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Memories of the Seventies

07/16/2008 12:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says the current market is reminiscent of 1973-1974, another dark period that turned out to be a great buying opportunity.

We believe the action in the Dow Jones Industrial Average from the first quarter of 2003 to the present is eerily reminiscent of the action in said average from mid-May 1970 through 1973. Both periods enjoyed an initial breakout, entered a primary rising trend, and were challenged by multiple sharp corrective phases.

With the Industrials making a new low, we now wait to see if the Dow Jones Transportation Average will confirm, which would mirror the pattern from 1973 to 1974. Then, as now, the currency was in crisis, the nation was at war, oil was skyrocketing, unemployment was rising, inflation was threatening, and recession loomed on the horizon.

By the end of 1973 the nation was gripped by the nightmare of Watergate and the potential for a Constitutional crisis. The present state of political discourse can be fairly characterized as acrimonious, and one must concede from intellectual honesty that some portion of current market weakness is directly attributable to concerns about the outcome of the November election.

Then as now, sectors of the market previously believed to be invulnerable were in tatters. Venerable oil giant Exxon (now Exxon Mobil) was battered so badly by the oil crisis created by the Arab oil embargo that its dividend yield reached a heady 10%.

Today, mighty Bank of America (NYSE: BAC) is trading so low its dividend yield is at 10%, which means the market believes it will cut its dividend. BAC doesn’t have to cut the dividend, but given the cuts by other financial stalwarts it seems like the safe bet and it could happen. The pending acquisition of Countrywide Financial also makes people nervous because they don’t know the size of the reserves they’ll have to take against Countrywide’s loans. Long term the deal will be a positive, but it’s going to take 18 to 24 months.

The final comparison I will make about the two periods is this: Both created generational values that Benjamin Graham would advocate buying. If Graham were alive today, he would be like a kid in a candy store, snapping up shares of high-quality companies whose asset values, in many cases, are equal to or exceeding its stock values. Why is this important? Because the gain is established on the Buy price!

The market may indeed move lower, but it will eventually establish a bottom. In the meantime, many stocks have already reached or are close to reaching their respective bottoms. The lesson to take from the 1973/1974 period: When investors buy high-quality stocks at extreme levels of value and are patient, the rewards are outstanding.

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