Bullish Sentiment Declines as of 5.30.2007

The weekly bullish sentiment survey from the American Association of Individual Investors declined to 33.33% from last week's 37.35%. This is the third decline in bullish sentiment in as many weeks. However, when looking at the 8-period moving average of bullish sentiment, the trend continues to move higher since February, 2003.

As noted in yesterday's post, many times it is not the level of the indicator, but the direction in which it is moving. In the case of bullish sentiment, it continues to move higher since 2003, albeit from a lower level.

(click on table/graph for larger image)

Data source: American Association of Individual Investors

Short Interest: What Does It Mean For This Market Cycle?

From time to time I have noted the high level of market short interest.

Short interest is the total number of shares of a particular stock that investors have sold short in anticipation of a decline in the share price and have not yet repurchased the shares.

Short interest is often considered an indicator of pessimism in the market and a sign that prices will decline. From a contrarian perspective, some view short interest as a positive sign, pointing out that short sales have to be covered, and that the need to repurchase the shares sold short can increased demand for a particular stock potentially forcing the stock price to move higher.

In today's Ahead of the Tape column in the Wall Street Journal, the column noted:

So-called contrarians typically see such bearishness as a reason to buy. The idea is that when investors are down on stocks, expectations are so low that the slightest inkling of good news can send prices higher. In contrast, when investors get too bullish, stocks get priced for perfection, and when perfection doesn't come, stocks decline.

But with hedge funds cutting a much bigger swath in the market, today's high level of short interest doesn't represent the bearishness that it did in the past. Many hedge funds engage in a strategy of offsetting the purchase of shares in one company by shorting another, betting that it will perform worse than the stock of the company that they own. Then there is the booming deals market, which drives merger arbitrage, where investors buy shares of companies set to be acquired and short the acquirers.

I agree with the article that the increased M & A activity is contributing to the higher level of short interest. Another interesting indicator is the put/call ratio. There is an interesting article at this link that looks at the put/call ratio. As detailed in a few of the comments to the article, it is important to look at the direction of an indicator and not just the absolute level.

In the end, an important point to be drawn from this is one should not look at a single variable when making investment decisions.

Source:

Short Story: Bearish Bets Lose Bullish Bias ($)
Ahead of The Tape
The Wall Street Journal
By: Justin Lahart
May 30, 2007
http://online.wsj.com/article/SB118048148598217838.html?mod=todays_us_money_and_investing

Dow Jones U.S. Select Dividend Index Changes

On Friday, Dow Jones Index services indicated Kinder Morgan, Inc and Duquesne Light Holdings, Inc. will be removed from the Dow Jones U.S. Select Dividend Index on May 31, 2007. Both Kinder Morgan and Duquense Light Holdings are being acquired. The Dow Jones U.S. Select Dividend Index includes 100 stocks derived from the Dow Jones U.S. Total Market Index, a broad-market benchmark index that represents approximately 95% of U.S. market capitalization.

Removed	Ticker	Yield
Kinder Morgan, Inc.	KMI	3.30%
Duquesne Light Holdings Inc.	DQE	5.00%
Added	Ticker	Yield
Wilmington Trust Corp.	WL	3.20%
Trustmark Corp.	TRMK	3.30%

The iShares Dow Jones Select Dividend Index (DVY) is an exchange traded fund that replicates the Select Dividend Index for investors.

Source:
Component Changes Made to Dow Jones U.S. Select Dividend Index
PrimeNewswire
May 25, 2007
http://news.moneycentral.msn.com/provider/providerarticle.aspx?Feed=PZ&Date=20070525&ID=6961887

Lowes Increases Dividend 60%

Lowes (LOW) announced a 60% increase in the company's quarterly dividend to 8 cents a share versus 5 cents per share in the same quarter last year. Lowes also announced an additional $3 billion dollar share repurchase program. The company has $800 million remaining from a prior $5 billion dollar share repurchase program that was alread in place. Since 2004, LOW has repurchased $4.2 billion of its stock.

The following table contains a comparison of some fundamental data between Home Depot (HD) and Lowes.

(click on table for larger image)

Notable Dividend Increases: Fedex, Bunge Ltd. & Old Republic International

Fedex (FDX), Bunge Ltd. (BG) and Old Republic International (ORI) announced dividend increases today. Fedex first began paying a dividend in 2002.

(click on table/charts for larger image)

REITs: Buying Opportunity Or Further Downside?

On February 25th, I noted the strong performance of REITs (prior post) and posed the question whether REIT performance was ahead of fundamentals.

Shortly after that post, the charts detailed below note the decline in the DJ Reit Index. Are REITs simply trading at the low end of resistance, but still in a longer term uptrend or is there further downside ahead for REIT shares?

(click on charts for larger image)

Supervalu Inc. Increases Dividend 3%

Today, Supervalu Inc. (SVU) a S&P dividend aristocrat, announced a 3% increase in its quarterly dividend to 17 cents per share versus 16.5 cents per share in the same quarter last year. The new dividend will be paid in the 3rd quarter.

• SVU's Earnings & Dividend Ranking is B+.

• The company's 5-year historical dividend growth rate is 4%.

• The estimated payout ratio on 2007 estimated earnings (February year-end) of $2.79 is 24%. The 5-year historical payout ratio is approximately 27%.

Individual Investors Still Not Overly Bullish

In today's sentiment survey release from the American Association of Individual Investors, bullishness fell slightly from last week's level of 38.39%.

Source: American Association of Individual Investors

SEI Investments Raises Dividend 16.7%

Today, SEI Investments (SEIC) announced a 16.7% increase in its semi-annual dividend to 14 cents per share versus 12 cents per share in the 2nd quarter last year. The company pays a dividend in the 2nd and 4th quarters of the year.Additionally, the company announced a 2 for 1 stock spilt. The aforementioned dividends are on a presplit basis.The company has increased its dividend each year since 1998.

• SEIC's Earnings and Dividend Ranking is A+.

• The 5-Year historical dividend growth rate is approximately 19%.

• The estimated 2007 payout ratio is approximately 11% based on 2007 estimated earnings of $2.62. The 5-year historical payout ratio is 11% as well.
  

Kentucky Versus Davis Municipal Bond Case: Supreme Court To Hear Case

Today it was revealed the United States Supreme Court will hear the Kentucky municipal case, Department of Revenue v. Davis, 06-666. The justices will review the case in the nine month term that begins in October.

According to a Bloomberg report:

The justices delayed a decision on hearing the Kentucky dispute until they ruled in a fight over two New York counties that require trash to go to designated, publicly owned facilities. The court on April 30 upheld the rules on a 6-3 vote, rejecting arguments by haulers who said they were illegally barred from shipping to out-of-state sites with lower fees.

Both cases center on the so-called dormant commerce clause, a court-created rule that bars states from discriminating against out-of-state business without congressional authorization.

The case also raises questions about state tax treatment of college savings funds, said Leonard Weiser-Varon, a lawyer specializing in public finance at Mintz Levin in Boston.

A discussion on the trash hauler case can be found at the bottom of an earlier post (here).

Source:

Municipal Bond Tax Breaks Draw High Court Scrutiny
Bloomberg.com
By: Greg Stohr
May 21, 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVdu47TLoLrU&refer=home

Dividends Gaining More Attention

In this week's Barron's magazine, the cover article, Still Too Stingy, highlighted the fact corporations are more focused on stock buybacks than dividend payments. The buyback focus may actually be to the detriment of a company's stock performance.

Source: Barrons

The article notes:

Just look at some of the strongest sectors of the stock market in the past two years: electric utilities, real-estate investment trusts, cigarette makers, telecommunications providers and energy-oriented master limited partnerships. All of them pay nice dividends.

Additionally, as noted in prior posts, baby boomers appear to be focusing equity purchases on those companies that pay and grow their dividend.

"A lot of corporations are missing the seismic shift in retail demand for yield," says Henry McVey, chief investment strategist at Morgan Stanley. As tens of millions of baby boomers start retirement, the demand for yield-oriented investments will climb. McVey notes that Americans over 65 have equity portfolios with an average yield of 2.6%, versus 0.8% for those under 65.

Investors should keep in mind that dividends are an important aspect of overall stocks returns.

The waning importance of dividends in the States reflects the rise in the past two decades of institutional investors, who tend to see stocks as vehicles for capital gains, not income. Historically, however, dividends have been crucial to investors. Since 1928, stocks have returned 10.4% annually, with 40% of that generated by dividends.

The article notes company's prefer buybacks to increasing the company dividend because buybacks are not a long term commitment, where dividends are. As an investor, company's that can make a long term commitment to a higher and growing dividend are those that likely will see stronger stock price returns in the long run.

Following is a link to a few related posts on this site discussing the buyback versus dividend growth conundrum.

• Buyback Frenzy And Its Impact On Equity Prices

• Baby Boomers Attracted To Dividend Funds

• Baby Boomers: They Just Might Impact The Equity Markets As They Move Into Retirement

• Stock Buybacks And Dividend Payments Remain Strong

Source:
Still Too Stingy ($)
Barron's
By: Andrew Bary
May 21, 2007
http://users2.barrons.com/lmda/do/checkLogin?mg=evo-barrons&url=http%3A%2F%2Fonline.barrons.com
%2Farticle%2FSB117952567396808058.html%3Fmod%3D9_0002_b_this_weeks_magazine_home

Buyout Frenzy And Its Impact On Equity Prices

Today, both USA Today and The Wall Street Journal featured articles on the recent buyout activity and its impact on equity prices. One result of the buyout activity is the available supply of equities has been reduced. All else being equal, if demand remains unchanged, this same demand for a reduced supply of stock will cause equity prices to move higher.

According to the USA Today article:

• There aren't 5,000 stocks anymore in the Dow Jones Wilshire 5000, a measure of the entire stock market. With fewer public companies, it has shrunk by 51 stocks, or 1%, this year and is down 89 stocks, or 2%, since 2005 to 4,910 now, Wilshire Associates says. There's no sign of the evaporation ending. "You're seeing a gradual shrinkage of the availability of public companies," says Richard Peterson of Thomson Financial.

• And it's not just small companies going away. This year, 12 members of the S&P 500, a benchmark index of large-company stocks, have been taken out by private buyouts and acquisitions, says Howard Silverblatt of S&P. An additional 17, including Bausch & Lomb, will disappear once their buyouts are completed, he says.

• Shares of remaining public companies become more valuable. Suddenly, stock investors have something the buyout firms want, putting a floor on their value, says Jack Ablin of Harris Private Bank. He estimates the dollar value of stocks available to the public has shrunk 6% the past year.

Related to stock buyouts is the impact stock buybacks are having on equity characteristics. In addition to buybacks reducing the supply of available equity, these buybacks are impacting the fundamentals of a company's financial results. Specifically, per share financial figures are being altered due to the large buyback activity. As companies report data on a per share basis, the reduction of outstanding shares for a particular company can enhance per share results. John Hussman of the Hussman Funds discusses this in a recent strategy article he wrote titled Double Counting.

In Hewlett Packard's recently released results, the company cites the favorable impact share buybacks had and will have on earnings per share results:

The company projected in February second-quarter earnings of 57 cents to 58 cents on roughly $24.5 billion in revenue. Excluding one-time costs, the company had forecast profit of between 63 cents and 64 cents per share for the quarter. Analysts expected earnings, on average, of 65 cents per share on $24.58 billion in revenue, according to a Thomson Financial survey. Higher levels of share buybacks during the quarter ending in April also contributed to the earnings lift, the company said (emphasis added).

As one analyzes companies, the impact of share buyback activity must be factored into the ratio analysis. The buyback activity is impacting the per share results of a company's per share financial figures.

Source:
Wave of buyouts shrinks public pools of stocks
USA Today
By: Matt Krantz
May 17, 2007
http://www.usatoday.com/money/companies/2007-05-16-private-usat_N.htm

Taking Stock: How Buyouts Alter the S&P ($)
The Wall Street Journal
By: Justin Lahart
May 17, 2007
http://online.wsj.com/article/SB117935811477305497.html?mod=todays_us_nonsub_money_and_investing

Bullish Sentiment Declines From Last Week's Level

In the American Association of Individual Investors Sentiment Survey release this week, bullish sentiment declines to 38.39% versus last week's level of 42.86%. This level of bullishness remains lower than one might expect at a market turning point from an individual investor sentiment perspective. The current result is in line with the long term average for bullishness as noted in the below table.

Source: American Association of Individual Investors

American International Group Increases Dividend 21.2%

Today, American International Group (AIG) announced a 21.2% increase in its quarterly cash dividend. The quarterly dividend increase to 20 cents per share versus 16.5 cents per share in the same quarter last year. This new dividend will be payable in the 3rd quarter. The projected payout ratio on the estimated 2007 earnings of $6.48 is approximately 12% versus the 5-year average payout of 10%.

Questar Increases Dividend 4.3% and Announces 2 for 1 Stock Split

Today, natural gas utility Questar (STR) announced a 4.3% increase in its quarterly dividend and a 2 for 1 stock split. On a pre-split basis, the quarterly dividend increases to 24.5 cents per share versus 23.5 cents per share on a year over year basis.

As noted in the PR Newswire release, the company has increased its dividend in 34 out of the last 35 years. The projected payout ratio is approximately 18% based on 2007 estimated earnings of $5.38. The 5-year average historical payout ratio is approximately 30%.

(click on table/chart for larger image)

401(k) Inheritance Trap

Historically, only spouses were permitted to enjoy the tax benefit of extending withdrawals from a deceased spouses 401(k) over the surviving spouse's expected lifetime. This extension stretched out the tax liability to coincide with the withdrawals. In the past, non-spouse beneficiaries could stretch out withdrawals over only a 1-5 year period. However, this past summer, Congress extended this spousal benefit to anyone who inherits a 401(k). The problem though, is it is up to the plan sponsor whether or not they want to permit this special treatment.

According to a recent BusinessWeek article:

The IRS ruling lets employers choose whether to amend their 401(k) plans to make IRA transfers more widely available. While some companies, including IBM (IBM), Eastman Kodak (EK), and MetLife (MET), have done so, many have yet to consider the matter.

The best way to avoid problems? When you retire or leave a job, transfer your 401(k) to an IRA. That gets your nest egg out from under an employer's rules. You may also be able to take a so-called in-service distribution. A growing number of businesses let employees transfer money out of the plan while they're still on the payroll, says Ed Slott, (editor of Ed Slott's IRA Advisor). With an IRA, your heirs will be subject to the more favorable tax treatment.

Source:
A Costly Glitch For 401(k) Heirs
BusinessWeek
By: Anne Tergesen
May 21, 2007
http://www.businessweek.com/magazine/content/07_21/b4035102.htm

Global Equity Markets Increasingly Correlated: What are the Pros and Cons of Diversification

Over the past five years, the various equity markets around the globe have seen an increase in correlation.

TheStreet.com defines correlation as:

The extent to which the values of different types of investments move in tandem with one another in response to changing economic and market conditions.

Correlation is measured on a scale of -1 to +1. Investments with a correlation of +0.5 or more tend to rise and fall in value at the same time. Investments with a negative correlation of -0.5 to -1 are more likely to gain or lose value in opposing cycles.

Historically investment professionals have advised clients that diversifying investments into other equity markets allows the client's investments to be exposed to an increasing equity market while another market might be declining. In part, due to the increased globalization of the world economy, the various equity markets around the globe tend to move together as noted in the above table. The higher correlation tends to be larger in declining equity markets as well. One of the apparent benefits of diversification in today's environment, therefore, is the opportunity to achieve higher returns.

Standard & Poor's notes:

...increased correlations are only part of the story. Even though markets are more directionally correlated than ever, they still have diverging total returns, reinforcing their diversification benefits.

While the S&P 500 index, the MSCI EAFE index, the MSCI Emerging Market index, the S&P MidCap 400, and the S&P SmallCap 600 index have all posted positive trailing five-year total returns, the magnitude of the gains has varied widely.

While the “500” has returned 9.5% annually over the past 5 years (through May 7), the MSCI EAFE index and the MSCI EM index have returned 17.2% and 25.9%, respectively, highlighting their powerful portfolio diversification benefits. Similarly, the S&P MidCap 400 index and the S&P SmallCap 600 index have posted returns of 12.5% and 12.6%, respectively, thereby adding value to a diversified portfolio. Hence, despite increasing directional correlation, the inclusion of a wide array of equity asset classes has significantly benefited portfolio performance.

As a result of this increased correlation, investors have looked for other ways to protect the downside volatility of their portfolio. Several investment products are available to meet this investor need. One such product has been hedge funds that focus on absolute return strategies and hedge funds that focus on long/short investment strategies.

Another investment vehicle gaining in popularity is known as structured product. These structured products tend to guaranty an investor some minimum market value at maturity while providing some upside return based on various market indices.

In a detailed article that appears on Professional Wealth Management's website, it outlines some of the reasons investors are attracted to structured products:

But the main driver for employing structured products remains the theme of capital protection. “From the majority of client surveys that we conduct periodically, it emerged that around 40 per cent of our clients want to have guaranteed capital at maturity,” says Ms Viviani. “Moreover, we wrap structured products in a bond, meeting the favour of retail investors, who represent the large majority of Banca Intesa clients. They have traditionally invested in government or bank bonds, as they typically have a low risk profile.”

For U.S. investors, structured products can have tax implications. These investments tend to have bond characteristics since the notes generate OID income based on the level of return earned in a particular year. Original issue discount (OID) is a form of taxable interest that must be reported on your tax return. If you have a bond, note, or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity, part of the original issue discount (the amount that it increases in value each tax year towards maturity) must be included in your taxable income as interest on your tax return. You report original issue discount (OID) as it accrues, whether or not you receive any taxable interest payments from the bond issuer (emphasis added).

In conclusion, investors need to be aware that investing in multiple global markets alone may not provide protection in the market value of a portfolio when markets contract. Some investment professionals are aware of this issue and have developed investment strategies to address this issue.

Source:
Cracking the Correlation Conundrum
Standard & Poor's, The Outlook
By: Alec Young
May 11, 2007
http://www.outlook.standardandpoors.com/NASApp/NetAdvantage/mkt/OutlookMarketInsight.do?
subtype=OWMO&pc=NET&tracking=NET&context=Company&docId=11966253

Entering the Efficient Frontier
Professional Wealth Management
By: Elisa Trovato
October 1, 2006
http://www.pwmnet.com/news/fullstory.php/aid/1670/Entering_the_efficient_frontier.html

E.W. Scripps Increases Dividend 16.7%

Media company E.W. Scripps (SSP) announced a 16.7% increase in the company's second quarter 2007 cash dividend to 14 cents per share versus 12 cents per share in the 2nd quarter of 2006. The company does have a history of not increasing its dividend on an every fifth quarter basis though.

• The 5-year average dividend growth rate for SSP is approximately 12%.

• The payout ratio on 2007 estimated earnings of $2.21 is ~25%. This compares to the 5-year average payout ratio of 21%.

• The company has exceeded earnings expectations in each of the last six quarters.
  

• The company has an A- S&P Earnings and Dividend Ranking.

(click on table/chart for larger image)

Bullish Sentiment Jumps

The volatile sentiment survey from the American Association of Individual Investors saw a large increase in bullishness to 42.86% versus last week's 28.57%. Given the steady upward advance in the markets of late, it is not surprising to see individual investors becoming more bullish. The fact the individual investor has been somewhat bearish on the market could be one reason the market has continued to move higher. If the individual investors go "all-in" maybe we will begin to see a short term pullback coinciding with typically weak summer market periods.

(click on table/chart for larger image)

Source: American Association of Individual Investors

Baby Boomers Attracted To Dividend Funds

A recent article in the Wall Street Journal notes baby boomers have an increased interest in dividend focused mutual funds/investments.

"During the late 1990s, many individual investors were consumed with the capital appreciation of technology stocks that soared to record prices. After the bubble burst and a bear market took hold, many baby boomers facing retirement got spooked when their savings plummeted in value. They sought out investments that could provide extra income and weather stormy markets, leading them to rediscover the power of dividends..."

"Recent data indicate it was a smart shift. According to a Morgan Stanley report, stocks that paid dividends returned an average annual 10.2% from 1970 through 2005, almost six percentage points ahead of nonpayers. And dividend-paying stocks provide some protection in a down market, says John Gould, co-manager of Cullen High Dividend Equity Fund, an important attribute given the possibility that the market soon might slip after nearly five years of gains."

As the baby boomers move closer to retirement, they may continue to pursue dividend focused equities. A post I wrote last month contains more detail on baby boomer's potential future investment strategies.

Source:
Dividend Funds Enjoy a Boom, Helped by Aging Baby Boomers ($)
The Wall Street Journal
By: Rob Wherry
May 7, 2007
http://online.wsj.com/article/SB117803007304288191.html?mod=todays_us_the_journal_report