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)

As 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

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.

Data Source: US Government Spending

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.

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.

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?

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)

The 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.

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.

Full View

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.

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.

Source:

Pimco’s Gross Boosts Cash to Most Since Lehman Failed
Bloomberg
By: Wes Goodman and Garfield Reynolds
December 17, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQYnPNqVNIsg&pos=2

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%.

Source: American Association of Individual Investors

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.

Full View

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.

Source:

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

Full View

Source: Standard & Poor's (xls)

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.
  

Source: Federal Reserve Bank of St. Louis

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.
  

Source: 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.
  

Source: 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.
  

(Chart Courtesy of Calculated Risk)

Data Source: National Association of Realtors

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."

Data Source: Consumer Confidence Board

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.
  

Source: 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.

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.

Source:

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

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:

• Brown-Forman Cl B (BF.B)
• Cintas (CTAS)
  

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

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)

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)

(Disclosure: long interest in NUE)

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.

Source: Standard & Poor's