/9). *2002 VIX highs
and lows: high = 56.74 (7/24), low = 18.87 (3/28).
@S&P high close and #low close, 10/19/02 forward.
---------------------------------------------------



TABLE 4.
------------------------------------------------
DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 24 WEEKS ENDED 03/14/03
------------------------------------------------
Week S&P NASDAQ
Ended DJIA 500 100
------------------------------------------------
2003
03/14 -10% -22% +68%
03/07 -60% -45% -53%
02/28 +9% +43% +303%
02/21 +66% +77% +372%
02/14 -38% -47% -3%
02/07 -58% -62% -65%
01/31 -81% -74% -59%
01/24 -87% -85% -90%
01/17 -4% -18% -30%
01/10 +333% +350% +834%
01/03 +32% +45% +59%
2002
12/27 -33% -34% -19%
12/20 -33% -38% -73%
12/13 -75% -74% -93%
12/06 -38% -40% -70%
11/29 +157% +111% +270%
11/22 +123% +177% +1295%
11/15 +21% +29% +187%
11/08 +33% -8% +917%
11/01 +83% +62% +425%
10/25 +566% +550% +1710%
10/18 +1256% +1231% +6178%
10/11 +64% +28% +146%
10/04 -78% -76% -82%
------------------------------------------------
PROJECTED VALUES TO 03/21/03 FROM 03/14/03 CLOSE
------------------------------------------------
Projections to 03/21/03
From -----------------------------------------
03/14 2-Wk. S&P 2-Wk. NASD 2-Wk.
Close DJIA ROC 500 ROC 100 ROC
------------------------------------------------
+5% 8253 +430% 875 +309% 1082 +996%
+3% 8096 +222% 858 +145% 1061 +558%
0% 7860 +49% 833 +14% 1030 +204%
-3% 7624 -32% 808 -49% 999 +38%
-5% 7467 -61% 792 -69% 979 -19%
------------------------------------------------



TABLE 5.
---------------------------------------------------
SELECTED STOCK MEASURES VS. RESPECTIVE 20-DAY, 50-
DAY, 200-DAY MOVING AVERAGES - AS OF 03/14/03 CLOSE
(Listed in Alphabetical Order)
---------------------------------------------------
03/14 Close
Moving Average Versus (%)
03/14 -------------- ----------------
Measure Close 20-D 50-D 200-D 20-D 50-D 200-D
---------------------------------------------------
DJIA 7860 7812 8094 8468 +0.6 -2.9 -7.2
NASDAQ Comp. 1340 1319 1343 1350 +1.6 -0.2 -0.7
S&P 500 833 830 857 896 +0.4 -2.8 -7.0
---------------------------------------------------
Average +0.9 -2.0 -5.0
Median +0.6 -2.8 -7.0
---------------------------------------------------
ABOVE AS OF THE 10/09/02 CLOSE
---------------------------------------------------
10/09 Close
Moving Average Versus (%)
10/09 -------------- ----------------
Measure Close 20-D 50-D 200-D 20-D 50-D 200-D
---------------------------------------------------
DJIA 7286 7860 8324 9445 -7.3 -12.5 -22.9
NASDAQ Comp. 1114 1202 1272 1600 -7.3 -12.4 -30.4
S&P 500 777 837 880 1026 -7.2 -11.7 -24.3
---------------------------------------------------
Average -7.3 -12.2 -25.9
Median -7.3 -12.4 -24.3
---------------------------------------------------



TABLE 6.
--------------------------------------------------
THE DJIA'S PERFORMANCE DURING THE SECULAR
BEAR MARKET OF 12/31/65 THROUGH 08/12/82
--------------------------------------------------
---------- Closing ---------- Year
Year High/Date Low/Date Change Index
--------------------------------------------------
------------
1965 969.26 12/31[1] 840.59 06/28 12/31/65=100.00
------------
1966 995.15 02/09 744.32 10/07 -18.9% 81.06
1967 943.08 09/25 786.41 01/03 +15.2% 93.38
1968 985.21 12/03 825.13 03/21 + 4.3% 97.37
1969 968.85 05/14 769.93 12/17 -15.2% 82.58
1970 842.00 12/29 631.16 05/26 + 4.8% 86.56
1971 950.82 04/28 797.97 11/23 + 6.1% 91.85
1972 1036.27 12/11 889.15 01/26 +14.6% 105.24
-------------
1973 1051.70 01/11[2] 788.31 12/05 -16.6% 87.79
-------------
------------
1974 891.66 03/13 577.60 12/06[3]-27.6% 63.59
------------
1975 881.81 07/15 632.04 01/02 +38.3% 87.95
1976 1014.79 09/21 858.71 01/02 +17.9% 103.66
1977 999.75 01/03 800.85 11/02 -17.3% 85.76
1978 907.74 09/08 742.12 02/28 - 3.2% 83.06
1979 897.61 10/05 796.67 11/07 + 4.2% 86.54
1980 1000.17 11/20 759.13 04/21 +14.9% 99.46
1981 1024.05 04/27 824.01 09/25 - 9.2% 90.28
------------
1982 1070.55 12/27 776.92 08/12[4]+19.6% 107.97
------------
--------------------------------------------------
[1]Beginning of 1965-82 bear market. [2]Closing
high during 1965-82 period. [3]Closing low during
1965-82 period. [4]End of 1965-82 bear market --
total 12/65 to 8/82 price-only return = -19.8%.
--------------------------------------------------



TABLE 7.
-----------------------------------------------------
DOW JONES INDUSTRIAL AVERAGE VALUATIONS
-- 1972 TO 1983, AND 1999 TO 03/14/03
-----------------------------------------------------


12/31 01/14 12/31 12/31 12/31 03/14
1999 2000 2000 2001 2002 2003
-----------------------------------
DJIA Close 11497 11723 10787 10022 8342 7860
-----------------------------------
Earnings[1][2] $477 $477 $485 $370 $388 $388
Dividends[3] $169 $169 $172 $181 $190 $190
Book Value[4] $1638 $1638 $1315 $2464 $2464 $2464
90-Day T-Bill[5] 5.27% 5.39% 5.85% 1.70% 1.19% 1.12%
10-Yr. T-Note 6.28% 6.66% 5.24% 5.09% 4.03% 3.70%
-----------------------------------------------------
Earnings[6] (%) 24.5 -- 1.7 -23.7 4.9 --
Price/Earnings 24.1 24.6 22.2 27.1 21.5 20.3
Div. Yield (%) 1.47 1.44 1.59 1.81 2.28 2.42
Market/Book 7.02 7.16 8.20 4.07 3.39 3.19
-----------------------------------------------------
Actual P/E 24.1 24.6 22.2 27.1 21.5 20.3
Theoret. P/E[7] 15.9 15.0 19.1 19.7 24.8 27.0
Actual/Theoret. 1.52 1.64 1.16 1.38 0.87 0.75
T-Bill/Div. Yield 3.59 3.74 3.68 0.94 0.52 0.46
=====================================================
12/31 12/31 12/31 12/31 12/31 12/31
1978 1979 1980 1981 1982 1983
-----------------------------------
DJIA Close 805 839 964 875 1047 1259
-----------------------------------
Earnings[1][2] $113 $124 $122 $114 $9 $72
Dividends[3] $49 $51 $54 $56 $54 $56
Book Value[4] $891 $859 $929 $976 $882 $888
90-Day T-Bill[5] 9.29% 12.4% 16.1% 11.2% 8.10% 9.21%
10-Yr. T-Note 9.01% 10.4% 12.8% 13.7% 10.5% 11.8%
-----------------------------------------------------
Earnings[6] (%) 27.0 9.7 -1.6 -6.6 -92.0 +700
Price/Earnings 7.1 6.8 7.9 7.7 116.0 17.5
Div. Yield (%) 6.09 6.08 5.60 6.40 5.16 4.44
Market/Book 0.90 0.98 1.04 0.90 1.19 1.42
-----------------------------------------------------
Actual P/E 7.1 6.8 7.9 7.7 116.0 17.5
Theoret. P/E[7] 11.1 9.6 7.8 7.3 9.5 8.5
Actual/Theoret. 0.64 0.71 1.01 1.05 12.21 2.06
T-Bill/Div. Yield 1.53 2.04 2.88 1.74 1.57 2.07
=====================================================
12/31 12/31 12/31 12/31 12/31 12/31
1972 1973 1974 1975 1976 1977
-----------------------------------
DJIA Close 1020 851 616 852 1005 831
-----------------------------------
Earnings[1][2] $67 $86 $99 $76 $97 $89
Dividends[3] $32 $35 $38 $37 $41 $46
Book Value[4] $643 $690 $747 $784 $798 $842
90-Day T-Bill[5] 5.14% 7.59% 7.28% 5.52% 4.40% 6.16%
10-Yr. T-Note 6.36% 6.74% 7.43% 8.00% 6.87% 7.69%
-----------------------------------------------------
Earnings[6] (%) 21.8 28.4 15.1 -23.2 27.6 -8.2
Price/Earnings 15.2 9.9 6.2 11.2 10.4 9.3
Div. Yield (%) 3.14 4.11 6.17 4.34 4.08 5.54
Market/Book 1.59 1.23 0.82 1.09 1.26 0.99
-----------------------------------------------------
Actual P/E 15.2 9.9 6.2 11.2 10.4 9.3
Theoret. P/E[7] 15.7 14.8 13.5 12.5 14.6 13.0
Actual/Theoret. 0.97 0.67 0.46 0.90 0.71 0.72
T-Bill/Div. Yield 1.64 1.85 1.18 1.27 1.08 1.11
-----------------------------------------------------
[1]Trailing four-quarter earnings as of 12/31 of
calendar years shown, except 12/31/02, which
are trailing four-quarter earnings as of 9/30/02.
Earnings shown and used for 3/7/03 are also trail-
ing four-quarter earnings as of 9/30/02.
[2]Earnings shown and used for 1/14/00 are trailing
four-quarter earnings as of 12/31/99.
[3]Trailing four-quarter dividends as of 12/31 of
calendar years shown. Dividends shown and used for
1/14/00 are trailing four-quarter dividends as of
12/31/99. Dividends shown and used for 3/7/03 are
trailing four-quarter dividends as of 12/31/02.
[4]Book value shown and used for 12/31/02 and 3/7/03
is book value for 2001, which is the latest cur-
rently available.
[5]Coupon-equivalent yield.
[6]Change in trailing four-quarter earnings as of
12/31 of year shown from 12/31 of prior year
except for 12/2002, which is change in trailing
four-quarter earnings as of 9/30/02 from 12/2001.
[7]The "theoretical" price-earnings ratio is the re-
ciprocal of the 10-year T-Note yield shown in the
table.
-----------------------------------------------------



TABLE 8.
----------------------------------------------------
THE DJIA'S PRICE-EARNINGS RATIO AND DIVIDEND YIELD
COMPARED WITH THE YIELDS ON THE 90-DAY TREASURY
BILL AND 10-YEAR TREASURY NOTE OVER SELECTED PERIODS
----------------------------------------------------
[1] [2] [3] [4]
--- --- [1] --- --- [3]
Act. Theo. --- T-Bill Div. ---
P/E P/E [2] Yield Yield [4]
-----------------------------------------
03/14/02 20.3 27.0 0.75 1.12% 2.42% 0.46
---------------------------------------------------
12/31/02 21.5 24.8 0.87 1.19% 2.28% 0.52
10/09/02* 18.0 28.0 0.67 1.55% 2.53% 0.61
12/31/01 27.1 19.7 1.38 1.70% 1.81% 0.94
12/31/00 22.2 19.1 1.16 5.85% 1.59% 3.68
01/14/00# 24.6 15.0 1.64 5.39% 1.44% 3.74
12/31/99 24.1 15.9 1.52 5.27% 1.47% 3.59
====================================================
12/31/83 17.5 8.5 2.06 9.21% 4.44% 2.07
12/31/82 116.0 9.5 12.21 8.10% 5.16% 1.57
12/31/81 7.7 7.3 1.05 11.15% 6.40% 1.74
12/31/80 7.9 7.8 1.01 16.11% 5.60% 2.88
12/31/79 6.8 9.6 0.71 12.41% 6.08% 2.04
12/31/78 7.1 11.1 0.64 9.29% 6.09% 1.53
12/31/77 9.3 13.0 0.72 6.16% 5.54% 1.11
12/31/76 10.4 14.6 0.71 4.40% 4.08% 1.08
12/31/75 11.2 12.5 0.90 5.52% 4.34% 1.27
12/31/74 6.2 13.5 0.46 7.28% 6.17% 1.18
12/31/73 9.9 14.8 0.67 7.59% 4.11% 1.85
12/31/72 15.2 15.7 0.97 5.14% 3.14% 1.64
----------------------------------------------------
[1]DJIA actual price/earnings ratio calculated on
reported trailing four-quarter earnings as of
or closest to date shown.
[2]"Theoretical" price-earnings ratio is the re-
ciprocal of the 10-year T-Note yield.
[3]Coupon-equivalent yield.
[4]Calculated on reported four-quarter dividends
as of or closest to date shown.
*Lowest DJIA close during bear market to date.
#Record DJIA close and beginning of bear market.
----------------------------------------------------



TABLE 9.
------------------------------------------------
BEHAVIOR OF DJIA EARNINGS: (1) CURRENT CYCLE,
(2) AROUND THE TIME OF THE LAST RECESSION,
(3) AROUND THE TIME OF THE 1987 STOCK CRASH*
------------------------------------------------
------% Change----
Quarter --Earnings ($s)--- Q/Same Q 4-Q/Prior
Ended Quarter 4-Quarter Prior Yr. 4-Qtr.
------------------------------------------------
09/30/02 106.46 388.47 +6.3 +1.6
06/30/02 95.12 382.20 +20.3 +4.4
03/31/02 96.87 366.12 -3.4 -0.9
12/31/01 90.02 369.51 +14.4 +3.2
09/30/01 100.19 358.18 -24.2 -8.2
06/30/01 79.04 390.23 -46.1 -14.8
03/31/01 100.26 457.93 -21.3 -5.6
03/31/01 2001-? RECESSION OFFICIALLY BEGINS ->
12/31/00 78.69 485.14 -19.7 -3.8
09/30/00 132.24 504.39 -7.3 -2.0
06/30/00 146.74 514.75 12.0 3.1
03/31/00 127.47 499.06 20.7 4.5
12/31/99 97.94 477.22 -6.1 -1.3
==============================================
03/31/92 38.91 60.62 41.2 23.0
12/31/91 -25.80 49.27 -- -51.2
09/30/91 11.11 100.91 -73.3 -23.2
06/30/91 36.40 131.42 -38.5 -14.8
03/31/91 1990-91 RECESSION OFFICIALLY ENDS--->
03/31/91 27.56 154.17 -39.3 -10.4
12/31/90 25.84 172.05 -45.0 -10.9
09/30/90 41.62 193.17 -26.0 -7.0
07/01/00 1990-91 RECESSION OFFICIALLY BEGINS->
06/30/90 59.15 207.78 3.8 1.1
03/31/90 45.44 205.60 -25.9 -7.2
12/31/89 46.96 221.48 -7.8 -1.8
09/30/89 56.23 225.48 -1.8 -0.5
06/30/89 56.97 226.52 -5.4 -1.4
03/31/89 61.32 229.75 30.4 6.6
12/31/88 50.96 215.46 208.1 19.0
09/30/88 57.27 181.04 27.9 7.4
06/30/88 60.20 168.54 66.7 16.7
03/31/88 47.03 144.45 32.0 8.6
12/31/87 16.54 133.05 -23.0 -3.6
10/19/87 1987 STOCK-MARKET CRASH------------->
09/30/87 44.77 137.99 35.6 9.3
------------------------------------------------
*MEMO ITEMS: Calculated on trailing four-qtr.
earnings: 12/31/91 thru 6/30/00 rise = 994.8%;
3/31/89 thru 12/31/91 decline = 78.6%; 9/30/87
thru 3/31/89 rise = 66.5%.
------------------------------------------------