Thursday, December 31, 2009

Markets And Their 200 Day Moving Average

One thing is certain and that is the markets have advanced significantly this year. The adage that a rising tide lifts all boats seems appropriate as it relates to many of the market indices this year. As a result and in hindsight, an index strategy would have served investors well in 2009. The Dow Jones Industrial Average (^DJI) has gained over 20%, the S&P 500 (^GSPX)over 24% and the Nasdaq Composite (^IXIC) over 45%. When looking at the market advance since the March 9th lows, the gains are even more pronounced; the DJIA is up 61%, the S&P 500 is up 67% and the Nasdaq is up 79%. This strong advance has pushed the index levels far above their 200 day moving averages.

Source: Charles Schwab and Argus Research

For investors looking at investment opportunities going into 2010, this likely means they will need to focus more specifically on individual stocks versus indexing. Even though the broader indexes are trading far above their moving averages, some individual stocks have not participated in the rally. For example, the below chart shows the performance of Procter & Gamble (PG) versus the S&P 500 Index (^GSPX).

(click to enlarge)

Procter & Gamble versus S&P 500 Index chartAs the above chart shows, P&G has generated a flat return on a price only basis versus a return in excess of 20% for the S&P 500 Index. As investors then, for 2010, look for opportunities in higher quality stocks that have not participated in this mostly lower quality stock rally of 2009.

Disclosure: Long Procter & Gamble

Wednesday, December 30, 2009

Unsustainable Growth In Government Debt

The growth of U.S. total government debt is on an unsustainable trajectory. At some point in the very near term, the U.S. populous needs to voice their concern about this growth to their elected representatives. This debt growth does not include the future cost of health care legislation or cap and trade legislation. In my opinion we are mortgaging our children's and grandchildren's futures.

Monday, December 28, 2009

Book Review: Why Are We So Clueless About The Stock Market?

Although I normally do not write book reviews, I agreed to read and review Mariusz Skonieczny's book, Why Are We So Clueless About The Stock Market. Since I would have a few days off around the holidays and the new year, I suppose he made the ask to review the book at an opportune time.

I believe this book is best suited for new, or somewhat new, investors in the stock market. Mariusz does a nice job leading his readers from the beginning or inception of a stock, a company's capital structure and through the time one should consider selling a stock. The book includes a chapter on the economy including a brief discussion on the economic cycle. Mariusz's investment style seems more of a contrarian or value one. He rhetorically ask a couple of questions,
  • "When is it best to own a great company--in good times or bad times?"
  • "When is one more likely to buy a great company at a reasonable price--in good times or bad times?"
Both are important questions investors need to answer as they buy and evaluate stocks. He does provide answers to the questions in his book.

Buying stocks is not too different from buying real estate. That is, one makes money in real estate not when they sell it, but when they buy it. In other words, what one makes is based on how much they paid for it. Real estate investors have been finding that out over the last year to year and a half. So I digressed.

The book covers topics on valuing stocks based on the dividend discount model. Additionally, he shows how company leverage can add value to a company's earnings. He shows how the value that is created (or not created) is based on the financing cost and the company's return on equity or ROE. In the chapter on "Basic Capital Structure" he provides investors with a way to evaluate a company's earnings growth and whether reinvested earnings are being reinvested "efficiently" as he states.

And finally, beyond the financial numbers, he discusses what comprises a good business. Does the company have a "wide moat" around its products and market. If so, this type of company tends to have higher ROEs and thus potentially higher sustainable returns.

At the end of the book Mariusz provides several case studies or real examples that utilize the topics he covers in his book in order to evaluate specific companies.

In conclusion, I found the book an easy read that was not mired in technical details. Having said this, Mariusz provides his readers with spreadsheets useful in valuing a company's stock. Additionally, I do believe this book will provide its readers with a good starting foundation upon which to build their investment knowledge.

Thursday, December 24, 2009

Top Economist Ed Hyman's And Francois Trahan's 2010 Forecast

Ed Hyman of ISI Group has been voted Wall Street's top economist for thirty straight years. In an interview with Consuelo Mack on WealthTrack, Ed and Francois provide their firm's view on both the global and U.S. economy in 2010 and 2011. A couple of takeaways from the interview:
  • 2009 was the year of the beta trade. In 2010 the focus will be on companies that generate free cash flow and pay dividends.
  • anticipate upside surprise for companies with exposure to southeast Asia economies.
  • Francois believes a contrarian view could be rates actually fall in 2010. On a percentage basis, interest rates have risen as much as the equity markets have moved higher.

Wednesday, December 23, 2009

If Investing Based On Yield, Know What Makes Up The Yield

As a follow up to my post yesterday, Jim Cramer Does Not Disclose Complete Picture On Blackrock's Dividend Achievers Trust Yield, investors purchasing an investment for its yield or income payout need to know what comprises that yield.

As noted in yesterday's post, Blackrock's Dividend Achievers Trust (BDV) distributes a payout every quarter. This quarterly payout includes more than the income from the underlying investments. This type of payment is often referred to as a managed distribution. Many online sources include the entire distributions amount in the yield calculation. Some of the distribution can be a return of an investor's capital.

Investors can get a list of closed end funds that make payouts that are in excess of the income generated by the underlying investments at the Closed End Fund Association's (CEFA) website. The CEFA lists some forty CE funds that have manged distributions. For reference, these distributions are know as Section 19 payments.

Several years ago, the Gabelli Funds prepared a paper on the pros and cons of managed distributions. The paper can be read below.

Closed End Funds Managed Distribution Policy: What Is It?

Monday, December 21, 2009

Jim Cramer Does Not Disclose Complete Picture On Blackrock's Dividend Achievers Trust Yield

I was driving home tonight listening to Jim Cramer's Mad Money on XM Radio when he was pounding the table on dividend paying investments. As readers of my blog know by now, I am certainly a strong proponent of dividend growth stocks. One of the recommended investments Jim cited for a worthwhile investment because of its 7.6% yield was Blackrock's Dividend Achievers Trust (BDV). What Jim unfortunately did not mention was this yield was not all income yield.

Some investments distribute both principal (an investor's capital) and income to its investor on a regular basis. For Blackrock's Dividend Achievers Trust, the "income yield" is only 3.46% and the "distribution yield" is 7.67% as of November 30, 2009. The difference between the two yields is the return of an investor's investment in the fund so should it really be counted as income? Personally, I don't think so. Below is a table taken from Blackrock's Section 19 Notice for the Dividend Achievers Fund.

(click to enlarge)

Blackrock Dividend Achhievers Fund BDV Section 19 noticeThe SEC has been on top of these so called Section 19 distributions and the misleading reporting of yields by some investment firms. (It should be noted Blackrock does a pretty decent job of providing a link to the Section 19 Notice on its website). In a November 2009 speech by Andrew J. Donohue, a Director of the SEC, to the Independent Directors Council Investment Company Directors Conference, it was noted:
"The last challenge that I would like to discuss with you today involves disclosures associated with a fund's yield or its managed distribution plan. Closed-end funds sometimes tout a high, level dividend or a managed distribution plan to investors. Investors may incorrectly believe that the dividend rate is "yield," i.e., earned income or gain. In fact, the dividend rate often includes a return of capital (emphasis added). As directors, you must make sure that the fund's disclosures explain what the distribution yield represents and what it does not represent and that it is not confused with the fund's actual performance. In particular, if a fund with a managed distribution plan does not earn enough income to sustain a distribution, it must be clear that distributions to investors may be paid from a return of capital which has the effect of depleting the fund's assets. Moreover, in exercising your oversight, you should carefully consider whether managed distribution plans continue to be in the best interests of the fund and its shareholders.

Let me highlight one additional managed distribution plan disclosure issue for your consideration. As you know, funds are required under Rule 19a-1 to provide notice when distributions include a return of capital. In reviewing these notices, my staff has found inconsistencies between 19a-1 notices and other information posted on a fund's website. In particular, the 19a-1 notices show the return of capital while other charts on a fund's website show distributions consisting of all income. Funds have indicated to us that the reason for any differences is because the disclosures are prepared under different bases with 19a-1 notices disclosing book values and other disclosures based on tax considerations. However, fund websites do not always include an explanation discussing why the information is inconsistent in different online sections. Accordingly, I suggest that you review your fund's disclosures to make sure that the information is disclosed consistently and, if not, that the reason or reasons for any inconsistencies are adequately explained to investors."
For investors, be sure to review an investment and ascertain what comprises its yield. In addition to these Section 19 distributions, some funds use leverage in an attempt to increase a fund's yield. This increased leverage might not be so good when interest rates begin to rise and cut into the actual "income yield" for a particular fund. So don't chase an investment based solely on its yield.

Sunday, December 20, 2009

BetterInvestings Most Active As Of December 20, 2009

Below is a list of companies attracting the most interest from BetterInvesting's members based on their recent buy and sell decisions. The list is based on a small, informal sampling of 145 transactions for the trailing 4-week period ending December 20, 2009.

Note: Figures in parentheses provide the previous ranking four weeks ago. (*) denotes unranked in previous period. This listing is presented as a source of stock study ideas in the current market. No investment recommendation is intended.

Thursday, December 17, 2009

Pimco Increasing Cash Position

Pimco's Bill Gross has increased the cash level in the firm's flagship total return fund (PTTRX) to 7%. This compares to a negative 7% cash position in October. This higher cash level would indicate the firm expects interest rates to rise near term. Does this mean Pimco believes a stronger economy is ahead of us or is it simply the fact the Fed is beginning to step away from some of its fixed income market support programs? Time will tell.


Pimco’s Gross Boosts Cash to Most Since Lehman Failed
By: Wes Goodman and Garfield Reynolds
December 17, 2009

Bullish Investor Sentiment Stuck In A Range

Today's release of the individual investor sentiment survey shows investor bullish sentiment stuck at the low 40% level over the past several weeks. For the period ending November 17, 2009, individual investor bullish sentiment was reported at 42.11%. For the last four weeks, bullish investor sentiment has had a 41 or 42 handle on the percentage.

As this indicator is a contrarian one, bullishness readings in the high 40% area would be a reason for equity investor to become more cautious based on this indicator if viewed in a vacuum. Interestingly, this week's bearishness level fell to 28.42% versus the prior week's bearishness level of 35.37%. Consequently, the bull/bear spread widened to +14% versus last week's spread of +7%.

Wednesday, December 16, 2009

A List of Dividend Growers In The S&P 1500 Index

Standard & Poor's recently assembled a list of dividend growth stocks screened from the S&P 1500 Index (SPSUPX). S&P based the below list on those companies that have paid increasing annual cash dividends for the past ten years and have an actual 2008 and estimated 2009 and 2010 dividend coverage ratio of at least 2.0 (based on street estimates divided by the current 12 month indicated dividend rate).

This list includes large, mid and small capitalization dividend growers. S&P appropriately notes that the below list of stocks are not necessarily buy candidates, but a starting point for additional research.

Tuesday, December 15, 2009

Stock Buybacks On The Rise

In a sign that corporate America's prospects are taking a turn for the better, on a sequential basis stock buybacks increased 44% in the third quarter of 2009 for companies in the S&P 500 Index. On an absolute dollar basis buybacks totaled $34.8 billion versus $24.2 billion in the second quarter.

This increased buyback activity coincides with an improvement in "as reported" earnings. The low point in earnings came in the fourth quarter last year when earnings, or lack there of, were reported at -$202.11 billion. In the third quarter of 2009 the final tally for as reported earnings are projected to total $131.96 billion, the third straight quarterly improvement.

The negative aspect of the increased buyback activity and no corresponding increase in dividends may be reflect of the uncertain view companies have about prospects in 2010. If companies had a favorable view of the business climate in 2010, dividends may have been increased as well. Increasing dividends is a longer term commitment on a companies cash while buybacks can be suspended easily at any time. Given the uncertain impact that all the new policies coming out of Washington may have on businesses, it is understandable that businesses are cautious about the economy next year.


S&P 500 Buybacks Rebound 44%; Remain 80% off Their High (pdf)
Standard & Poor's
By: David Guarino and Howard Silverblatt
December 14, 2009

Sunday, December 13, 2009

Dividend Aristocrats For 2010

Below is the list of companies that will comprise Standard & Poor's Dividend Aristocrats after the close of business on December 18th. The changes that will be made to the list were detailed in an earlier post, Big Changes For Dividend Aristocrats Index in 2010.

Source: Standard & Poor's (xls)

Saturday, December 12, 2009

Government Spending Is Out of Control

A significant risk to economic growth in the U.S. is the record amount of debt being taken on by the U.S. government. The brief video below explains the spending in this crisis compared to past crises.

Since this crisis began in late 2008, the government has spent $4 trillion supporting various new programs. The government has committed to spend an additional $7.8 trillion over the next several years which will bring the total new spending amount to $12 trillion. As year-end approaches, Congress wants to increase the U.S. debt limit by nearly $2 trillion. The spending coming out of Washington does need to stop.

How does this spending compare to spending in past crises?
  • Marshall Plan-$115 billion
  • New Deal-$500 billion
  • TARP-$700 billion
  • Stimulus Plan-$787 billion
  • World War II-$3.6 trillion

Some of this spending is finding its way into the hands of government employees. USA Today reports the average pay for federal workers is now $71,206 versus $40,331 in the private sector.

As Margaret Thatcher once said, "the problem with socialism is that you eventually run out of other people's money." I think we could be on a slippery slope to that outcome if the government does not reign in its current rate of spending growth.

Key Economic Indicators Suggest The Worst Is Behind Us

In a post I wrote on July 12, 2009, Economic Indicators That May Signal A Bottom In The Economy, I noted six indicators investors might follow to determine the future direction of the economy. The indicators outlined back in July were excerpted from a Kiplinger's Personal Finance magazine article. The magazine article noted when three of the six below indicators turn in a favorable direction, then an economic recovery is likely unfolding. At this point in time three of the six indicators support the contention an economic recover is unfolding.

The three indicators that are in an improving trend are:
  • Jobless Claims
  • Retail Sales
  • Interest Rate Spread (the TED spread)
The three indicators needing to show more improvement are:
  • Durable Goods Orders
  • Existing home Sales
  • Consumer Confidence
Jobless Claims
  • Look for a four-week moving average hitting 550,000 and continuing to decline would signal that companies have stopped slashing jobs. The four week moving average is 473,750.

Durable Goods Orders
  • A two- or three-month uptrend in orders -- excluding defense, aircraft and other transportation equipment -- would presage an expanding economy. New orders for manufactured durable goods in October decreased $1.0 billion or 0.6 percent to $166.2 billion according to the latest U.S. Census Bureau report. This was the second monthly decrease in the last three months. This followed a 2.0 percent September increase. Consequently, this indicator's trend falls short of meeting an uptrend requirement.
durable goods orders chartSource: Federal Reserve Bank of St. Louis

Retail Sales
  • Two to three straight months of increasing sales would mean consumers have more money in their pockets and are willing to spend it. Each of the last two months have seen higher retail sales. Sales have increased from $343.7 billion in September to $352.1 billion in November.
retail sales chart November 2009Source: Federal Reserve Bank of St. Louis

Existing Home Sales
  • Two or three consecutive months of growth would be a sign that investors and would-be homeowners are back in the market. Although existing home sales are not showing sequential 2 or 3 months of growth, since May, sales in 2009 have exceeded the monthly sales of the same period in 2008.

existing home sales chart October 2009(Chart Courtesy of Calculated Risk)

Consumer Confidence
  • An index in the 60s would suggest that consumers will be less tightfisted. The November Index was reported at 49.5 versus the prior months index reading of 48.7. According to the Conference Board, "the moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen, as opposed to an increase in the percent of consumers expecting conditions to improve. Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood."
consumer confidence and S&P 500 Index Decemer 2009
Interest Rate Spread
  • A narrowing of the gap to about one-half of a percentage point would signal improving health in the banking sector. The spread has remained below 50 basis points for the last six months.
TED spread December 11, 2009Source: Bloomberg

Also noted in my earlier post, the stock market tends to be a leading indicator. Once a number of the data points become more favorable, the market tends to move higher in advance of the economic data confirming a stronger or improving economic environment. My March 9th post touches on the lagging nature of the consumer confidence data as an example.

Monday, December 07, 2009

S&P 500 Dividend Estimate Down 21.4% In 2009, But Growth Likely Resumes In 2010

In spite of the fact that dividends paid in 2009 are estimated to decline 21.4% or $52.6 billion in 2009 versus 2008, dividend growth is projected to resume in 2010. Standard & Poor's is projecting that dividends per share for the S&P 500 Index will rise 6.1% in 2010 to $23.67 per share versus the estimated payment for 2009 of $22.31.

As the below chart notes, as reported operating earnings are estimated to have returned to growth in 2009. This improved earnings outlook as pushed down the payout ratio (based on operating earnings) for 2009.

S&P believes that the growth in dividends will be back half loaded next year:
"While we do expect additional dividend decreases, Standard & Poor’s believes that improving economic conditions will inspire companies to slowly increase their payouts," notes Howard Silverblatt, Senior Index Analyst at S&P Indices. "We expect dividend rate increases to average in the mid to high single digits, with the second half of the year much better than the first half as companies will need time to reassure themselves of their product and financial position."
In addition to other fundamental factors like lower valuation, positive currency impact, to name a few, this improved earnings and dividend picture provides further support for better returns in the higher quality dividend growth stocks.


S&P Estimates 6.1% Dividend Increase for the S&P 500 Companies in 2010;
2009 Dividend Payment Expected to Post 21.4% Decline

Standard & Poor's
By: David Guarino and Howard Silverblatt
December 7, 2009

Sunday, December 06, 2009

Big Changes For Dividend Aristocrats Index in 2010

On Friday, Standard & Poor's announced the changes to its Dividend Aristocrats for the coming year. According to S&P,
The S&P 500 Dividend Aristocrats Index is designed to measure the performance of S&P 500 constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 years. The index is equal-weighted, with constituents being re-weighted every quarter. Membership is reviewed each December.
The two additions are:
The following ten companies will be removed from the Aristocrats list:
  • Avery Dennison (AVY)
  • BB&T Corp (BBT)
  • Gannett (GCI)
  • General Electric (GE)
  • Johnson Controls (JCI)
  • Legg Mason (LM)
  • M&T Bank (MTB)
  • Pfizer (PFE)
  • State Street (STT)
  • US Bancorp (USB)
The annual rebalancing will take effect at the close of business on December 18, 2009.

Source: Standard & Poor's

Thursday, December 03, 2009

Ecolab Increases Dividend 10.7%

Ecolab (ECL) announced the company is increasing its first quarter 2010 dividend by 10.7%. The new quarterly dividend rate will equal 15.5 cents per share versus 14 cents per share in the same quarter last year. This represents the 18th consecutive annual dividend rate increase for Ecolab. The estimated 2010 payout ratio is 27% based on 2010 estimated earnings of $2.27. The 5-year average payout ratio is approximately 29%. The company maintains an S&P Earnings & Dividend Quality Ranking of A+.

(click to enlarge)

Ecolab dividend analysis table December 2009
Ecolab stock chart December 2010

Wednesday, December 02, 2009

Nucor Increases Dividend 37th Consecutive Year

Nucor Corp. (NUE), a mini steel mill company, announced a 2.8% increase in the company's quarterly dividend. The new quarterly dividend increases to 36 cents per share versus 35 cents per share in the same quarter last year. During strong economic times the company often institutes special dividends as well.

The company is projected to report a loss of 85 cents per share for 2009 but 2010 estimates have the company earning $2.79 per share. The payout ratio is estimated to equal 52% based on 2010 earnings. The company's 5-year average payout ratio (excluding 2009) is 9%. Nucor as an S&P Earnings & Dividend Quality Ranking of B.

As noted in Nucor's press release:
"Nucor has increased its regular, or base, dividend for 37 consecutive years -- every year since it first began paying dividends in 1973. Reflecting the Nucor team's success in building Nucor's long-term earnings power, the base quarterly dividend has more than tripled since the end of 2007. In addition, over the period from 2000 to 2009, Nucor's base dividend has increased approximately ten-fold."
(click to enlarge)

Nucor dividend analysis December 2009
Nucor stock chart December 2009
(Disclosure: long interest in NUE)

Tuesday, December 01, 2009

Dividend Payers Outperform Non Payers In November

For the second month in a row, the dividend payers in the S&P 500 Index outperformed the non payers, 5.77% versus 4.86% respectively. This could be a sign that the market is turning in favor of the payers as they tend to be higher quality companies and have underperformed this year. On a year to date and 12-month basis, the payers have lagged the non payers by a wide margin.

Friday, November 27, 2009

Better Investing's Most Active-November 27, 2009

Each week Better Investing details the most active stocks that its members are either buying or selling. Below is a list of the companies attracting the most interest of BI's members, according to their recent buy and sell decisions, as reported by a small, informal sampling of 213 transactions for the trailing 4-week period ended Friday, November 27, 2009.

Tuesday, November 24, 2009

Taxing Stock Trades Gets Closer

As I have noted in several posts in the recent past, Congress is getting closer to taxing certain securities transactions. The bill proposes a .25 percent tax on the sale and purchase of financial instruments such as stocks, options, derivatives and futures. Half of the proceeds would go to reduce the deficit and the other half of the proceeds from the tax would be used to create jobs. Retirement accounts would be exempt from the tax. Unions, such as the AFL-CIO and SEIU are in favor of the tax since they believe the tax will not have an impact on the average investor.

Who does Congress and the unions believe will pay the tax? The tax will be passed on to all investors. It's just like saying a company pays taxes. Companies do not pay taxes, they collect them and pass them on to the government. The taxes become a component of the cost of business that is passed on to the end consumer. The Congress and White House need to cut spending. Higher taxes do not stimulate job creation.

The recent actions out of Congress do not surprise me given the lack of business experience in President Obama's cabinet.

Chart Source: InfectiousGreed

Sunday, November 22, 2009

Carry Trade Risk Might Be Overstated

In early November Nouriel Roubini wrote in the Financial Times that the Mother of all carry trades faces an inevitable bust. Roubini states the rise in risky asset values: equities, high yield bonds, etc. has been driven by the carry trade with the U.S. Dollar.
"Roubini states, so what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions."
David Rosenberg, Chief Economist & Strategist for Gluskin Shelf, recently weighed in on the carry trade as well.
"The U.S. dollar has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%."
The reason for the heightened focus on the carry trade is because when it is unwound, negative shocks can inflict risky assets and weak currency economies. Earlier this year, this type of shock inflicted Latvia and other Eastern and Central European economies. Does the data really support this carry trade risk though?

According to Larry Hathewey, an economist at UBS, in a report dated November 12, 2009, data on leverage and financial flows do not support the assertion that gains in global equity, credit, or most commodity prices have been primarily driven by leverage and liquidity. Hatheway indicates that margin debt and stock market volumes should be higher for the carry trade to be leading to bubles in these riskier asset investments. In fact the opposite is true.

According to an article in the Globe and Mail, Dr. Doom, borrowing and bubbles,
"If a ‘speculative bubble' were driving equity prices higher, presumably volumes would reflect the exuberance,” Mr. Hatheway said. “Yet average daily trading volume on the New York Stock Exchange has been declining since 2005, reversing the strong trend growth over the previous decade."

There is one bubble that is worth noting, UBS suggested. As the price of gold has increased, so too has derivative volumes."

"There, soaring prices have coincided with an increase in derivatives volumes. That squares with our view that what is driving gold prices is not a supply-demand imbalance in the physical market, but rather an increase in financial demand, he said.

"Gold prices and derivatives activity, in other words, show signs of a market driven by financial demand, either for hedging or speculative purposes. But what's notable is that gold is unique – equity, credit and even government bond markets do not show evidence of a similar pick up in derivatives activity."
The U.S. is not the only country whose currency continues to weaken. In Japan, the BOJ has its target interest rate near zero as well. In Q3, Japan's nominal GDP fell at a .3% rate due to continued price weakness and seems unable to shake off deflation. This lower rate in Japan will put downward pressure on the Yen, thus providing another currency for the carry trade.

In the end though, I believe Larry Hatheway points to important data that indicates the carry trade may not be fueling this global market melt up. As Hatheway noted in his research report,
"we (UBS) believe price gains largely reflect improved fundamentals, including signs of global economic recovery, the strength of emerging economies, and a recovery of earnings. Financial market activity—including the size of the financial sector as well as funds flows and derivatives activity—remains subdued by historical standards."

"Until leverage resumes market outcomes will be driven mostly by growth and earnings expectations. Importantly, as well, uncertainty about monetary policy 'exit strategies' is likely to boost market volatility next year. And with many asset classes now close to 'fair value', risk-adjusted returns are likely to be lower in the year to come."

A Contrarian Money Manager's Case For A Slower Growing U.S. Economy

Much has been made recently about the U.S. Dollar and its use in the carry trade. Consuelo Mack of WealthTrack recently interviewed Robert Kleinschmidt, President and Chief Investment Officer of Tocqueville Asset Management and portfolio manager of the Tocqueville Fund. In the below video, Kleinschmidt discusses where his contrarian investment philosophy is leading him now and why investors should be concerned about U.S. government debt and the future of the dollar.

Kleinschmidt believes the government's action of bailing out AIG, TARP etc., actually contributed to and worsened the global financial crisis. He also believes the U.S.'s actions have jeopardized the dollar's status as the world's reserve currency. Lastly, Kleinschmidt believes the U.S. economy will look more like a European one where growth is in the 1-2% range and results in unemployment remaining in the 10% range for the foreseeable future.

Thursday, November 19, 2009

Investor Bullish Sentiment Above Long Term Average

Today's investor sentiment as reported by the American Association of Individual Investors shows bullish sentiment increased to 42.73% compared to last week's reading of 38.60%. This week's bullishness level is above the long term average of 39% but remains below the +1 standard deviation level of 50%. The bull/bear spread came in at a +11% versus last weeks 0%.

(click graph for large chart)

Wednesday, November 18, 2009

Fixated On The VIX

Seems a day does not go by that a market commentator can't resist mentioning the low level of the VIX and the potential implication for the market's future direction. The reason this fear index is in the news is low levels of the VIX tend to be a signal of a market top. I wrote a post in October of last year titled, What is the VIX Index, that provides background on this market measure.

Many commentators are suggesting that the current current level of the VIX, 21.8, is one reason to be skeptical of the current level of the stock market. Certainly the +50% advance off of the March low is reason to be cautious; however, the current level of the VIX doesn't necessarily indicate a market correction is around the corner. As the below chart notes, during the mid 1990's and early 2007, the VIX reached a level near 10.

So just because the VIX is near 20, this does not necessarily foretell a market correction around the corner.

Tuesday, November 17, 2009

Sysco Corp Increases Dividend 4.1%

Sysco Corp. (SYY) announced the company is increasing its fiscal 3rd quarter 2010 dividend by 4.17% to 25 cents per share. This compares to 24 cents per share paid in the same quarter last year. The company has increased its dividend in each of the 40 years it has been trading as a public company.
  • The estimated payout ratio will equal 48% based on 6/2010 estimated earnings of $1.89. This compares to the 5-year average payout ratio of approximately 53%.
  • The company carries an S&P Earnings & Dividend Quality Ranking of A+.

(Disclosure: Long SYY)

Intel and Lancaster Colony Increase Dividends

Catching up after some dividend increases this week.


On Monday, Intel Corp. (INTC) announced the company is increasing its 1st quarter 2010 dividend by 12.5% to 15.75 cents per share. This is Intel's first quarterly dividend increase since the second quarter of 2008 when the company increased the quarterly dividend to 14 cents per share.
  • The estimated payout ratio will equal 43% based on 12/2010 estimated earnings of $1.46. This compares to the 5-year average payout ratio of approximately 36%.
  • The company carries an S&P Earnings & Dividend Quality Ranking of B+.
Lancaster Colony

Today, Lancaster Colony (LANC) announced the company is increasing its fiscal 2nd quarter dividend 5.26% to 30 cents per share. This compares to 28.5 cents per share paid in the same quarter last year.
  • The estimated payout ratio will equal 33% based on June 2010 estimated earnings of $3.68. The reported earnings for the year ending June 2009 equaled $3.18.
  • The company has an S&P Dividend & Earnings Quality Ranking of B.

(Disclosure: Long INTC)

Sunday, November 15, 2009

Bullish Investor Sentiment Increases But Below Long Term Average

This past week's American Association of Individual Investors bullish sentiment reading saw an increase to 38.6% versus last week's reading of 22.2%. The long term average of the bullish sentiment level is 39% so the reading remains below this longer term trend. The 8-period moving average of the reading declined to 37.5% from 37.9% last week and is the fourth straight week the 8-period average has declined. The bull/bear spread came in at a flat 0%.

For contrarians, individual investors seem to remain cautious about the future direction of the market. Guy Lerner of the Technical Take website notes the so called "smart money" indicator has turned bearish. Guy notes the "smart money" tends to get the trends right, while the "dumb money" does not. We will see. If we could break resistance of 1,100 on the S&P 500 Index, a further move higher in the market through year end is possible.

Saturday, November 14, 2009

Watching Consumer Confidence

As I noted in an earlier post on March 9th of this year, consumer confidence tends to lag the stock market by about 2-3 months. The Conference Board's consumer confidence index reported its second monthly decline at the end of October. Since the confidence index tends to lag the market by several months, it is not surprising to see this confidence drop in October. October was a down month for the S&P 500 Index with the index closing at 1,036 versus September's close of 1,057.

Friday's preliminary release of the Reuters - University of Michigan Surveys of Consumers similarly saw an October decline in confidence as well to 69.4 versus September's 73.5. One positive is the S&P 500 Index is up 5.66% so far in November. A big negative impacting confidence is the level of the unemployment rate at 10.2% and seemingly continuing to move higher.

As the below chart of the S&P 500 Index shows, the market is struggling to break resistance at the 1,100 level. The weak attempt to move through this 1,100 level is evidenced by the declining volume.

The White House and Congress may finally be seeing that its spending binge is weighing on the market and consumers. A recent article on Politico notes the White House may focus on deficits "after voting for the stimulus, the bailouts, the health care legislation and a plan to address global warming, four enormous government programs. Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives." Let's only hope so.

Tuesday, November 10, 2009

Money Market Cash: Fuel For The Fire

Investor cash on the sidelines could serve as a source of funds for additional stock purchases and a continued move higher in the market averages. As the below chart shows, cash levels remain higher than the 27% reached during the 2001-2002 recession and far above the 16% historical average.

From Disciplined Approach to Investing

If one includes ultra short and short term bond fund investments, potential liquidity that could find its way into stocks is significant. In short, investors do not believe this rally is sustainable and that is music to a contrarian's ears.


Still High Cash Levels May Provide Further Support For Stocks (PDF)
Fidelity's Market Analysis, Research and Education
October 22, 2009

Friday, November 06, 2009

Unemployment Rate Above 10%, Only Second Time Since WWII

Today's Labor Department report that the unemployment rate rose to 10.2% is only the second time it has crossed the 10% threshold since the post World War II period. Today's unemployment rate represents a 26-year high for this indicator.

According to Chart of the Day, "it is also worth noting that the unemployment rate has tended to peak shortly after the end of the recession. Following the previous two recessions, however, the unemployment rate kept rising for many months following the beginning of an economic 'expansion.'"

unemployment chart November 2009

Thursday, November 05, 2009

Small Cap Relative Valuations Look Stretched

Historically, small cap stock returns coming out of a bear market have outperformed large cap stocks. The performance of small caps relative to large caps since the March 9th lows has been no different. The small cap outperformance tends to run for a period of around two years.

(click to enlarge)

small cap performance performance versus large cap chart Fall 2009
However, this might not be the case in this market cycle. The difference this time is the relative valuations of small caps look the most stretched going back to 1983. Given the valuation gap between small and large, it appears large caps might be the better asset class at this point in the cycle.

(click to enlarge)

relative valuation small versus large cap 1983-2009
One factor that may serve as a tailwind for large cap stock outperformance is the fact many large companies generate significant amounts of revenue from foreign sources. With the U.S. Dollar weakening, the conversion of foreign earnings into the dollar will provide a boost to earnings growth near term. Additionally, the developing market countries are experiencing better economic growth, thus a benefit to the large multinational companies.


The Market Recovery and Outlook for Small-Cap Stocks (PDF)
T.Rowe Price Report
By: Jack LaPorte
Fall 2009

Bullish Investor Sentiment In Freefall

This week's bullish investor sentiment reported by the American Association of Individual Investors took a dramatic slide to the downside. The bullish sentiment reading fell 11.4 percentage points to 22.22% from last week's reading of 33.65%. This week's reading is the lowest since March 5th's bullishness reading of 18.92%. The bull bear spread widened to -33% compared to last weeks spread of -9%.

(click to enlarge)

When looking at the 8-period moving average of the sentiment at 37.94%, the decline is not so significant though. In the February-March 2008 time frame, the 8-period average was in the mid 20% range for six weeks. Nonetheless, investors seem to be doubtful of future market advances. As this is a contrary indicator, it is one factor that suggests the market could advance further over the next six months. Today's 200 point or 2% advance on the Dow Jones Index is a good start.

Wednesday, November 04, 2009

Dividend Aristocrats Performance Update

It seems it has been some time since I updated the performance of Standard & Poor's Dividend Aristocrats. Year to date through November 4, 2009, the Aristocrats have generated a better return than the Dow Jones Industrial Index, 12.2% versus 11.7%, respectively. However, the Aristocrats performance has trailed the return on the S & P 500 Index's return of 15.9%.

In the below table, I have shaded the rows for those companies that have cut their dividend this year.

Full View

Monday, November 02, 2009

Dividend Payers Outperform Non Payers In October

October was a down month for the S&P 500 Index seeing the index decline 1.87%. During the month, the dividend payers finally did outperform the non payers, -2.3% versus -6.2%, respectively. This is the first time payers have outperformed the non payers this year. On a year to date and 12-month time frame, the non payers continue to maintain a significantly higher return than the dividend payers.

Howard Silverblatt, Senior Index Analyst for Standard & Poor's notes in the October Monthly Market Attributes Report:
  • From March 9th, the 165 trading days produced a 53.16% gain for the S&P 500, which is the best gain since the 53.76% increase in October 1938.
  • While the market remains 33.80% off its 2007 high, the gains have mostly stayed with little profit taking and few major selling days.
  • Volatility picked up during October and continues to remain higher than historical values, although lower than the first half of 2009. Year-to-date, there have now been more days where the S&P 500 moved less than 1% than more than 1%. However, the swings have also been fewer and less drastic. The last 5% move was on March 23rd (+7.08%), with the last 3% move occurring on June 22nd (-3.06%).
If the easy money has been made with strong performance from the higher risk, lower quality stocks, the market may be entering a period where the higher quality dividend growers begin to outperform the non payers over an extended period of time.

Sunday, November 01, 2009

Market Looks Oversold

In looking at the percentage of S&P 500 Index stocks trading above their 50 day moving average, the market looks to be near a short term oversold position.

In looking at the 150 day moving average, 80% of S&P 500 stocks are trading above the 150 day M.A. This is down from 97% in September.

A Piotroski Low Price To Book Stock: Highway Holdings Ltd.

One of the American Association of Individual Investors' better performing stock screens over the long run is the Piotroski Price to Book Screen.

Piotroski stock screen long term performance chartOf late the number of companies passing the screen's criteria has been slim to none. The criteria of the screen are:
  • The price-to-book ratio ranks in the lowest 20% of the entire Stock Investor AAII database.
  • The stock does not trade on the over-the-counter exchange.
  • The return on assets for the last fiscal year (Y1) is positive.
  • Cash from operations for the last fiscal year (Y1) is positive.
  • The return on assets ratio for the last fiscal year (Y1) is greater than the return on assets ratio for the fiscal year two years ago (Y2).
  • Cash from operations for the last fiscal year (Y1) is greater than income after taxes for the last fiscal year (Y1).
  • The long-term debt to assets ratio for the last fiscal year (Y1) is less than the long-term debt to assets ratio for the fiscal year two years ago (Y2).
  • The current ratio for the last fiscal year (Y1) is greater than the current ratio for the fiscal year two years ago (Y2).
  • The average shares outstanding for the last fiscal year (Y1) is less than or equal to the average number of shares outstanding for the fiscal year two years ago (Y2).
  • The gross margin for the last fiscal year (Y1) is greater than the gross margin for the fiscal year two years ago (Y2)
  • The asset turnover for the last fiscal year (Y1) is greater than the asset turnover for the fiscal year two years ago (Y2).
Currently, only one company out of AAII's database of companies passes the screening criteria. The company is a Hong Kong based company, Highway Holdings Ltd. (HIHO) and trades on the NasdaqCM exchange.

Highway Holdings stock chartInvestors are highly encouraged to fully research any company mentioned before purchasing. In the case of HIHO, it is a small company trading at a stock price below $5 per share. The stock's market capitalization is $6.1 million. These below $5 stocks are typically very volatile investments.

James Grant Interview On WealthTrack: Believes Strong Recovery Ahead

Consuelo Mack of WealthTrack interviews James Grant, Editor of Grant's Interest Rate Observer. By nature, James Grant is a glass is half empty type of person, yet he believes the economy will surprise to the upside and be surprisingly strong.

In the interview, Grant cites a quote from English economist, A.C. Pigou,
"The error of optimism dies in the crisis but in dying it ‘gives birth to an error of pessimism. This new error is born, not an infant, but a giant; for (the) boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.’"
One other noteworthy piece of advice to investors is that Wall Street is not an investors friend. Investors should buy investments not when they feel good, but when they feel the worst about a particular investment.

The interview is a worthwhile one that investors should view.

Saturday, October 31, 2009

Stryker Increases Dividend 50%

Yesterday Stryker Corp. (SYK) announced the company's dividend payment would be transitioned to a quarterly dividend from an annual one. In order to accommodate this change, SYK will pay a 10 cent fourth quarter dividend for 2009.
  • This will bring total 2009 dividends to 50 cents per share versus 33 cents per share paid in 2008. This represents a 51% increase in the dividend on a year over year basis.
  • Further, the company will begin paying a 15 cent per share quarterly dividend beginning in the first quarter of 2010. If the 2009 dividend is spread over four quarters (12.5 cents per quarter), the 2010 quarterly dividend will represent a 20% increase over the 2009 estimated quarterly dividend.
  • The payout ratio based on estimated 2009 earnings per share of $2.94 will be about 17%.
  • The company has an S&P Earnings & Dividend Quality Ranking of A+.

Thursday, October 29, 2009

Bullish Sentiment At Lowest Level Since July 16th

This week's release of bullish investor sentiment by the American Association of Individual Investors shows bullish sentiment fell to 33.65%. This is the lowest level for the bullishness reading since the bullishness reading was reported at 28.68% for the week of July 16, 2009. The eight period moving average fell slightly to 39.83% versus the prior week's average of 40.37%.

Individual investors do not appear to have reached the overly bullish state as of yet.

Monday, October 26, 2009

Supervalu Cuts Dividend

Catching up after some travel.

Last week Dividend Aristocrat Supervalu (SVU) cut the company's dividend by 50%. SVU becomes the first consumer staples stock to reduce its dividend.
  • The new quarterly dividend is reduced to 8.75% from 17.5%.
  • The company's second quarter earnings came in at 35 cents per share versus 61 cents per share in the same quarter last year.
  • Full year earnings for February 2010 are estimated to come in at $1.94 and February 2011 earnings are projected at $2.01.
(click to enlarge)

Suppervalu dividend analysis table
Supervalu stock chart

Sunday, October 25, 2009

Fund Flows During And After The Crisis

Investors who stuck with equity investments (S&P 500 Index) in October 2008 and through the March 2009 sell off would now be up 9% from October 2008 through August 2009. Many investors liquidated equity investments in October and again in March.
  • Investors withdrew $70 billion from the stock market in October 2008 and another $50 billion in the February/March 2009 period.
  • As of October 16, 2009, one year after the peak in liquidations, investors who remained in the stock market had fared better than those who exited at the peak of the crisis and stayed on the sidelines.

One implication for investors as it relates to this data is the difficulty in trying to time the market. For investors, focusing on high quality dividend growth stocks provides the potential to minimize the downside volatility in the equity portion of ones portfolio.


Stay-the-Course Ahead of Panic Sellers
By: Fidelity's Market Analysis, Research, & Education Group
October 23, 2009