Thursday, July 30, 2009

Bullish Investor Sentiment Above Long Term Average

Keeping in mind that the individual investor sentiment reading is a contrarian indicator, bullish sentiment spiked higher to 47.67% versus last week's level of 37.60%. The long term average for the bullish reading is 39%. The bull/bear spread turned positive at 16% versus last week's spread of -5%. When the S&P was at 1,562.47 during the week of October 11, 2007, the American Association of Individual Investors' reported a bullishness reading of 54.64% .

Tuesday, July 28, 2009

Dividend Aristocrats Dividend Actions YTD

Dividend increases can still be uncovered in this market in spite of the number of dividend cuts or suspensions that seem to make the news on a regular basis. So far this year (through July 22, 2009) 28 out of 52 (54%) Dividend Aristocrats have increased their quarterly dividend. Dividend cuts for the Aristocrats total six. Detail on the year to date actions is contained in the below spreadsheet.

Monday, July 27, 2009

Understanding The Bear Case

As an investor it is important to have an understanding of the bear perspective as it relates to this market. Tyler Durden of Zero Hedge, in conjunction with David Rosenberg, Chief Economist & Strategist at Gluskin Sheff + Associates, Inc., have assembled a research report that outlines the challeges facing the economy and market. Their report is detailed below.
The End of the End of the Recession

At this point in time, I do believe we remain in a secular bear market; however, cyclical bull phases do occur during these market phases as I have noted before. The following table from Crestmont Research details the historical market phases going back to 1901.
Secular Bear Market Table

As the above table notes, investors can still make money during secular bear markets. One key is to structure the portfolio in investments that hold up better during market pullbacks. Given the strength and duration of the recent advance off of the March lows, some consolidation of gains is certainly probable.

Sunday, July 26, 2009

Its All About Revenue Growth: Versus When Though?

Over 70% of companies reporting second quarter earnings during this reporting period have beat analyst earnings expectations. Year over year top line revenue growth has been anything but nonexistent. And this focus on lack of revenue growth is an often sighted issue with the bearish market participants. The lack of revenue growth is based on comparison of the second quarter 2009 revenue versus the second quarter of 2008, i.e., year over year. The issue with this earlier period reference point is simply it is the wrong one.

Companies have gone through a significant right sizing period by slashing cost wherever possible. The brunt of this cost cutting has been centered in the employment area. As the below chart shows, the overall employment level has been reduced to late 2004 levels.

The point is an investor needs to look for growth in revenue, and earnings for that matter, based on a period in time comparable to a period which comes close to mirroring a time in which a company's operations looked similar to today. In many cases, this is 2003 or 2004. So can the company grow, say third quarter revenue and earnings, compared to the third quarter of 2004? If so, what does this growth rate look like vis-à-vis the companies current valuation. If one continues to look for the normal year over year growth, it could be several years before a company gets back to that type of favorable comparison. For some companies though, the revenue and earnings bar is pretty low when looking at fourth quarter 2008 or first quarter 2009.

In looking at United Technologies' (UTX) historical and projected earnings per share, if one is waiting for 2008 levels to be exceeded, it might be as late as 2011 before that bar is crossed. When in fact, the earnings growth estimates for 2009 through 2011 do not look too bad. If one continually compared 2009 levels to 2008, you might not get back into the stock until the company exhibited the positive YOY comparison sometime in 2010.

How much stock price upside would one have missed then? Like March through June of this year?

Disclosure: Long UTX

Thursday, July 23, 2009

Investors In Denial Phase?

I continue to believe investors are in denial regarding the sustainability of this market advance and for good reason. Over 85% of S&P 500 stocks are trading above their 50 day moving average. As noted by the white circle near the top of the chart though, the market can continue to move higher while the percentage of stocks trading above their 50 day trends sideways.

As I have noted in earlier posts, the below chart was first publish in 1991 by technical analyst Justin Mamis in a book titled The Nature of Risk.

As the chart of the S&P 500 Index shows below, the resistance level is around S&P 1005. This was the level achieved in early November 2008 and corresponds to the market rebound from the panic phase in the above chart.

The caution is this analysis is strictly technical and the market could be topping out at the anxiety phase. Nonetheless, it appears we are past retesting the March lows.

Fundamentally, recent earnings reports have shown nearly 50% of companies reporting earnings have beat analyst estimates. This might not say much given analyst normally over estimate earnings at market tops and underestimate earnings at market bottoms. What if analyst under estimate earnings at the bottom of the market, maybe the second quarter does represent trough earnings. What is necessary now is top line revenue growth on a year over year basis.

Many companies have right sized their companies to operate at levels not seen since 2003 or 2004. Using one of these years as a reference point, then when will the year over year bar be low enough that top line revenue growth will show year over year growth? For some companies this positive year over year revenue growth bar could be realized in the 4th quarter this year and for others the first quarter of 2010. As the market tends to be a leading indicator, the market's recent advance may be telegraphing this potential scenario.

Individual investor sentiment continues to remain on the cautious side. The American Association of Individual Investors reported that bullish investor sentiment did increase to 37.60% versus last week's bullishness reading of 28.68%. However, the bull/bear spread remains at a negative 5%, an improvement from last week's spread of negative 18%. Prior market tops have occurred at spreads above 30%. Since the sentiment reading is a contrarian indicator and individual investors are not overly bullish, further market advances could be on the near term horizon.

A consolidation of recent gains is not out of the realm of possibilities. Retesting June support around 939 would be healthy and would equate to an approximately 4% market correction. Increasing market volume on positive market days could indicate the cash on the sidelines is finding its way into equities.

Tuesday, July 21, 2009

Stanley Works Increases Dividend 3.1%

Stanley Works (SWK) supplies industrial tools and security related products to a broad range of customers each representing about 1/3rd of company sales: professional, industrial and consumer. Many of the company's products are tied to construction and home improvement related segments of the economy.

Earlier this week the company announced a 3.1% increase in the company's third quarter dividend to 33 cents per share. This compares to 32 cents per share in the same period last year.
  • The payout ratio increases to 57% based on 2009 estimated earnings of $2.31 per share. Estimated earnings for 2010 are 20% higher at $2.79.
  • The 5-year average payout ratio is 37%.
  • The company carries an S&P Earnings & Dividend Quality Ranking of B+.
Stanley Works dividend analysis July 22, 2009

Saturday, July 18, 2009

Where Will Investors Invest Their Cash?

If the Economic Cycle Research Institute is correct in their assessment that the recession is over as I noted in yesterday's post, then where will investors deploy their cash position? Money market cash as a percentage of total stock market capitalization stands at nearly 40%. The average cash level prior to the financial crisis was 16%.

From an allocation perspective, investors appear to be under invested in equities. At a minimum the high cash levels may provide support for equity prices or even provide a source of funds that pushes equity prices higher. The below chart represents individual investor allocations as reported by the American Association of Individual Investors in their monthly asset allocation survey.

If one is a contrarian investing in the underperforming asset class can lead to higher returns. This decade that asset class has been large cap equities as measured by the S&P 500 Index, at least compared to bonds.

The potential headwind for bonds is higher interest that may result from the Federal Reserve increasing the Fed Funds rate as well as potential inflation due to the level of monetary support provided by the U.S. Government. The Argus Leading Fed Funds Index reported its second consecutive monthly gain in June.

Argus notes:
In June, the ALFFI climbed five points to 52.45 from 47.48 in May — which itself was a 10 point+ increase from April. This is the highest reading since last October (when we saw 63.15). Four of the six ALFFI’s components registered gains last month, with the core intermediate producer price index and the CRB posting declines. This index is designed to predict changes in the direction of the Federal Reserve’s target rate. It certainly seems as if the next move will be to the upside.
With interest rates at this level, a move higher is more probable than a move lower. Higher rates would push bond prices lower, thus resulting in potentially negative total returns.

Friday, July 17, 2009

Recession Is Over: Economic Cycle Research Institute

Anirvan Banerji, director of research for the Economic Cycle Research Institute, notes in a column today in RealMoney at that the recession is now over. An excerpt from Anirvan Banerji's article:
When approaching a cyclical turning point in U.S. economic growth, the growth rate of the U.S. Long Leading Index (USLLI) typically turns first, followed by the growth rate of the Weekly Leading Index (WLI), growth in the U.S. Short Leading Index (USSLI) and growth in the U.S. Coincident Index (USCI). Notably, the levels of the USLLI, WLI and USSLI are all rising. In fact, the chart below shows that by May, USLLI growth (top line) had already surged to a four-year high. Meanwhile, WLI growth (second line) has spurted to a two-year high, having crossed into positive territory. Following in their footsteps, USSLI growth (third line) has shot up to a one-year high, though it's still in negative territory...

...But the sequential upswings in the leading indices aren't just about less negative growth -- we have pronounced, pervasive and persistent upswings in a succession of leading indices of economic revival, the most powerful possible predictor of a business cycle recovery. What's impressive here is the degree of unanimity within and across these leading indices, along with the classic sequence of advances in those indices. Such a combination of upturns doesn't happen unless an end to the recession is imminent.

If so, why is there such broad pessimism among analysts? The problem is a widespread inability to distinguish among leading, coincident and lagging indicators, along with the vast majority of economic indicators that don't fall neatly into any of those three categories. Thus, indicators are typically judged by their freshness, not their foresight. Because most market-moving numbers are coincident to short leading, while corporate guidance is often lagging, it's no surprise that analysts don't discern any convincing evidence of an economic upturn.

The arguments marshaled by standard-bearers of the pessimistic consensus hold little water. Usually, their "analysis" is based on gut feel, bolstered by any seemingly plausible argument that would support their case...

Recession Is Over

Updated July 19, 2009

Lakshman Achuthan, managing director of ECRI, speaks on NPR regarding the end of the recession:

Click to listen


The Recession Is Over ($)
RealMoney at
By: Anirvan Banerji

Thursday, July 16, 2009

Bearish Sentiment and Market In Denial Phase

Individual investor bullish sentiment moved fractionally higher as reported by the American Association of Individual Investors. The bullishness reading increased to 28.68% versus last week's reading of 27.91%. The bull/bear spread improved to -18% versus last week's level of -27%. The improvement came from bearish investors moving towards a more neutral stance.

As noted in an earlier post containing the Justin Mamis's sentiment cycle chart, is it likely the market is in the "denial" phase of the sentiment cycle?

Tuesday, July 14, 2009

S&P 500 Companies Increase Foreign Sales and Foreign Taxes Paid

Standard & Poor's reports that companies in the 500 Index increased the percentage of sales outside of the U.S. to 47.9% in 2008 versus 45.8% in 2007. Downward pressure on the U.S. Dollar is likely if unrestrained deficit spending continues in the in the U.S. This weaker Dollar scenario would benefit companies that generate a large portion of their sales outside the U.S.

In addition to the increase in foreign sales, S&P "...determined that foreign income taxes increased $11.5 billion or 9.3%, while U.S. federal income taxes declined $43.9 billion or 29.1%, in fiscal 2008." This increase in foreign taxes paid is in spite of the fact the U.S. has a higher tax rate than most foreign countries. Congress should take note of this as more multinational companies are moving their domicile outside the U.S. due to unfavorable proposed corporate tax legislation rhetoric coming out of Washington, D.C.

Essentially, only two sectors saw a decline in the foreign sales component: energy & utilities. For the information technology sector, foreign sales in 2008 were basically flat compared to 2007.


S&P: Foreign Sales by U.S. Companies Continue to Rise (PDF)
Standard & Poor's

By: David Guarino and Howard Silverblatt
July 14, 2009

Sunday, July 12, 2009

Economic Indicators That May Signal A Bottom In The Economy

As important as it may seem to review technical stock market data, an investor should also review technical economic data. The goal is to review the economic data in order to spot potential turning points in the overall economy.

A recent article in Kiplinger's Personal Finance magazine outlined six economic indicators worth reviewing that might help an investor determine the bottom in the economy. When three of the below six indicators turn in a more favorable direction, an economic recovery is likely unfolding.

Jobless Claims
  • Look for a four-week moving average hitting 550,000 and continuing to decline would signal that companies have stopped slashing jobs.

Durable Goods Orders
  • A two- or three-month uptrend in orders -- excluding defense, aircraft and other transportation equipment -- would presage an expanding economy.
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.
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.
existing home sales(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.
Interest Rate Spread
  • A narrowing of the gap to about one-half of a percentage point would signal improving health in the banking sector.
TED spread chartSource: Bloomberg

One last point to keep in mind is the market tends to be leading indicator. As a result, once a number of the data points become more favorable, the market may move higher in advance of the economic data confirming a stronger or improving economy. I wrote a post on March 9th that touched on the lagging nature of the consumer confidence data.


How To Spot The Bottom
Kiplinger's Personal Finance
July 2009

Market Short Term Oversold

From a pure technical perspective, the market does appear to be oversold on a short term basis. The percentage of S&P 500 Index stocks trading above their 50 day moving average has fallen to 26.6%. This is down from nearly 90% in early May. In looking at a longer term moving average, 57.2% remain above the 200 day moving average--down from over 70% in mid June.

Thursday, July 09, 2009

Investor Bearish Sentiment Increases

In the investor sentiment survey reported today by the American Association of Individual Investors, individual investor bearish sentiment increased to 54.65% versus last week's reading of 44.59%.

The average bearishness level going back to July 1987 is 30% with a standard deviation of 10%; therefore, this week's bearishness reading is over 2 S.D. from its average. As a result of this increased bearishness, the bull/bear spread came in at -27%. During the first week of March, the bearishness reading was as high as 70.27% and the bull/bear spread equaled -51%.

Wednesday, July 08, 2009

A Green Shoot That Is Not Less Bad But Actually Good

Many data points have been cited as green shoots since they are simply "less bad". For example, if earnings continue to decline, but at a lower rate, this has been cited as a positive or green shoot. Well, one data point that is actually positive is the New Orders minus Inventories (NO-I) data point. Argus Research notes:
  • During June, the NO-I jumped to a reading of 18.4, bringing the second-quarter average sharply into positive territory (at 16.7).

  • The New Orders minus Inventory Index...has offered the most-promising indication of an economic trough.
  • This barometer accurately identified the troughs in 1990-91 and 2001 recessions.

Tuesday, July 07, 2009

Government Debt Has Consequences

Morgan Stanley's Richard Berner noted in a recent research report, America's Fiscal Train Wreck, that the U.S. budget deficit and resultant debt issuance will have negative economic implications over the long run. In the report Berner estimates:
  • ...federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then - a doubling over the next decade. Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth.
  • the federal deficit has ballooned to US$1.8 trillion or 13% of GDP in fiscal 2009. But the bulk of the threat is structural: The fiscal stimulus package included spending increases with minimal bang for the buck, leaving more debt than growth.
  • most important, by 2019 the full force of rising entitlement outlays and debt service will begin to hit the budget. No rosy growth scenario will provide sufficient resources to meet all the claims on future federal revenue. And while tax hikes or a broader tax base will likely be part of the solution, the real cure is to curb the growth of entitlement spending.
  • in 2010, some 100 million Americans will be enrolled in Medicare, Medicaid and SCHIP (the State Children's Health Insurance Program), and outlays amount to 5% of GDP. Longer term, Medicare enrollment will rise significantly as the population ages. More importantly, future per capita cost growth for both programs is well in excess of per capita GDP, meaning that outlays for these three programs will double to 10% of GDP by 2035 and nearly double again by 2080. Translated into budget outcomes, according to CBO, these programs will account for virtually all of the likely growth in primary federal spending - total spending less interest on debt held by the public - in relation to GDP, and thus all the likely expansion of the deficit and debt. In contrast, social security cost increases will play a relatively minor supporting role.
The full research report can be read below.
Americas Fiscal Train Wreck

Investors and the public should give serious thought about the real benefit additional entitlement programs, i.e., government health care. The long term negative economic consequences are likely significant.

Dividend Increase Stocks Harder To Uncover

If dividend increasing stocks were fish in a pond, the catch would be harder to come by. For the first six months of 2009, 65 companies in the S&P 500 Index either cut or suspended their dividend payment. This compares to 20 for the same period in 2008 and 4 in 2007. Increases feel nearly 50% to 86 increases versus 158 increases for the first six months of 2008.

  • Consumer Staples now account for largest dividend cash payments at 17.0%; financials once over 30% and now represent 9.3% of the dividend cash payments.
  • The top 26 issues account for 50.0% of the dividends with the first financial issue being Wells Fargo (WFC) at #41.

Data Source: Standard & Poor's (PDF)

Saturday, July 04, 2009

Competive Edge Stocks

One source of a wide variety of stock screens is the American Association of Individual Investors website. Access to the screens does require a membership in the organization.

From time to time the AAII Journal will feature screens the editor believes might be of interest to its readership. In the July issue of the AAII Journal, the featured screen focuses on: Stocks With a Competitive Edge. According to the article, the thinking behind this featured screen is:
"Earnings are dependent on the ability of a company to convert sales into profits. Converting a large and growing proportion of sales into earnings often points to firms that have a competitive advantage, due to brand-name loyalty, a limited niche, or even patent protection. The First Cut this issue screens for companies turning a larger percentage of sales into gross profits, operating profits and net profits."
Highlights of the screening criteria are:
  • Gross profit margin: calculated by dividing gross income (sales less the cost of goods sold) by sales. It reflects the firm’s basic pricing decisions and its material costs.
  • Operating profit margin: calculated by dividing operating income by sales. Operating income represents income generated after all costs except interest, taxes, and non-operating items. The operating margin reflects the relationship between sales and management-controlled costs (the cost of goods sold, as well as operating costs including selling, administrative and general expenses; research and development expenses; and depreciation).
  • Net profit margin: calculated by dividing net income by sales. It indicates how well management has been able to turn sales into earnings available for shareholders.
The 30 companies passing the First Cut are domestic exchanged-listed companies with positive sales growth coupled with gross, operating and net margins above their five-year averages and also showing improvement over the previous year. A partial list of the firms with the highest annual growth in sales over the last five years are noted below.


Stocks With a Competitive Edge ($)
AAII Journal
By: John Bajkowski
July 2009

Where Are We In The Market Cycle?

From a technical perspective could the market be following the path of past sentiment cycles? The below sentiment cycle chart was first published in 1991 by technical analyst Justin Mamis in a book titled, The Nature of Risk. In looking at the below chart, it appears the current market pattern is following the pattern outlined in Mamis' chart.

(click charts to enlarge)

sentiment cycle chart
S&P 500 chart July 2, 2009The market's recent advance from the early March low appears to follow the sentiment cycle's "wall of worry" advance. The next phase would then be the investor's "aversion" portion of the cycle. Consolidating some of the gains achieved since the March low would be healthy.

Although the market has had a strong recovery off the March low, since the beginning of the year, the market has essentially traded sideways.

From a longer term perspective, the market has a long way to go to reach its earlier high.

(click to enlarge)

S&P 500 Index chart monthly closing prices since 1971From an economic perspective, I could cite a number of factors that would support a bullish case for the market and I could cite an equal number of bearish factors. One statistic that sticks out like a sore thumb is the continued increase in the jobless data.

Initial claims have exceeded 600M for 22 straight weeks. Historically, the consumer has represented 70% of the U.S. economy and unless there is some job creation, this 70% stat is not going to hold. What then will stimulate economic growth?

Wednesday, July 01, 2009

House Closer To Proposing Tax On Stock Trades?

Could it be the U.S. House of Representatives is getting closer to proposing taxes on stock trades? Below is a screen shot from my Sitemeter account detailing a search earlier today. that came from the U.S. House of Representatives. The search phrase was "taxing stock trades." The search landed on one of my earlier articles, Congress Proposing Transaction Tax On Stock Trades, written in early March.

(click to enlarge)

U.S. House of Representatives looking to tax stock trades