Saturday, February 28, 2009

S&P Cuts Dividend Rate On S&P 500 Index

On February 27th Standard & Poor's cut the estimated dividend payment rate for the index to $21.97. This compares to $28.39 that was paid in 2008. This represents a decline of 22.6%, which is the worst decline since the 36.3% decline in 1938. The indicated rate for the index for 2009 is now $22.90. This lower dividend reduces the yield on the S&P 500 Index to 2.99%. The yield based on the 2008 dividend equaled 3.86%.

Warren Buffett Releases 2008 Shareholder Letter

One document worth reading every year is Warren Buffett's 2008 letter to shareholders of Berkshire Hathaway (BRK.A) As it relates to his thoughts on the near term economic outlook:
We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.
On an absolute basis, Bershire reported its worst decline in per share book value of -9.6%. This did outpace the 37% decline in the S&P 500 Index though.

Friday, February 27, 2009

Where Is The Market Bottom?

The President's State of the Union address on Tuesday and his proposed budget on Thursday were game changers for the economy and the market. The budget that is proposed will do little to stimulate economic growth and moves the country rapidly towards a socialistic economy and government. Many have written about the magnitude of this budget:
  • Obama's total budget is $3.6 trillion, which works out at $34,000 per household; median household income is about $50,000. Which basically means that for every dollar that a US household earns, the US government plans to spend 68 cents next year.
  • CNBC: [Obama] is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds.

    That is the meaning of his anti-growth tax-hike proposals, which make absolutely no sense at all — either for this recession or from the standpoint of expanding our economy’s long-run potential to grow.

    Raising the marginal tax rate on successful earners, capital, dividends, and all the private funds is a function of Obama’s left-wing social vision, and a repudiation of his economic-recovery statements. Ditto for his sweeping government-planning-and-spending program, which will wind up raising federal outlays as a share of GDP to at least 30 percent, if not more, over the next 10 years.

The question for investors is whether the market has factored in this type of economic structure. I believe the answer is--who knows. As a country we are embarking down an unknown path since these proposed changes have not been tried in this country before. So in what direction does the market move?

The Bespoke Investment Group had a couple of graphics a few days ago detailing today's market action versus the market's correction from 1929 to 1954.

Correction S&P 500 Index 1929 and 2009Source: Bespoke Investment Group

The Chart of the Day provides a chart of the Dow on an inflation adjusted basis. From a technical perspective, will the Dow trade down to test support at the 4,000 level?

Many strategists have lowered earnings estimates for the S&P 500 Index to $45. If one places a 10 P/E on earnings, that would mean the S&P Index could trade down to 450. Today's close on the S&P was 735. The $45 earnings estimate could be trough earnings and the market doesn't necessarily trade on trough earnings, but it is a data point. And, as noted by Smart Money, although GDP was horrible:
The fact that the economy shrank at a rate of 6.2% last quarter -- the worst showing in more than a quarter century -- sounds pretty awful. But here's another way to look at it. The last time GDP dropped so precipitously (back in the first quarter of 1982) the Dow went on to gain 25% in the next 12 months.
Let's hope history repeats itself as it applies to GDP centered data.

Tuesday, February 24, 2009

Dividends Critical Component Of Total Return

Historically, dividends have accounted for a large part of the total return for stocks. If dividends are excluded, the capital gain on stocks trails the return on treasury bonds.

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asset class returns since 1900
The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

..."It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price," said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. "Dividends have been a cushion in bad times. If they go to zero it’s a disaster."


Dividends Falling Means S&P 500 Is Still Expensive
By: Michael Tsang
February 23, 2009

(HT-The Float)

Too Many Just Consuming

Recently, it seems some in this country would rather receive a fish versus learn to fish. The saying, "give a man a fish and he’ll eat for a day, teach a man to fish and he will eat for the rest of his life," reminded me of a recent email I received:
A self-important college freshman walking along the beach took it upon himself to explain to a senior citizen resting on the steps why it was impossible for the older generation to understand his generation.

"You grew up in a different world, actually an almost primitive one" the student said loud enough for others to hear. "The young people of today grew up with television, jet planes, space travel and man walking on the moon. We have nuclear energy, ships and cell phones, computers with light speed...and many more."

After a brief silence the senior citizen responded as follows. "You're right son. We didn't have those things when we were we invented them. Now, you arrogant young man what are you doing for the next generation? The applause was amazing!

The U.S. needs to get away from giving everyone a fish.

Monday, February 23, 2009

Chicago Fed National Activity Index Below Trend

Although the Chicago Fed National Activity Index rose .20 points in January, the index remains below trend. The CFNAI came in at -3.45 versus -3.65 in December. The three-month moving average fell to -3.41, to its worst reading since February 1975, one month before that recession ended.

A longer term view of the CFNAI is detailed below:

What is the CFNAI?
The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data:
  1. production and income,
  2. employment, unemployment, and hours,
  3. personal consumption and housing, and
  4. sales, orders, and inventories.
A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

Sunday, February 22, 2009

A Correction For The Record Books

The Dow Jones Industrial Average (^DJI) correction that began on October 9, 2007 is now the second worst since 1900 and only behind the correction that began in 1929. According to Chart of the Day:

The Dow put in its record high of 14,164.53 back on October 9, 2007. [On February 19, 2009],the Dow closed at 7,465.95 – down 47.3% from its peak made 499 calendar days ago. For some perspective on the magnitude of the current bear market, today's chart compares the current, 499 calendar day old Dow correction to that of all other Dow corrections, 499 calendar days after their respective peak (and that were still ongoing).

Saturday, February 21, 2009

Stocks Benjamin Graham May Have Found Of Interest

Periodically, Standard & Poor's provides a list of stocks under certain screening or factor assumptions. This week's featured screen attempts to uncover stocks that Benjamin Graham may have found as attractive investments. Benjamin Graham noted the following characteristics for selecting attractive defensive stocks:
Graham believed that the defensive investor should select between 10 and 30 stocks that each have the following characteristics: large, prominent, and conservatively financed, with long records of continuous dividend payments. Such stocks should be purchased at attractive prices. As a yardstick, Graham suggested that the investor pay no more than 25 times average earnings over the past seven years, and no more than 20 times earnings over the last 12 months.
In order to create a factor screening model based on the above characteristics, Richard Tortoriello, a S&P Equity Analyst and author of Quantitative Strategies for Achieving Alpha, ran the screen on companies with a S&P Quality Ranking (pdf) greater than B+. S&P's database contains 430 U.S. companies with a Quality Ranking greater than B+. The specific screening factors used by Tortoriello are as follows:
● S&P Quality Ranking > B+
● 3-Year Average ROE > 18%
● Total Debt to Invested Capital < 20%
● Enterprise Value to 3-Year Average EBIT < 7
● Free Cash Flow to Invested Capital > 40%
The companies resulting from the screen are detailed in the below table.

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Benjamin Graham stocks screened from S&P database February 25, 2009Source:

Exploring Quantitative Strategies ($)
The Outlook
Standard & Poor's
By: Richard Tortoriello, S&P Equity Analyst
February 25, 2009

(It should be assumed I have a long interest in Chevron, Exxon Mobil, Genuine Parts and Nike)

Friday, February 20, 2009

Investor Bullish Sentiment Continues To Fall

The bullish sentiment reading reported by the American Association of Individual Investors fell over 11 percentage points this week. This week's bullishness reading was reported at 21.64% versus last week's reading of 32.91%. The bull/bear spread widened to a negative 35% versus last week's spread of minus 6%. The equity market performance is contributing to this high level of bearishness and low level of bullishness.

(click to enlarge)

Additionally, as reported at the end of 2008, cash levels were at 18-year highs and cash continues to build. Bloomberg reported in December:
The $8.85 trillion held in cash, bank deposits and money- market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg....

Leuthold Group, whose Grizzly Short Fund returned 83 percent in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer "one of the great buying opportunities of your lifetime."

Cash at 18-Year High Makes Stocks a Buy at Leuthold
Eric Martin and Michael Tsang
December 29, 2009

Tuesday, February 17, 2009

Standard & Poor's Advises Caution In Chasing Dividend Yield

Howard Silverblatt, Senior Index Analyst with Standard & Poor's, prepared a list of 142 S&P 500 issues that have paid increased cash dividends (xls) for at least ten years in a row or have paid increased cash dividends in at least 20 out of the last 25 years. Additionally, Mr. Silverblatt included information on companies whose earnings covered twice the annual dividend payment.

A video discussion of dividends is available at this dividend video link. Not surprisingly, given the number of dividend reductions, Mr. Silverblatt advises caution in simply focusing on yield when selecting dividend paying stocks.


Good Dividend, Bad Dividend

By: Howard Silverblatt
February 11, 2009

Sunday, February 15, 2009

U.S. Dollar Continued Headwind For Multinational Companies

One investment factor difficult to predict is the direction of currency moves. In large part, currency moves are impacted by a number of factors that are not necessarily specific to one single country or one single event. As an example, does the price of oil impact exchange rates or does the exchange rate dictate the level of oil prices? Throwing in the demand and supply aspects of oil just adds another twist to the exchange rate question.

One factor is certain, hindsight shows the stronger US Dollar has had a negative impact on earnings for multinational companies in the 4th quarter of 2008. The currency exchange rate impact on earnings will likely have continued negative headwinds through 2nd quarter 2009 earnings results vis-à-vis the comparable periods in 2008.

Standard & Poor's February 18, 2009 The Outlook newsletter ($) reports some currency changes since March 31, 2008 to January 31, 2009 exchange levels:
  • U.S. dollar +23% vs. the euro;
  • +39% vs. the pound;
  • +20% vs. the Canadian dollar;
  • +55% vs. the zloty; and
  • +33% vs. the real;
  • +33%vs. the Mexican peso;
  • +23% vs. the ruble
The dollar is down 10% vs. the yen and down slightly vs. the yuan renminbi.

It seems the U.S. has been ahead of other countries in addressing the economic slowdown by being ahead of the curve in lowering interest rates as well as the government providing stimulus to the economy. Below is a table of some of the interest rate levels around the globe.

If the U.S. economy comes out of this economic recession before most countries around the globe, it is almost a certainty the Federal Reserve will be raising interest rates. Additionally, the level of government stimulus will mean more U.S. Government debt issuance. With this higher supply will come higher interest rates. So even under a recessionary environment, the higher rates will likely mean continued strength in the dollar and hence a stronger dollar and currency headwinds for U.S. multinationals. One benefit of a stronger dollar is the likely downward pressure this keeps on oil prices.

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US Dollar and Oil chart February 2009

Another implication for investors is the impact the negative currency adjustment has on the earnings results reported by multinational companies. Many investors are focusing on high quality dividend paying stocks as potential shelter from this economic storm and dividend payers tend to be multinational companies. Certainly, constructing the foundation of ones stock portfolio with high quality dividend payers/growers is appropriate in this environment. However, investors need to be aware of the percentage of a company's sales that are derived outside the U.S. and understand what the company does, if anything, to hedge currency risk. Exchange rates will impact bottom line results.

Saturday, February 14, 2009

Sales Declining Faster Than Inventory

Although businesses are trimming inventory levels, actual sales are declining at a faster pace. The result is a spike higher in the inventory to sales ratio.

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business inventory February 2009
One reason for the decline in sales is due to consumers reducing their debt exposure. The consumers' desire to reduce debt is attributable to concern about the future direction of the economy and, for some, the inability to gain access to credit. In the short run, the reduced spending/higher savings is a drag on economic activity, but reducing debt levels is beneficial in the longer term.

(click to enlarge)

Thursday, February 12, 2009

S&P 500 Index Still Holding Support

The S&P 500 Index continues to hold support in a short term uptrend channel. The MACD also continues to be positive with the fast moving average line remaining above the slow moving average line. Although up volume on the last two positive trading days is unimpressive, today's volume was higher than yesterdays. The negative aspect of today's trading volume is much of it would seem to be short covering at the end of trading given the market moving mortgage news near the end of trading.

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s&p 500 Index chart February 12, 2009

Wednesday, February 11, 2009

Near The Bottom If History Repeats Itself?

From a pure technical perspective, the depth of this market decline has mirrored past declines. In terms of duration, the decline is about half as long as the longest market contraction that began in 2000 as noted in the below chart.

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During the depression years, the worst back to back yearly contractions occurred in 1930 and 1931.

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S&P 500 calendar year returns during depression years

Tuesday, February 10, 2009

Investors Head For The Exit

The market could not find any upward momentum from the beginning of trading today. As more details were gleaned from the stimulus bill this morning, investors began to understand the long term negative consequences of the added unfunded mandates in the stimulus bill. One unfunded mandate, and one that will certainly add additional stress to the government budget (that means higher taxes) was the health care provisions in the bill.

Bloomberg picked up on this and provided commentary on the two new departments created for health care, Federal Coordinating Council for Comparative Effectiveness Research and National Coordinator of Health Information Technology, established out of this bill. The article, Ruin Your Health With the Obama Stimulus Plan, describes the infrastructure that is established out of the bill that will provide for national health care down the road. As the article notes, rationing health care to seniors will result as the new policies are implemented.

It seems the two positives from today's market action are both technical. The S&P 500 Index chart has maintained its positive flag formation as the market closed above the lower resistance line. The question is whether or not the market can maintain this support level around 820. Additionally, the MACD remains bullish although the fast moving average line has hooked downward.

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S&P 500 Index chart analysis February 10, 2009Wednesday could be an interesting trading day as investors digest all the news out of Washington.

Monday, February 09, 2009

January Was Not Kind To Dividend Payers In The S&P 500 Index

Dividend payers are not getting off to a good start in 2009. For the month of January, the dividend payers in the S&P 500 Index declined 9.40% versus a decline of 3.39% for the non-payers. The once reliable financial sector contributed to the poor performance for the dividend payers. The financial sector alone fell 26.55% versus the S&P's decline of 8.57% in January.

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dividend payers versus non payers performance January 2009In the month of January dividend decreases doubled to 10 versus 5 in January 2008.

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Dividend decrease table January 2009Source:

Market Attributes Snapshot (pdf)

Standard & Poor's
January 30, 2009

Sunday, February 08, 2009

Stimulus Bill Is Nearly Half Pork!

No matter your political party affiliation, one should be concerned about the so-called stimulus bill making its way through Congress. Nearly half of this bill is earmarks (i.e., pork).

The Political Calculations website has a breakdown of the spending bill in a brief article titled:
The article contains the below chart:

(click to enlarge)

stimulus bill chart february 2009The seemingly "panic" efforts by the White House to pass this bill is representative of their lack of understanding of the the factors that are causing this economic crisis. Todd Sullivan has a brief comment that addresses the mark to market accounting issue in an article titled:
On one hand, I believe the market price is what it is. On the other hand, the dysfunctional market for some credit investments leads one to price investments far below market value even though all payments are being received. Is it as simple as a revision to the mark to market accounting rules that could ease the credit markets?

Friday, February 06, 2009

Dividends In 2009: Trust But Verify

Today, Standard & Poor's released a report containing a not so favorable outlook on dividends for 2009. In S&P's press release the firm projects dividends on the S&P 500 Index will be down 13.3% in 2009. This would be the worst decline since the 16.9% decline in 1942. The expected dividend rate for the S&P 500 Index is being reduced to $24.60 versus the $28.39 paid in 2008.

Howard Silverblatt, Senior Index Analyst at Standard & Poor's notes, "actual January dividend payments for the S&P 500 were down 23.9%, which speaks to the Q4 decreases, the $13.5 billion cuts year-to-date speaks to future payments."

S&P data shows:
  • sixty-two S&P 500 companies decreased their dividends in 2008 by an aggregate $40.6 billion with forty-eight of the decreases coming from Financials ($37 billion).
  • Over the previous five years (2003-2007), there were only 12 dividend decreases in the Financials sector amounting to $5.1 billion.
  • So far in 2009, fourteen issues (nine of which are Financials) have decreased their dividend rate by over $13.5 billion.
Appropriately, Howard Silverblatt indicates, "the bottom line is that investors need to do a lot more homework than in years past as the prospect for future dividends remains extremely cautious. On former President Ronald Reagan’s 98th birthday, his words still ring true today, Trust but Verify."


S&P 500 Dividends Projected to Decline 13.3% in 2009;
Worst Annual Decline Since World War II (pdf)

Standard & Poor's
By: Howard Silverblatt and David Guarino
February 6, 2009

Thursday, February 05, 2009

Investor Sentiment Continues To Decline And Market Grinds Higher

For the fourth straight week investor bullish sentiment has continued to decline. The American Association of Individual Investors reports bullish sentiment declined to 24.63% for the period ending February 4, 2009 versus last week's reading of 25.27%. In the week of January 8th, the bullishness reading stood at 48.70%. The four week bullish sentiment decline coincides with a four week decline in the S&P 500 Index as detailed below in the weekly chart of the index.

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S&P 500 Index weekly chart February 5, 2009
True to form, the sentiment indicator is a contrarian one and as investors have become less bullish, the market has advanced approximately 2.4% this week with one trading day remaining.

Since the November low, the S&P continues to trade within a slightly bullish trend channel. Recent trading though has set up a flag pattern as noted in the below chart. If the S&P can close above 855 and penetrate the top of the flag, the market could see a move towards the top of the longer term trend channel.

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S&P 500 Index chart February 5, 2009
In addition to the positive bullish trend channel, the 50 moving average has begun to turn higher and the MACD portion of the chart has turned positive with the fast moving average line crossing above the slower moving average line.

This is certainly a difficult market, but with all the seemingly bad headline economic news, the market seems to want to grind higher. Keep in mind, this is the technical aspect of the market and fundamentals will win out in the long run.

Wednesday, February 04, 2009

Financial Innovation Has Benefited Innovators And Not Investors

The recent issue of the Financial Analyst Journal published an interesting interview with John Bogle, the founder of Vanguard Group. The interview covers the current market events relating to everything from creative destruction to the trend in market turnover. The article is an interesting read.

Following are a couple excerpts from the article, Markets in Crisis (pdf):
...And another difference is visible in the trend toward ownership of securities and, particularly, stocks by institutional investors rather than individuals. Fifty years ago, individuals owned 92 percent of all stocks and financial institutions owned 8 percent. Today, individuals own only 24 percent of all stocks and institutions own 76 percent. I think a central problem is that these institutions have not behaved in an appropriate manner....

...Investment principles used to be focused on the wisdom of longterm investing rather than the folly of short-term speculation. Yet, we are witnessing an orgy of speculation in the market, the likes of which we have literally never seen in the United States. For example, in 1928, during the old speculative high, stocks had about a 140 percent annual turnover rate. In the 1950s and 1960s, when I first came into this business, turnover in the stock exchange had dropped from that speculative level to about 30 percent a year. In 2006, it rose to 200 percent. In 2007, it was 280 percent. And this year, turnover of stock is running at 320 percent. In sum, when I came into this business, there might have been two, three, or maybe four days in the course of a year in which the stock market would go up or down by 2 percentage points or more. Since the end of July 2007, there have been not two, three, or four such days; there have been 52 2-percent moves—21 upward and 31 downward....


Markets in Crisis (pdf)
Financial Analyst Journal
By: John C. Bogle and Rodney N. Sullivan, CFA
January/February 2009