Dow Jones Is Erratic, Volatile

Up 4.4% Then Down 4.4% During Last Two Weeks

February 10, 2008
By: Jerry Cole - Retirement, Investment

What you will hear about and read about and for many perhaps concentrate on, is that the market (Dow Jones Industrial Average) fell 561.06 points, or 4.4% for the week ending Friday, Feb. 8, 2008.

That was a very poor performance to be sure, if fact the worst weekly percentage drop in nearly five years. However, just the week before the market was up 4.4%. What is this telling us? It is telling us that we are experiencing one heck of a lot of volatility, that's what!

Retail stocks gained some traction during the week, despite soft January sales. McDonald's reported "sizzling" sales on Friday. The fast-food chain reported that sales at stores open at least one year rose 5.7% in January from January 2007. This may be due in part to consumers keeping a close eye on their spending and opting for McDonald's rather than a more expensive fare. Sales in Europe jumped 8.2% and 7.8% in the company's Asia/Pacific, Middle East and Africa division. Part of those gains were due to a falling dollar, which boosts the value of results outside the United States.

Sears on the other hand has warned that its fourth quarter profit will be sharply lower. The stock price of Sears Holdings Corp. (symbol - SHLD), the parent company of the retail stores Sears and Kmart, has fallen 50% from a year ago, closing Friday at 98.59 down 4.09 on the day. Among other things, investors evaluating a company, especially a struggling one, look to the cash flow to determine the company's health.

At Sears there are signs that cash flows - which had remained healthy throughout the retailer's decline - are dwindling. With falling sales, slimmer profit margins and other woes, cash flows could fall to a level that could hinder a turnaround.

Simply stated, cash flow equals cash receipts minus cash payments over a given period of time. Or stated another way it is net profit plus amounts charged for depreciation, depletion and amortization. In business as in personal finance, cash flows are essential to solvency. They can be presented as a record of something that has happened in the past, such as sales of products or services, or forecasted into the future, representing what a business or a person expects to take in and to spend. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time.

One market indicator not to be overlooked is the positive showing of the Dow Jones Transportation Average. It is up 3% year to date and tracks economically sensitive stocks such as airlines and railroads. It is the oldest index used today, even older than the more famous Dow Jones Industrial Average. The Transportation Average was the first stock index developed by Charles Dow in 1884.

Today it is composed of 20 stocks, among them FedEx and United Parcel Service, Union Pacific and Burlington Northern Santa Fe, and Northwest Airlines and Delta Air Lines. When you consider the price increase in fuel, increase in wages and the enormous cost of replacement, the fact this average is up for the year says something about how some investors view the economic future of the country.

So, keep in mind that you will always have countervailing forces in the market. At times, like these, volatility will increase. This makes it all the more difficult to make short-term adjustments in your portfolio. Remember your objectives and strategy. Do not underestimate your time horizon; we are living longer. And don't forget to keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)