NEW LOW OBSERVER

There is much discussion about the stock market crash of 1929.  By default, that discussion centers around the collapse of the Dow Jones Industrial Average (as the S&P 500 didn’t exist at the time) which declined -89% from the 1929 high of 381.17 to the 1932 low of 41.22.

Little discussed is the collapse of the Dow Jones Utility Average. At the peak of the Dow Jones Utility Average, also topping in 1929, the index declined -92.67%. While the decline in the Dow Jones Industrial Average lasted approximately 2 and a half years, the final low in the Dow Jones Utility Average did not materialize until 1942, approximately 11 and a half years later.

While on the road to recovery from the 1932 low, the Dow Jones Industrial Average managed to exceed the 1929 peak in late 1954 and never looked back.

Meanwhile, The Dow Jones Utility Average has had a different path.  From the 1942 low, The Dow Jones Utility Average did not manage to attain the 1929 high until 1963.  By 1965, the Dow Jones Utility Average achieved a peak and fell to a low of 57.93 in September 1974.

Worse still, the Dow Jones Utility Average did not break above the 1929 high for good until 1984, creating the most unparalleled “cup and handle” technical formation.  You would think that the breakout from the 1929 high would be significant enough to not worry about revisiting such a level again.  However, the Dow Jones Utility Average came within 20% of the 1929 peak on October 9, 2002.

The decline in the Dow Jones Utility Average is not unlike the decline in the Nikkei 225 Index which peaked in 1989 at 38,876.94 and bottomed in 2003 at 7,607.88 fourteen years later (or at 7,054.98 in 2009 at 20 years after the peak). There is another similarity in the Dow Jones Utility Average and the Nikkei 225 Index.

After the collapse of the Nikkei 225, it was realized that the complex crossholding relationship of publicly traded companies made it difficult to unwind intricated positions in stock of insolvent or illiquid companies.  The complexity of the relationship is illustrated below.

Likewise, the Dow Jones Utility Average list of companies, after 1929, had similar cross holding relationships as seen in the illustration below.

Highlighted in red is Electric Bond & Share Company.  Below is the Electric Bond & Share Company web of business relationships.

In the example below, the violent rise and subsequent collapse in the share price of all publicly traded utilities made it difficult to unwind positions to allow for sale of assets or loans based on secured assets related to the actual business.

Electric Bond & Share Company had a share price increase from $45 in 1926 to as high as $475 in 1929.  Only to later fall as low as $1 in 1932.  Surviving such a rapid rise and fall wasn’t something that could have happened without considerable intervention.

Behind most utility companies was General Electric (GE) with outright ownership or majority stakes in the businesses. Ultimately, “orderly” government reorganization of the industry is what allowed General Electric to survive while the unwinding process dragged on for decades in the utility industry.

When there is discussion of the ravages of the stock market crash of 1929, keep in mind this story of the Dow Jones Utility Average.  The decline and recovery is worth your time and consideration.