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

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.

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

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.

Source: The Globe and Mail

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."

H/T: pazzomundo.com

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.

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)

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.

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.

Intel

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)

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.

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.

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.

Source:

Still High Cash Levels May Provide Further Support For Stocks (PDF)
Fidelity's Market Analysis, Research and Education
October 22, 2009
http://personal.fidelity.com/products/funds/content/pdf/MARE-Fuel-For-Stocks.pdf

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.'"

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)

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)

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.

Source:

The Market Recovery and Outlook for Small-Cap Stocks (PDF)
T.Rowe Price Report
By: Jack LaPorte
Fall 2009
http://individual.troweprice.com/staticFiles/Retail/Shared/PDFs/PriceReports/Fall2009PriceReport.pdf

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.

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

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.

Source: Standard & Poor's (xls)

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.

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.

Of 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.

Investors 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.

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+.

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.

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)

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.

Source:

Stay-the-Course Ahead of Panic Sellers
By: Fidelity's Market Analysis, Research, & Education Group
October 23, 2009
http://publications.fidelity.com/investorsWeekly/investorsWeekly/cms/IW0910crisis.dyn

Economic Activity Picking Up?

As readers may have noticed from the limited number of posts to my blog this week, I was away from the computer due to some out of town travel. I traveled by car from Ohio to Florida on I-75. Along with my travel companion, we both commented on the number of semi trucks that were traveling the highway. The parking lots at a couple of truck stops we passed were packed full with semis. Even several of the rest areas were packed with semis. I am guessing all these trucks were not traveling with empty loads. At a minimum, I think the economy is experiencing some inventory restocking activity and possibly a pick up in consumer demand.

Tax and Spend

As I have noted in several earlier posts, Congress is looking to place a tax on stock trades. They have not given up on this trading tax as noted by the below screen shot from my Site Meter account.

(click to enlarge)

Correlations Have Increased

Investors are often advised to spread their investments across differing asset classes because of the lower correlation of these other asset classes. Unfortunately, the correlation of many of these other asset classes has continued to increase.

I have discussed this issue of higher correlation in earlier posts:

• Diversification and Correlation During Market Crisis Periods

• Global Equity Market Correlations Continue To Increase

Fidelity's Market Analysis, Research and Education (MARE) group recently updated correlation data as of August 31, 2009. As the below table notes, correlation versus the S&P 500 Index has increased across a number of asset classes except U.S. Government Bonds.

MARE notes the potential investment implications:

• U.S. government bonds performed very well as riskier assets tumbled during the financial crisis in 2008, but so far in 2009 have fared poorly as riskier assets have rallied amid signs of economic stabilization and improvement.

• There are potential scenarios where U.S. bonds could either hold up well in the months ahead (a double-dip recession, further financial system turmoil, etc.) or underperform riskier assets (rising inflation, increased concerns about the U.S. fiscal deficit/creditworthiness, or a better-than-expected economic recovery).

• It remains to be seen whether the recent increase in correlations among riskier assets will define a new, more highly correlated era. In any case, investors are likely to be on safer ground anticipating that U.S. government bonds will continue to be one of the few ways to effectively diversify a portfolio.

In the end, investors need to be aware of this move towards higher correlation across a number of asset classes. Simply spreading ones investments into various asset classes will not necessarily ensure a higher risk adjusted return.

Source:

Where To Find Diversification In A Highly Correlated World (PDF)
Fidelity (MARE)
September 21, 2009
http://personal.fidelity.com/products/funds/content/pdf/where-to-find-diversification.pdf

Investors Sentiment Turns Bullish

This week's sentiment survey by the American Association of Individual Investors saw bullish investor sentiment jump by 12.21 percentage points. The bull/bear spread was reported at +14 versus -6 last week. These weekly measures are volatile and looking at the 8-week moving average smooths out this variability. The 8 week average increased to 39.56% compared to 37.90% last week.

Data Source: American Association of Individual Investors

The bullishness reading is a contrarian indicator and a continued increase in individual investor bullishness would be one signal the market could be approaching at least a short term top.

Stock Market's Upside Potential

When determining the future direction of the market, many investors and strategist turn to the price to earnings ratio. One key to using the P/E ratio is the calculation of earnings. Earnings are reported in several forms, one being "reported earnings" and the other referred to as "normalized" earnings. One significant point made in the article is the justification of using normalized earnings. Easterling notes,

"...if you only look at the P/E ratio reported for any quarter or year, the ratio during peaks and troughs will be quite distorted when compared to the more stable long-term average. About every five years or so, the reported P/E will reflect the opposite signal in contrast to a more rational view of P/E valuations. For example, the reported value for P/E in early 2003 reflected a fairly high value of 32 just as the S&P 500 Index had plunged to 800 (E had cycled to a trough of $25 per share). A P/E of 32 generally screams “sell” to most investment professionals; yet, in early 2003, that was a false signal! A more rational view using one of the business cycle-adjusted methods reflected a more modest 18. In a relatively low inflation and low interest rate environment, the scream should have been “Buy”…

Several years later, in 2006 (after an unusually-strong run in earnings growth), E peaked at $82 per share as the S&P 500 Index was hesitating at 1500. Most market pundits were recommending a strong “buy” due to a calculated P/E of only 17. Yet, using the rational business cycle-adjusted methodologies, the true message was “STOP”—P/Es were saying sell, with P/E more than 25.

Well the pundits were actually (sort of) right—P/Es did expand… Yet it was due to (what should have been expected) the normal down-cycle in E rather than the pundit-promoted increase in the stock market. So when investors’ stock market accounts were down almost 50%, they were handed explanations that the earnings decline was unexpected and the fault of the financial sector…

Many of the same pundits are bewildered by current market conditions and unsure about the future of E. The latest craze to extrapolate current conditions into the indefinite future has been named “The New Normal.” Slow economic growth, high saving rates, and unstable financial conditions—all fairly typical at the end of a recession—are now basic assumptions for years into the recovery expansion. Maybe this time will actually be different…or maybe not…

As for the market and P/E, it’s understandable that conservative investors and market spectators have watched the past six-month rally with awe. Yet the current P/E remains slightly undervalued and further gains are more likely; nonetheless, it is important to remain aware that typical market volatility makes it also likely that the market will experience significant short-term swings."

Ed Easterling of Crestmont Research provides an update on the market valuation in his quarterly P/E Report. The most recent report is detailed below and is a worthwhile reading. Beginning on page 4 of the report, he goes through his analysis of the potential target on the market (see Figure 6 on page 12.) Not that the market will go up in a straight line, but he does build a case for a 3-year target price on the S&P 500 Index of 1,685. The earnings figure utilized in the target is a normalized one that has been adjusted for inflation. A similar inflation adjusted valuation measure is used by Robert Shiller of Yale University.

The PE Report

The article's conclusion is the market remains in a secular bear market while still undervalued. As Crestmont has noted before, cyclical bull markets are common in longer term or secular bear market periods. Crestmont updates a table noting prior bear and bull market cylces.

For investors, inflation is a critical variable that will impact the value of the market. Staying abreast of inflation data points will provide some insight into the markets future direction. The advance from the market's March low has been impressive. Today's move above 10,000 on the Dow and 1,090 on the S&P 500 index was important from a technical point of view. Interestingly, the volume today was better than what we have seen of late, which is good, but the volume level is not what one would see at capitulation buying points. This is only "one" technical factor, but it would suggest the market could still move higher as some investors are in disbelief that the market has not had a significant correction that would consolidate the gains since March.

(click to enlarge)

Investor Sentiment Indicates Investors Are Cautious

Over the past month, investor bullish sentiment has continued to trend lower as measured by the 8-period moving average of the bullish sentiment reading. Last week's bullishness reading of 35.09% feel below the long term average of 38.94% as reported by the American Association of Individual Investors. Additionally, last week's reading was nearly 8.5 percentage points lower than the bullishness reading in the prior week. The bull/bear spread was -6% versus +8% last week.

Source: American Association of Individual Investors

Market Performance After Big Down Years

This has been a year that the old adages like "Sell in May and Go Away" or September is the worst month for market performance did not hold true. Some attribute this to the fact the market simply overshot on the downside in March.

In line with these adages, the market's performance in the year following big down years has generally been strong. Courtesy of Chart of the Day, the following chart notes the market's performance tends to be strong in those years following the years where the market declined significantly. As the chart notes, the exceptions were the early 1930's and 1978.

The below chart presents the performance of the Dow for the calendar year following the 15 worst calendar year performances of the Dow since 1896. The Dow's performance during the 2008 calendar year was the third worst on record. Could there be more upside to the market as we move into the end of this year?

(click to enlarge)

Source: Chart of the Day

RPM International Increases Dividend 2.5%

For the 36th consecutive year, RPM International (RPM) announces a YOY increase in its quarterly dividend to 20.5 cents per share. This compares to a quarterly dividend of 20 cents per share in the same period last year: a 2.5% increase.

The estimated payout ratio is 65% based on May 2010 estimated earnings of $1.26. May 2011 earnings are estimated at $1.50. RPM earnings have been impacted by the economic slowdown resulting in payouts of 80%, 176% and 38% over the course of the last three years. RPM carries an Earnings and Dividend Quality Ranking of B.

(click to enlarge)

Hayman Advisors 3Q Newsletter

J. Kyle Bass and his firm made billions shorting subprime mortgages prior to the mortgage meltdown. The below third quarter newsletter provides perspective on current monetary policy around the world. The newsletter contains an in depth discussion on China, Japan and the timing of potential inflation. The commentary is a must read for investors.

Hayman Advisors Third Quarter 2009 -

(H/T: Zero Hedge, Pragmatic Capitalist)

Tobin's q and The S&P 500 Scatter Chart

I had a reader (H/T br) send me a scatter chart of Tobin's q and the S&P 500 Index. The data period is 1950-1999. I added a line estimating where the second quarter ratio would fall at .78.
tobins q & S&P 500

Another chart sent by the reader contains a scatter chart of the S&P 500 Index's future 10-year annualized return versus the inflation adjusted 10-year average P/E ratio. This data was obtained from Robert Shiller's data base (.xls file).
S&P 500 Return and PE Scatter Chart

Dividend Payer's Return Lags Non Payers

As of the end of September, the return for the dividend payers in the S&P 500 Index continues to badly trail the return of the non payers. On a year to date basis, the payers' return equals 17.55% versus the non payers' return of 56.70%. The strongest performing stocks have been the lower quality ones and these tend to not pay dividends.

(click to enlarge)

Howard Silverblatt noted in a Dow Jones News Wire release:

In the third quarter, of about 7,000 U.S-traded companies, 191 increased their dividend for the period, down from 346 a year earlier and 439 in 2007. In contrast, 113 companies lowered their dividend payment during the quarter, down from 138 in 2008 but up from just 21 in 2007.

Howard Silverblatt said the third-quarter figures suggested that dividends may have finally hit a bottom. But he warned it may take several quarters of proven results for companies to be comfortable with increasing, or initiating dividends. Even then, Silverblatt said the level will likely be more subdued than what was seen two years ago.

According to Silverblatt, dividend increases have outnumbered cuts every year since 1955, with the average being 15 increases for every decrease. So far this year, the relationship is almost even, with increases at 707 and decreases at 730.