Wednesday, January 31, 2007

McGraw-Hill Increases Dividend 12.9%

Today, McGraw-Hill (MHP) announced a 12.9% increase in its quarterly dividend to 20.5 cents per share versus 18.15 in the same period last year. S&P does not provide a quality ranking for MHP since MHP is the parent company of Standard and Poor's.

The payout ratio for the new dividend based on 2007 estimated earnings is 28%. This compares to the 5-Year average payout for MHP of 31%. The new yield on the stock equals 1.22% versus 1.08% on the prior dividend.

(click on graph for larger image)

Saturday, January 27, 2007

928 Days Since S&P 500 Index had a One Day 2% Decline

An interesting analysis of the S&P 500 and 2% correction chart at this link. This certainly makes one feel as though a correction is due for whatever reason. On the other hand, the more we hear about a correction, maybe the less likely there will be one.

Weekend Reading: 1.27.2007

  • On the American Association of Individual Investors website is an article titled Cutting Through the Bond Market Fog when Shopping for Munis by Annette Thau. Obtaining information on bond prices is not nearly as easy as accessing information on bonds--both taxable and tax-free. The article provides information and detail on a website containing bond information an investor may find useful: A lead in to the article notes:
    • "...this article discusses how to shop for municipal bonds, using the Internet both as a source of bonds for purchase, as well as for information. The focus is on pricing and comparison shopping."
  • In an article on the optionetics website they discuss the implication of the recent increase in bearishness in a few sentiment indicators. One of the indicators highlighted is the AAII Sentiment Survey I note on this site on a weekly basis. The article notes:
    • ...So, judging by the VIX, the put activity in the options market, and the AAII survey, there is convincing evidence that investor sentiment is turning bearish. As a general rule, it makes sense to remain cautious as bearish sentiment is rising because more stockowners might jump ship and move into the bear camp as stocks come under pressure. Selling begets more selling. However, it is also possible that Thursday represented a short-term period of capitulation or a situation where the market has been washed out of sellers. If so stocks can continue the long-term grind higher..."
  • The Valueline website provides access to free research reports on the 30 stocks that comprising the Dow Jones Industrial Average.
  • As tax time approaches, the Wall Street Journal, via a Yahoo link, recently noted investors should not be in a rush to file their 2006 tax returns. One reason is due to a change instituted by the IRS requiring providers of 1099 forms to break out tax free income subject to the alternative minimum tax. Some investment organizations, like Wachovia and Morgan Stanley, have been granted 30-day extensions from the IRS. This extension allows those organizations to delay mailing their 1099 forms by 30-days; thus extending the deadline to the end of February when the forms must reach their investors.

Municipal Bonds: Kentucky Court Case

As many of my blog readers invest in municipal bonds, I am providing information on a court case that would have important implications to municipal bond valuations. The case is Kentucky vs. Davis.

The basic issue of the case is whether a state has the authority to tax the interest on out of state municipal bonds held by residents of the particular state. The case was brought by George and Catherine Davis of Louisville, Kentucky. The issue is whether the state of Kentucky has the right to tax the interest on bonds issued by other states. The Davises' maintain Kentucky's policy of taxing out of state municipal bonds, but not income from Kentucky bonds, violates the Commerce Clause and the Equal Protection Clause of the U.S. Constitution. A Kentucky appeals court ruled in Davises' favor. The case has been appealed to the U.S. Supreme Court which is weighing whether to hear the case. On January 19th, the U.S. Supreme Court did not include this case on its argument calendar. The next opportunity to hear from the Supreme Court would be around February 20th.

One issue is the yield on bonds from high tax states tend to be lower. If the U.S. Supreme Court sides with the Davises, the value of bonds from the high tax states could decline by 1% to 4%. The states that could be impacted the most are:
  • California
  • Missouri
  • New York
  • Rhode Island, and others with big in -state tax advantages.
Conversely, states that do not have in state tax advantages historically have offered higher yields to attract investors. A few of those states are:
  • Illinois
  • Texas
  • Washington, and others.
Investors that purchase individual bonds and hold them to maturity likely will not be impacted to a large extent since they will receive the principal on the bonds at maturity. This is the case so long as states do not decide to tax their own munis in the event the Davises ultimately prevail in their case.

Kentucky Bond Fight Confronts U.S. Supreme Court
By: Joe Mysak
January 24, 2007

A Bomb In The Muni Market
Fortune Magazine
By: Jon Birger
February 5, 2007

Thursday, January 25, 2007

Midland Company Raises Dividend 63%

The Midland Company (MLAN), a property and casualty insurance Company and headquartered near Cincinnati, Ohio, announced a YOY 1st quarter 2007 dividend increase of 63%. The new dividend rate is 10 cents per quarter versus 6.125 cents in the same quarter last year. This represents the company's 21st consecutive year of dividend increases.

Midland is a small capitalization company with an $860 million market cap. This company is an example of a lower yielding dividend paying stock that exhibits a higher dividend growth rate. The S&P Earnings and Dividend Ranking is A-. The yield on the new dividend is .89% versus .50%.

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Midland Company Stock Chart

Bullish Sentiment Sees Significant Decline

The American Association of Individual Investors sentiment survey sees a significant decline in its bullish reading. The bullish reading drops to 39.51% versus last week's 57.58% reading last week. As a contrarian indicator and on a standalone basis, this is actually a bullish reading for the equity markets.

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sentiment reading January 24 2007

Wednesday, January 24, 2007

Dividend Aristocrats Performance: 1.24.2007

On a market cap weighted basis, S&P's Dividend Aristocrats continue to have a YTD performance edge on the S&P 500 Index and the Dow Jones Industrial Average as of 1.24.2007; however, the Aristocrats have fallen behind the NASDAQ index in large part due to the NASDAQ's 1.4% increase today.

The Aristocrat's YTD portfolio performance equals 1.60%:
  • The NASDAQ = 2.10%
  • The S&P 500 Index = 1.50%
  • The Dow Jones Industrial Average = 1.30%
(click on table for larger image)

Aristocrats stock performance

Tuesday, January 23, 2007

Dividend Increases: Comerica and Praxair

Today Comerica (CMA) announced an 8.5% YOY increase in its quarterly cash dividend. The new quarterly dividend is 64 cents per share versus 59 cents in the same period last year. The payout ratio based on 2007 earnings estimates is 52% versus a 5-year historical average of 50%.

Also, Praxair (PX) announced a 20% YOY increase in its cash dividend. The new quarterly dividend is 30 cents per share versus 25 cents per share in the same period last year. The payout ratio on 2007 earnings estimates is 35% versus a 5-year historical average of 28%.

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comerica praxair dividend analysis
comerica praxair stock chart

Monday, January 22, 2007

Dividend Aristocrat Performance Update: 1.22.2007

On a market cap weighted basis, S&P's Dividend Aristocrats have outperformed the NASDAQ, S&P 500 Index and the Dow Jones Industrial Average year to date through 1.22.2007.

The Aristocrat's portfolio performance is .80%:

  • The NASDAQ = .70%
  • The S&P 500 Index = .30%
  • The Dow Jones Industrial Average = .10%
(click on table for larger image)

s&p dividend aristocrat performance

Saturday, January 20, 2007

Chasing Returns

One reason international investments have been good performers for U.S. investors over the past few years is the weak U.S. dollar. Is U.S. dollar weakness a trend that will persist going forward? It likely is, but not against all foreign economies so selectivity will be an important aspect of ones returns from international investments.

Following is an excerpt from a recent Schwab Insight Report that highlights the comfort level of investing in yesterday's strong market performers.
Be the “Smart Money”
By Liz Ann Sonders, Chief Investment Strategist
Charles Schwab & Co., Inc.

You may have heard the terms “dumb money” and “smart money,” which typically refer to individual investors and professional investors, respectively. In reality, there is a lot of gray area, as there are many smart individual investors and quite a few dumb professional ones. But the “dumb money” term stems from the historic tendency for individual investors to act like lemmings, chasing past performance in the hopes of its repetition.

Take a look at the chart below, which shows the annual performance rankings of the broad asset classes, from best to worst, over the past 10 years. If there were ever a snapshot exemplifying why investors should be diversified, this quilt pattern is it. But there’s more: boxes bordered in black represent the year (specific quarter in box) during which an asset class saw peak mutual fund inflows. Conversely, boxes bordered in yellow represent the year (and quarter) during which an asset class saw peak outflows. It turns out that mutual fund investors have regularly poured money into asset classes after their peak, while bailing out closer to the bottom.

(click on chart for larger image)

Let’s take a few examples. In the first column, you’ll see emerging markets’ weak performance, followed by another brutal year in 1998. By the fourth quarter of 1998, investors threw in the towel and withdrew from emerging markets mutual funds at a record pace. This, of course, was just in time for 1999’s record-breaking return. Fast-forward to 2006, when in the first quarter, there were record inflows into emerging market funds, as investors were “chasing” the prior three years’ exceptional returns. This peak inflow was just in time for the big swoon between May and June of this year.

In 1998 and 1999, large-cap growth was a big winner, while smallcap value had terrible performance. Not surprisingly, investors left small-cap value in droves in 1999’s fourth quarter, just in time for it to top the performance rankings the next two years! On the other hand, the peak inflows into large-cap growth, in reaction to past performance, came in 2000’s first quarter, just in time for its abysmal three-year run. When investors finally decided to bail in 2002’s third quarter, large-cap growth went on to post big gains the next year.

I think you get the picture, and you can see the trend for the other asset classes. The bottom line: Don’t be a performance chaser. Stay diversified. Rebalance regularly. Be the “smart money!"

Be the "Smart Money"
Insights Report: Best Ideas For 2007 And Beyond
Charles Schwab & Co., Inc.
By: Liz Ann Sonders, Chief Investment Strategist
December 21, 2006

Friday, January 19, 2007

Citigroup Announces 10.2% Increase In Dividend

Today, Citigroup (C) announced a year YOY 10.2% increase in its first quarter 2007 dividend. The new dividend of 54 cents per quarter compares to 49 cents in the first quarter of 2006. The projected payout ratio on 2007 estimated earnings equals 48%. The 5-Year average payout ratio for Citigroup is approximately 38%.

(click on charts for larger image)

Thursday, January 18, 2007

Bullish Sentiment Jumps 1.17.2007

American Association of Individual Investors Sentiment Indicator jumps to 57.58% this week. This is the highest level since January 12, 2006 reading of 58.96%.

(click on charts for larger image)

Source: American Association of Individual Investors

Wednesday, January 17, 2007

Washington Mutual: Another Quarterly Dividend Increase

Today Washington Mutual (WM) announced earnings and a quarterly dividend increase. Earnings for the 4th quarter of 2006 totaled $1.06 billion versus $865 million in the same quarter of 2005. Of note though, the 4Q earnings included an after tax gain of $415 million as a result of Wamu selling WM Advisors, Inc.

From a dividend perspective, WM announced an increase in the 1Q 2007 dividend to 54 cents per share versus 50 cents in the same quarter last year. This recent dividend announcement represents a 1 cent increase over the 4th quarter 2006 dividend. WM has increased its dividend by a penny in each quarter since the 3rd quarter of 2000. The payout ratio based on 2007 estimated earnings is approximately 53%. The 5-Year average payout ratio for Wamu is 46%.

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Historical Dividend Yield

Market and Sector Turning Points?

Most equity markets around the globe, the included, have experienced a steady rise since this summer. The S&P 500 Index gained 1.26% in December, its seventh straight monthly increase. In fact, over the last several years, the rising economic tide seems to have lifted most markets. Although many markets may seem to be overvalued, maybe not the U.S. large capitalization equity market, markets do not generally correct simply because they appear overvalued. At this point in the economic cycle, high quality dividend paying stocks can serve as a potential safe haven.

Below are a few highlights from the Hussman Fund's November Research and Insight newsletter titled, Profit Margins, Earnings Growth, and Stock Returns:
  • The value of an investment is based on sustainable earnings and not just current ones, investors ought to be paying a lot more attention to profit margins.
  • Corporate profits as a percent of GDP hit 13 percent in the second quarter, a 50-year high.
  • Following the earnings plunge of 2001-2002, the recent economic rebound has put net income at about 8.5 percent of revenues, a 50-year high.
  • For the S&P 500 companies, capital expenditures as a percent of revenue has fallen from 7.5 percent to 5.6 percent today.
  • Financial companies-including investment banks, regional banks, real estate companies, and insurance companies-now contribute 28 percent of the S&P 500's total income.
  • Profit margins are a bit like P/E multiples in that when they move from low levels to high levels, they can provide a tailwind to returns. On the other hand, when margins move from high to low levels, earnings growth becomes more challenging...
  • When earnings are weak, investors become frustrated and unwilling to pay much even for a dollar of depressed earnings. The opposite is true after a long expansion in earnings.
Reading the entire newsletter will provide some perspective on the potential factors that might lead one to view the market as fully valued. The Hussman Funds' all equity mutual fund is classified as a long/short fund.

In this week's Barron's Streetwise section, Michael Santoli notes:
  • ...the greatest risks lay in markets that are priced as if they hold no risk.
  • Plenty of markets around the world appear to be close to this condition. Yet the market for big U.S. stocks is not among them.
  • ...shares of household-name companies have lagged other asset-classes badly.
  • Last year, nearly $140 billion-or 90%- of all inflows to stock funds went offshore. And small investors are doing what they always do, chasing last year's performers.
  • All else being equal, this is bullish for U.S. shares, as the little guy is usually a contrary indicator at important market turns...
Lastly, highlights from the January 22, 2007 BusinessWeek's Business Outlook:
    • the unemployment rate remains tight at 4.5% last month, only a tick above October's 51/2-year low.
    • The bigger risk to the economy down the road is not weak growth but accelerating inflation.
    • Expectations of lower rates have always been predicated on weaker consumer spending... real consumer spending appears to have grown last quarter by an annual rate of about 4%...
    • Through December 26, Internet sales at U.S. sites for nontravel items during the holiday season were up 26% from a year ago, to $23.2 billion, according to an estimate by comScore Networks. The company says retail e-commerce outside of gas, autos and food now accounts for about 7% of all retail outlays.
    • Gift-card sales are booming, a trend that boosts January receipts, often at the expense of retailers' December numbers.
    • Prior to the holidays, the National Retail Federation Gift Card Survey projected a 34% jump in card buying from the previous year, to $24.8 billion.
    • Average hourly pay of production workers in December grew 4.2% from a year ago, up from 3.2% in the same period last year.
    • Income of production workers last quarter was up 6.4% from a year ago. Adjusted for inflation, the pace was the strongest since the boom of the late 1990's.
    • While the acceleration in wage growth is great for consumers, it is not so comforting to the Fed.
    Based simply on the above three points of view, it seems the markets/economy could be at an inflection point. Certainly many investors and strategists are saying the markets are due for some typr of correction. From a contrarian point of view, it is not likely the markets correct simply because they appear overvalued. Has the Fed possibly engineered a soft landing?

    I really can't name a famous and wealthy market timer-so what is an investor to do? I believe focusing on those parts of the equity markets that have not increased at a rate similar to some emerging markets, provides some opportunity. Also noted in Barron's

    Morgan Stanley strategist, Henry McVey "...the U.S. stock market is "the best house in a bad neighborhood," -- meaning the most attractive market in a cash-saturated, generally overpriced world. Still, as one real-estate truism suggests, if you buy the nicest house in a poor neighborhood, it's unlikely to be spared if things take a turn for the worse; it may just lose less value than others as the owners await a new buyer. That's worth considering in a universe where global markets trade in near unison, and where leveraged, professional "fast money" is setting the marginal price.

    Profit Margins, Earnings Growth, and Stock Returns
    Hussman Funds
    By William Hester, CFA
    November 2006

    In Risky World, U.S. Is Better Bet ($)
    Barron's Streetwise
    By Michael Santoli
    January 15, 2007

    Strong Job Markets Dash Hopes For Rate Cuts ($)
    By James C. Cooper
    January22, 2007

    Tuesday, January 16, 2007

    Notable Dividend Increases 1.16.2007

    Corporate uniform company, Cintas (CTAS), announced an 11.4% increase in its dividend to 39 cents from 35 cents. Cintas pays one dividend a year in the first quarter.

    Linear Technology Corporation (LLTC) designs and manufacturers linear integrated circuits. Linear increased its quarterly dividend 20% to 18 cents a share from 15 cents a share. Linear's payout ratio increases to 50% based on 2007 estimated earnings. The five year average payout ratio for LLTC is 30%.

    (click on charts for larger images)

    Canadian Income Trust: Canetic Resources

    Canetic Resources (CNE) announced its February distribution of C$.19 per trust unit (approximately US$.16 per trust unit) to be paid February 15th. This represents a 17% reduction in the trust payment.

    The interesting part of the Trust's press release was the statement indicating the Trust's desire to maintain a payout ratio of approximately 60-70% of funds from operations. All else being equal then, does this mean in 2011 that the trusts income distribution will be cut further when the Trust is subject to the new Canadian tax?

    (click on chart for larger image)

    Monday, January 15, 2007

    Canadian Income Trust: True Energy Intends to Convert to Corporate Structure

    Today, Canadian Income Trust, True Energy (TUI-UN.TO), indicated it desires to convert back to a corporate structure from the current income trust structure. As I noted in an earlier post, this was a likely outcome for these income trusts. The result of this conversion is the company will reduce the dividend to 2 cents per month to be paid quarterly. The January dividend announced by True was 12 cents.
    (click on chart for larger image)

    Source: Yahoo! Finance

    Saturday, January 13, 2007

    Where Does the Dow Go from Here?

    Chart of the Day provides the following chart showing the Dow's trading range. They note:

    "Despite a host of concerns (weakening economy, softening housing market, geopolitical issues, etc.), the Dow made another record high today. While the recent string of new record highs is significant (especially coming on the heels of a major bear market), it should be noted that the Dow is not yet in the clear as the Dow currently trades near the top of the three-year trading channel (see red line). Stay tuned..."

    Winning versus Losing Sectors

    In the recent issue of The Outlook, and on the public portion of the firm's website, they analyze what industries tend to perform best from year to year based on past performance. The analysis notes:
    • During the past 37 years, the S&P 500 posted a 7.7% compound annual growth rate (CAGR)-price only-and had a 16.3 standard deviation...The risk adjusted return during this period was .47. (higher number is better
    • An investor who chose the worst industries portfolio achieved a return of 7.8% with higher volatility (i.e., standard deviation). This portfolio beat the market 49% of the time. The risk adjusted return was .30.
    • An investor who selected the best industries portfolio achieved a return of 13.8% with higher volatility. However, the risk adjusted return was .57.
    (click on table for larger image)
    Source: Standard & Poor's, The Outlook newsletter, January 17, 2007

    So, is it better to let your winners ride and sell your losers? S&P's analysis would suggest it is.

    The above analysis was based on industries. One caution is an investor needs to pay attention to industry and sector fundamentals. If an investor had loaded up on technology stocks at the height of the tech bubble, they would have incurred a significant erosion in the value of their equity portfolio.

    Following is a summary of sector performance over the past two years and performance for the first few weeks of January 2007.

    (click on table for larger image)

    As detailed in the above table, energy has been a strong performing sector over the past two years; however, year-to-date, energy is getting off to a slow start. The utility sector seems to be in the same situation.

    In conclusion, although the S&P data certainly supports sticking with the better performing sectors on a year over year basis, an investor should not expect an industry or sector to move higher forever. In the end, understanding the fundamentals of an investment and where the economy is projected to move on a prospective basis, are equally important factors to consider when investing. At the end of the day, fundamentals tend to win out versus technicals.

    Friday, January 12, 2007

    Ratings Changes on Dividend Growth Stocks

    The site newratings contains a nice layout of rating changes and links to research summaries on stocks with various rating actions. The site categorizes the changes by market region, i.e., Asia/Pacific, NASDAQ, etc.

    Following is a summary of some of today's rating changes that impact dividend growth stocks:

    • Stryker (SYK): Target price raised to $61 by Banc of America
    • Altria Group (MO): Target price raised to $94 by UBS
    • Anheuser Busch Co. (BUD): Upgraded to market perform by Berstein
    • General Dynamics (GD): Target price raised to $85 by Prudential Financial
    • Comerica (CMA): Initiated with neutral rating by Credit Suisse
    • Bemis (BMS): Upgraded to buy by Banc of America

    Thursday, January 11, 2007

    Bullish Sentiment Update as of 1.11.2007

    In the American Association of Individual Investors sentiment survey this week, AAII reports a decrease in bullish sentiment. As evident from the sentiment post last week, bullish sentiment can persist at higher levels for weeks at a time. As noted in past posts, this is a contrarian indicator--meaning high bullishness can be a signal of a market setting itself up for a downward correction.

    (click on table for larger image)

    CVS Corp. Raises Dividend 25.8%

    CVS is not a true dividend growth stock as the company went from 1999-2003 without increasing its dividend. However, it is an example of a stock that trades at a lower yield and these lower yielding stocks tend to have higher dividend growth rates. The 25.8% increase is certainly a nice increase; however, the new yield, .63%, still remains quite a bit lower than the S&P 500 Index yield of 1.8%. The payout ratio based on the new dividend and 2007 earnings is approximately 10.4%. This is below the 5-year average payout of 13%.

    (click on charts for larger image)

    Tuesday, January 09, 2007

    Duke Energy Spin-Off: Impact on Dividend

    Last week Duke Energy (DUK) spun-off to Duke shareholders, the midstream natural gas operations into a new company, Spectra Eneregy (SE). Duke shareholders received 1/2 share of Spectra for each share of Duke.

    (click on charts for larger image)

    On January 5th, Duke announced its upcoming quarterly dividend of 21 cents per share. This is down 11 cents from the prior quarterly dividend of 32 cents; however, on the same day, Spectra announced it would pay a dividend of 22 cents per share. Since Duke shareholders received 1/2 share of SE for each share of DUK, the Duke equivalent dividend on the SE shares is 11 cents (that is, one half of the 22 cent SE quarterly dividend).

    In total then, DUK shareholders end up receiving the same dollar dividend as they would have received on the DUK shares held before the spin-off.

    Monday, January 08, 2007

    An Investor's Focus Should Be On Risk

    If equity market history has a tendency to repeat itself, an investor will want to pay particular attention to the risk he or she is willing to assume in constructing their investment portfolio.

    Zvi Bodie and Paula Hogan wrote an article, For Long-Term Investors, the Focus Should Be on Risk, that begins:
    There is a common notion that stocks, at least if held for a long-time, usually outperform other assets, so that stocks should be the cornerstone of any long-term portfolio.

    If, when this idea is presented, you protest: “Wait a minute. Stocks are also risky!” the reply is either, “Stocks have done well in the past and so they will probably also do well in the future,” or “If you have a long time horizon, you’ll do well in stocks.”

    However, the thoughtful investor must also wonder: “But what if stocks don’t do well? What happens then to my retirement?”

    And in this self query, the more appropriate approach becomes clear: It makes more sense to think first about what risk you are able and willing to bear, and then to think about what potential investment returns you might be able to capture...
    Risk is not simply losing money in a down market, but is experiencing a return that does not result in an investor's investment assets attaining annual asset level targets at the same time regular withdrawals are being made from the investments. Bodie and Hogan note in their article:
    "The fact is, lower than expected returns could happen—even for many years in a row—which is exactly what makes stock ownership a risky investment, not a certainty. Lower-than-expected returns that last for a long time and/or that are severe in nature would have the impact of dramatically lowering the ending value of your portfolio, and thus could significantly threaten your ability to meet financial goals. While the probability of such an event is low, the consequences are potentially devastating and so are worthy of careful consideration. What the current reasoning omits is the fact that as the investor’s time horizon lengthens, the range of possible ending values for the portfolio also increases, and that these widening ranges include the low, but still positive possibility of a whoppingly low actual versus expected portfolio ending value (emphasis added)."
    Also contained in the article are examples of different portfolio returns along with withdrawal assumptions. The examples note that negative returns can be detrimental to one achieving retirement goals and objectives.

    Historically, a dividend growth portfolio has been less volatile in down markets. If the market is down -20% and ones investment portfolio is down -18%, the investor has beat the market on a relative basis, but likely not achieved retirement goals and objectives. Bodie and Hogan address this issue in their article and conclude:

    In sum, rather than reaching for a high stock return because it might come true, the goal of investing is better expressed as having enough cash on the day a bill comes due—for example, for college tuition for your children, and/or enough cash to maintain or improve your standard of living throughout retirement with minimal chance of having to go backward in your daily standard of living. These are the typical actual concerns of individual investors.

    Against this standard, beating one’s peers or surpassing the market averages, or achieving a particular targeted rate of return all pale in comparative appeal. As the investment saying goes: “You can’t eat relative returns.”

    For Long-Term Investors, the Focus Should Be on Risk
    The American Association of Individual Investors
    By Zvi Bodie and Paula H. Hogan

    Sunday, January 07, 2007

    Equity Performance by Quality Ranking

    In this week's Market Watch section of Barron's, Harris Private Bank CIO, Jack Ablin notes:

    "The most dominant theme among [S&P 500] investors last year was quality, or lack thereof. The 76 issue rated B-minus or less gained in excess of 20% on average in 2006, while the 98 names ranked A and above picked up roughly half as much. A-plus issues gained less than 10% for the year. Interesting to note, the quality trend has reversed over the last month, with A-plus issues up over 3%, compared to C-rated selections edging 1% higher. This is a trend that bears watching.

    Dividend yield was another favorite among investors last year. Stocks in the highest yielding quintile of the S&P 500 gained over 21%, while non-yielding issues trailed the market, picking up 13%. Most recently, the dividend theme has only strengthened. Last month, the highest-yielding names gained 2.5%, while non-yielding stocks picked up less than 1%.

    Looking ahead, liquidity will continue to be a favorable backdrop for stocks this year, although profit growth and margin compression will emerge.

    Dividends should continue to curry investors' favor, while there will be a gradual shift toward growth-oriented sectors, like health care and eventually technology. Slowing profits will be offset by P/E expansion. We expect the S&P to gain roughly half as much this year as last." Jack A. Ablin

    Handicapping Quality ($)
    Barron's Market Watch
    Edited by Anita Peltonen
    January 8, 2007

    Saturday, January 06, 2007

    Weekend Reading: 1.6.2007

    1) Standard & Poor's website contains an article on low volatility (the VIX) vis-à-vis the strong global equity market returns achieved over the past several years. The VIX is certainly trading at low levels.

    (click on chart for larger image)

    Chart source: Standard & Poor's The Outlook, January 10, 2007 ($)
    From Standard & Poor's Equity Research. Financial markets are driven by what John Maynard Keynes called "animal spirits," the most powerful being fear and greed. One widely tracked gauge of fear is the CBOE Volatility Index, or VIX, which measures the market's expectations for near-term volatility as conveyed by S&P 500 index option prices. Higher readings point to increased investor anxiety.

    Currently, the VIX is trading at multi-year lows, suggesting that fear is in deep hibernation. But when combined with the strength in global markets over the past three years -- the S&P Global 1200 is up roughly 100% since March 2003 -- many market participants are concerned that the complacency implied by the VIX is spreading, leaving global stock markets vulnerable to attack by the dreaded bear. (more)

    2) The equity market returns on Friday were impacted by the employment report released on Friday. An important aspect of short term market performance is linked to various government releases of economic data. The link to the article titled, Understanding Economic Statistics, provides insight into the importance of various economic releases that can impact the investment markets. The website, Calculated Risk, contains an analysis of Friday's employment report: Report 1, Report 2.

    Friday, January 05, 2007

    Dividend Summary for 2006

    Standard & Poor's reported that dividend payments continued to rise in 2006:
    • 1,969 of the approximately 7,000 publicly owned companies that report dividend information to S&P's Dividend Record increased their dividend in 2006.
    • This represents a 1% increase from the 1,949 companies that raised their dividend in 2005.
    • overall, the number of dividend payments rose 7.1% versus 2005 and a 16.1% increase over 2004
    • special or extra dividend payments increased 14.3% to 622 in 2006 versus 544 in 2005
    S&P notes extra dividend payments have increased versus regular dividend increases in part due to the fact a company is not committing to a longer ongoing regular payment. From a dividend growth analysis perspective, special dividend payments are not given much weight in the analysis of dividend growth stocks.

    S&P: Dividends Rise Slightly in 2006; Extras Surge
    January 4, 2006, 10:42 am

    Thursday, January 04, 2007

    Standard & Poor's will add 12th REIT to S&P 500 Index

    Today, S&P announced they would remove Symbol Technologies (SBL) from the S&P 500 Index at the close of trading on January 9, 2006 and replace the company with AvalonBay Communities Inc. (AVB). AvalonBay will be the 12th REIT in the S&P 500 Index.
    • Banc of America securities analyst Ross Nussbaum states index funds will need to purchase 4.5 million to 5.0 million shares of AVB, about 6.5% of the company's outstanding shares, or approximately 16 to 17 days worth of average trading volume of AVB.
    • Citigroup estimates adding AVB to the index will increase the REIT sector weighting to 1.2%.
    (click on chart for larger image)

    Given the strong price increase in REITs over the last few years, how much higher can REITs advance given their current valuations?

    Twelfth REIT tapped to join the S&P 500 Index
    John Spence
    January 4, 2007, 11:53 am

    Bullish Sentiment Continues to Rise

    In the American Association of Individual Investors sentiment survey this week, AAII reported another increase in bullish sentiment.
    • Bullish sentiment climbed as high as 75% on 1.6.2000
    • Bullish sentiment equaled 66.7% on 7.20.2000
    As evident from above, bullish sentiment can persist at higher levels for weeks at a time. As noted in past posts, this is a contrarian indicator--meaning high bullishness can be a signal of a market setting itself up for a downward correction.

    (click on charts for larger image)

    Wednesday, January 03, 2007

    Length of Dow Rally

    Chart of the Day provided the following analysis of the length of past Dow advances. Although this advance is the fourth longest since 1900, it is below average in magnitude.

    (click on chart for larger image)

    As of December 22, 2006

      • The Dow Jones Industrial Average was not adjusted for inflation or dividends.
      • There are 252 trading days in a year (100 trading days equal about 4.8 calendar months).
      • A major stock market rally has been defined as a 30% or greater increase in the Dow (following a correction of 15% or more).

    From a dividend valuation perspective, Investment Quality Trends shows where the Dow is trading relative to the Dow's historical high and low dividend yield.

    (click on chart for larger image)

    Tuesday, January 02, 2007

    S&P 500: Dividend Information by Sector

    Within the S&P 500 Index, the companies in the financial sector contribute a great deal to the dividend composition of the Index:

    • 98.8% of the companies in the financial sector pay a dividend (77 out of 78 companies).
    • dividend paying issues account for 99.7% of the financial sector market value.
    • the dividend paying stocks in the financial sector account for 28.7% of the dividend contribution of the Index
    • the telecommunications sector carries the highest yield at 3.84%
    (click on table for larger image)

    Performance of the S&P 500 Dividend Payers vs. Non-Payers

    Standard & Poor's reported that in December, the the dividend payers in the S&P 500 Index outperformed the non-payers. For the 2006 calendar year, the dividend payers returned 16.9% versus the non-payers return of 12.9%.

    Performance as of 12.29.2006

    Monday, January 01, 2007

    Happy New Year

    Have a Healthy and Prosperous New Year.