Dow Jones Industrial Average: Fundamental Reasons for Supporting Industrial Average Momentum

On April 20, 2007, Dow Jones industrial average (30 industrial stocks), succeed once again (14 of the past 15 consecutive days) make a new historical high 12, 961.38 up 153.35 points. Reflecting a broad spectrum of economic growth and strong earnings, as the U.S. economy or industrial sector of the economy continues to expand, supported by consumer demand for goods and services. Shareholders (investors) have seen their financial wealth increase (besides their retirement accounts), on paper and capital gains taken. Besides, many public traded companies have increased their dividend payout. Certainly, unexpected events around the world and concerns of inflation (related to crude oil or energy costs) could undermine the fundamental reasons for economic expansion for consumer goods and services, could limit or reduces U.S. economic prosperity and lowering corporate earnings.

Reported events underscore future prospects for higher stock prices:

One of the most well known and recognizable investors for many years (from 1960s to present) Warren Buffet, made his shareholders of Berkshire Hathaway very happy, long term view on making investments that have proven to be very profitable. His strategy for investing is simple to purchase shares of companies that are currently undervalued, and prospects for very good earnings in the future, based upon increase demand for consumer goods and services. Reported in April 2007, Berkshire Hathaway bought 10.9% or 39 million shares of Burlington Northern Santa Fe (Parent company of BNSF Railway - (BNI) Company transports various products and commodities, including consumer, industrial, coal, and agricultural products), a market capitalization of $31.4 billion. Also, spokeswoman said Warren Buffet firm invested nearly $1.4 billion in two other undisclosed North American railroad companies. The prospects for increase consumer demand for goods both imported and domestically produced (manufactured) throughout the United States gets transported, high demand and speed on railway tracks. Large part of the railway transportation demand: Growth of the ethanol industry persuaded many farmers to grow record crop of corn in 2007, increasing the transportation of the byproduct ethanol (Unlike gasoline or diesel fuel, ethanol is transported exclusively by rail, truck and river barge.), and corn seeds transported by railroads. According Washington based Renewable Fuels Association ethanol consumption jumped 33 percent 5.4 billion gallons, from 2005 - 2006. In January 2007, President Bush set a goal to increase ethanol production 35 billion gallons by 2017, and thus reduce gasoline usage by twenty percent. According to the American Association of Railroads, rail freight volume was 1.74 trillion ton miles in 2006, up nearly a fifth since 2000. Increased ethanol demand (alternative source of energy) will increase the number of more ethanol run vehicles in the future, provided the cost to fuel these vehicles is less than conventionally purchasing gasoline, and readily available throughout the United States. Also, an alternative to use of fossil fuel is coal. Coal usage has increased, as the price of crude oil has gone up. According Richard Russack spokesman for Burlington Northern, previously acknowledged that the company has invested $2.5 billion over the last ten years under "an aggressive program" to support basin's (Ten giant coal mines in Wyoming produce nearly 40% of the US supply) transportation network of coal. The economic expansion that is occurring in China increases U.S railway transportation, by increasing demand of China's imported and exported commodities and goods. According to the World Trade Organization, China imports rose twenty percent in 2006 to $792 billion; "faster than global trade but continued to lag behind export growth". Attributing China's demand for importing coal: Expected China coal consumer demand rise to 2.87 billion tons in 2010, while domestic production is expected to reach 2.6 billion tons, during the same period. China merchandise trade expansion remains strong and expected to further grow, as U.S. consumer demand from China goods is expected to increase, underscoring the need to transport the merchandise quickly across the United States by railway, besides by trucks. The consumer demand for commodities (including coal and ethanol), and manufactured goods imported / exported, and transportation affects earnings of those public (and privately owned businesses) companies (both countries) and appreciation of their share price.

Hedge funds have evolved into a mega source of funds from private investors and institutions, realizing substantial stock price appreciation. Besides owning stocks and bonds, many hedge funds engage to takeover private and public owned businesses, for the purpose of reorganizing management's, achieve higher return on investment (profits) and future growth. Upon accomplishing a takeover of public trading company, appreciates their stock price and rewards those shareholders. Also, investors in many hedge funds have realized capital gains, when a fund sells a business owned or an appreciated asset. Hedge funds may invest in commodities, derivatives (future contracts, swaps (hedge against certain risks), real estate and any appreciating assets, achieve capital gains. Also, ability to purchase put options and future contracts on stocks, and commodities, hedging against any downside risk or take advantage of an anticipated downside turn in any financial market. Unlike mutual funds, hedge funds not regulated by the Securities and Exchange Commission or any federal government agency, (not having to report all financial holdings), except subjected against committing fraud as a market participant, and managers have fiduciary responsibility as any type of investment adviser. According to Hedge Fund Research, during first quarter of 2007, hedge funds took in a record $60 billion in new money, as institutions and individuals continued to be attracted by increasing financial rewards. No doubt, hedge funds (and mutual funds) achieved great financial rewards for investors, when U.S. economy is growing strong and future prospects are encouraging. However, many economists, investors and congressional members or leaders have concerns, hedge fund industry has grown monumentally, if the economy starts turning down or upon making sizable bad investments, hedge funds may cause sizable losses for investors and attribute to destabilizing the United States economy, because of their sizable accumulated net assets. In 2005, John Melcher (manages New York based hedge fund - Balestra Capital) said: 'I'm not worried about 8,000 hedge funds. I'm worried about 400 or 500 of them -- that's what could start the ball rolling down the hill. While most hedge fund managers are pretty smart and knowledgeable, it doesn't take to many to start a rout. One nervous cow and you could start a stampede."

The complexity of a strong United States economy secured by adding jobs thus increasing individual income and spending capability. Based upon the amount of earned income, basic living expenses are paid, and any disposable income is invested, saved and/or applied buying goods and services, contributing to increased sales many public and / or private business. Businesses tend to hire employees when the demand for their goods or services exceeds the level of current output. Applying the fundamental economic theory of supply and demand. Public traded companies share price appreciation often reflected by an increase in earnings or profits, underscored by consumer demand. On the first Friday of each month, the Federal Labor Department reports the unemployment rate, including the number of jobs either gained or lost during the previous month and any revisions or updates from prior months reports. On April 6, 2007, the Federal Labor Department reported non-farm payroll employment increased by 180,000 in March 2007 and revised up 113,000 gain jobs in February 2007. During the past two years, job growth in the United States has shown solid gains (However in residential construction and manufacturing jobs have decline during the same period). The significance of job growth is important for two reasons: When an employer hires more workers (employees), the business pays more Federal Income Tax return, based upon an increase in corporate earnings, and more people in the work force, increase the amount of payroll taxes collected by the Internal Revenue Service. An increase of both Federal Income tax collections, contributes to help lower the Federal Budget Deficit, besides an increase in tax collection from capital gains earned or taken. (Also, taxes paid on dividend distributions.) Unfortunately, pork barrel spending, and funding the war in Iraq and Afghanistan has a significant negative impact on the budget. Lowering the Federal Budget deficit, (hopefully in the future a surplus) contributes to a strong U.S. Dollar currency against currency around the world, especially currencies of countries are leading trade partners of the United States including China and Japan. Other attributing factors, positively influence a strong U.S Dollar currency: Reported monthly positive news regarding retail sales, inflation, housing starts (sales), jobless claims, Leading Economic Indicator (prediction of future performance), purchasing managers Index (PMI - Survey over 200 purchasing managers nationwide who represent 20 different industries), and Import / export price index. From an economic point of view: A stronger United States Dollar currency (as reflected against other currencies around the world), directly lessens concern for consumer inflation, as reflected by the cost of goods (or services) imported at a lower price (costing less for consumers) and encourages foreigners maintain or further invest owning hard (includes real estates, arts, and privately owned businesses) and soft assets in the United States (includes purchasing equities (stocks/bonds). In the United States, low inflation concerns (despite recent high energy costs), moderate economic growth, reduction of the Federal Budget Deficit encourage the Federal Reserve lower or maintain current interest rate policy. No doubt lowering interest rates help stimulate financial markets (stock market) by increasing the number of investors, and increase debt borrowing at lower interest rate. Unfortunately, down side reflection of higher U.S. Dollar currency valuation, increase the cost of goods or services exported, may undermine or detrimentally effect trade deficits by limiting the number of goods or services exporting or purchased. Public traded Companies in the United States (and privately owned) have extend their businesses more outside the United States, influenced by exchange rate currency, may affect their earnings. Depending upon how corporations manage their exposure to exchange rates, earnings may not be affected or may reflect positive results, and encourage investors to purchase their company shares.

Aspects of financial (stock market) liquidity essential for investors, hedge funds, mutual funds, and financial institution, foresee further monetary gains. Liquidity comes from various sources: Money invested by individuals, institutions, and re-investment of capital gains and dividends. Also attributing more than $680 billion of mergers involving U.S. Companies (January - mid April 2007 - Forty-six percent increase more than a last year), large extent is reinvested back into financial markets. James W. Gaul, who helps oversee $2.4 billion at Boston Advisors, LLC in Boston said: " It's bullish for the stock market because it means there's more money out there chasing fewer shares." Many public traded companies, repurchase a number of their shares outstanding, reflecting their optimistic view their share price is undervalued and attributes higher share price appreciation almost immediately after the news. Also, when shares prices of companies far exceed affordability to be purchased by most investors, board of directors of some companies consider or implement a stock split, reducing the share price to an affordable level and encourage more investor's participation.

The Dow Jones Industrial average never goes up in a strait line, but has proven to provide wealth for investors that have a long term horizon.