Wednesday, December 31, 2008

S&P 500 Index Approaching Breakout Level

In spite of the weak economic news, the S&P 500 Index has returned 20% since the November 20th low of 752. Today the index closed at 903.25 which is above its 50-day moving average of 887. A confirming uptrend can be achieved if the index breaks above 916.

From a technical perspective, a concerning aspect of the increase is the fact the uptrend has been occurring on increasingly lower volume. With the start of the new year just around the corner, increasing up volume and taking out the 916 level will be important technical factors to follow for the S&P 500 Index.

(click to enlarge)


Monday, December 29, 2008

A Perspective On The Fed's Recent Actions

On December 18th, Dallas Federal Reserve President Richard Fisher gave a speech before the World Affairs Council in Dallas. What is interesting about the speech is the insight it provides into the Fed's thinking regarding the recent interventions into the markets.

Additionally, history has a tendency to repeat itself and Mr. Fisher points to events that deepened the economic crises of 1873 and 1929. In both cases, country governments reverted to protectionist trade policies. The most common one many have heard of today is the passage of the Smoot–Hawley Act during the slowdown in 1930. This protectionist legislation deepened the economic contraction leading to the so called Great Depression. As Mr. Fisher states,
"As world economic growth slows and economic conditions in the United States toughen, our elected representatives and newly elected commander-in-chief must resist with every fiber of their political beings the temptation to compound our travails by embracing protectionism. For if they fail to do so, the economic situation we now are working so hard to overcome will seem like a cakewalk."


Sunday, December 28, 2008

Highest Yielding Stocks In The S&P 500 Index

A list of the ten highest dividend yielding stocks in the S&P 500 Index is detailed below. Currently, 371 of the S&P 500 companies pay a dividend and have an average yield of 3.9%. The overall yield for the index is 2.9%.

Source: indexArb


Friday, December 26, 2008

Evidence The Media Is A Contrary Indicator

Often times market strategists note the media's take on the market can be viewed as a contrary indicator. When the magazine covers finally note that investors should sell, the markets are generally down substantially. Conversely, when the television and print media note the markets are likely to move higher, the markets have already moved higher. From time to time I write about individual investor sentiment. Investors tend to become the least bullish at market bottoms and the most bullish at the top of a market.

An example of the media as a contrary indicator is noted at Todd Sullivan's ValuePlays website. Todd provides several video reviews of Jim Cramer's market calls and history will enable investors to judge the outcome of these calls.

In the end, investors need to remember that going against the crowd can generally be a positive factor to consider when committing money to the market or withdrawing money from the market. Sticking to a disciplined investing approach is crucial at market turning points.


Thursday, December 25, 2008

Steep Decline In Bullish Investor Sentiment

The American Association of Individual Investors' Sentiment Survey saw a decline in bullish investor sentiment of 10+ percentage points. The individual investor bullishness level was reported at 28.95%. This is down from 39.73% last week. The bull/bear spread widened to -14% versus +4% last week.

(click to enlarge)


Tuesday, December 23, 2008

S&P Announces 2009 Aristocrats

Standard & Poor's recently announced the companies that will comprise the Dividend Aristocrats for 2009. The S&P 500 Dividend Aristocrats are companies in the S&P 500 index that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. The 2009 Aristocrats total 52 companies for 2009 versus 60 companies for the 2008 Aristocrats. The list of 2009 Aristocrats is detailed below.


The new companies added to the Aristocrats list are:
  • Bemis (BMS)
  • Legg Mason (LM)
The companies that have been eliminated from the Aristocrat group are primarily centered in the financial sector. The companies eliminated are:
  • Anheuser Busch (BUD)-acquired
  • Bank of America (BAC)
  • Comerica (CMA)
  • Fifth Third Bancorp (FITB)
  • KeyCorp (KEY)
  • Nucor Corp. (NUE)
  • Progressive Corp. (PGR)
  • Regions Financial (RF)
  • Synovus (SNV)
  • Wm. Wrigley (WWY)-acquired
Source:

S&P 500 Dividend Aristocrats (PDF)
Standard & Poor's
By: Aye M. Soe & David Guarino
http://www2.standardandpoors.com/spf/pdf/index/SP500_Aristocrats_Paper_2008Dec.pdf


Sunday, December 21, 2008

What Is Wrong With The Economy And How To Fix It

The below video by Fred Thompson provides background on what got us into this economic situation and the government's response to get us back on firmer economic footing.


Wednesday, December 17, 2008

Tobin's "q" At 1965 Level

According to Argus Research Tobin's "q" has reached its lowest level since 1965. Argus notes:

"When the stock market trades at a 'discount' to the replacement cost of its assets, the market is inexpensive, or cheaper to buy than build. This discount possesses ‘q’ ratios that are less than 1.0. Conversely, when “q” exceeds 1.0, the market trades at a premium to its replacement cost. The runup from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0...The long-term average for Tobin’s ‘q’ is 0.76."


Tobin's
I wrote an earlier post on Tobin's "q" in June that contains additional background information on this ratio.

Source:

Tobin’s ‘q’ at 0.76 in QIII ($)
Argus Research
December 17, 2008
http://www.argusresearch.com/


BB&T Corp. Increases Quarterly Dividend

BB&T Corp (BBT) announced a penny increase in the company's quarterly dividend. The new quarterly dividend increases to 47 cents per share versus 46 cents per share in the same quarter last year. It is encouraging to see the company come through with an increase, but the projected payout ratio is 74% based on 2009 estimated earnings per share of $2.52. The 2009 estimate is 12 cents lower than the 2008 EPS of $2.64. BBT carries a A- S&P Earnings & Dividend Quality Ranking.

(click to enlarge)

BB&T Corp. dividend analysis table December 16, 2008
BB&T Corp. stock chart December 16, 2008
Disclosure: I hold an interest in BB&T Corp.


Sunday, December 14, 2008

A Caution When Investing In Companies With High ROEs

(I orginally posted this article on The DIV-Net website.)

I have written a couple of articles in the past on on the benefits of reviewing a company's ROE or return on equity. One benefit of this measure is the resulting ROE calculation provides an investor with insight into management's use of capital. In general, higher ROE's point to better managed companies.

One danger looking solely at ROE is the ability of leverage (debt) to overstate ROE. In 2006, Bear Stearns' ROE was over 19% and this was an increase over the prior years ROE of 16%. What occurs is any debt taken on by a company reduces the equity figure. Since the ROE calculation is essentially net income divided by equity, a higher ROE would result for a company that uses debt versus equity to finance its operations. An example:

If you buy a house for $100,000 and borrow $50,000 to buy it, you have 50 percent debt and 50 percent equity in the home. Say the home is worth $110,000 a year later (this really is a hypothetical situation, isn’t it?). Your ROE is 20 percent: the $10,000 gain is divided by $50,000 in equity.

Now let’s say instead that you borrowed $75,000 to buy the home. The ROE would be 40 percent: $10,000 divided by $25,000 in equity. You’ve taken on more debt, but the results look more impressive.

Additionally, interest on debt (as compared to dividends) receives favorable tax treatment as well. The interest is deducted from a company's income before determining the level of taxes owed. On the other hand, dividends are paid out of net income and a company does not receive a tax deduction for the dividends that are paid. A company can enhance its ROE by using debt so long as the cost of the borrowing is less than the company's ROE.

Another way to calculate ROE is to use the DuPont Model. The DuPont Model formula is:

ROE = Net Profit Margin x Total Asset Turnover x Financial Leverage

  • Net Profit Margin = Net Income/Net Sales
  • Total Asset Turnover = Net Sales/Total Assets
  • Financial Leverage = Total Assets/Total Equity

The DuPont formula enables one to see more directly what is driving the increase in ROE.

As an investor analyzes a company and its ROE, it is important to know what is influencing the ratio. A high ROE in and of itself does not necessarily imply a strong management team or ongoing viability of the company.

Source: Checking for Bloated ROE ($)
BetterInvesting Magazine
By: Michael Maiello
January 2009
http://www.betterinvesting.org/Public/Store/Store/Membership/default.htm


Saturday, December 13, 2008

Dow Gold Ratio Suggests NineYear Bear Market

An updated chart of the Dow/Gold ratio indicates the market continues in a 9-year bear market. According to Chart of the Day, "...it currently takes 10.5 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the US stock market has been in a bear market for the entire 21st century."


Thursday, December 11, 2008

Harsco And Valspar Increase Dividend

Both Harsco Corp. (HSC) and Valspar Corp. (VAL) announce increases in each company's quarterly dividend. Both company's are included in S&P's list of firms in the S&P 1500 that have increased their cash dividend payments for at least 10 years.

Valspar:
  • Quarterly dividend increases to 15 cents per share versus 14 cents per share in the same quarter last year.
  • The projected payout ratio is 38% based on estimated 2009 earnings per share of $1.58. The 5-year average payout ratio is approximately 30%.
  • The company maintains a B+ S&P Earnings & Dividend Quality Ranking.
Harsco Corp.:
  • Quarterly dividend increases to 20 cents per share versus 19.5 cents per share in the same quarter last year.
  • The projected payout ratio is 25% based on estimated 2009 earnings per share of $3.11. The 5-year average payout ratio is approximately 30%.The estimated 2009 earnings are down from expected 2008 earnings per share of $3.25.
  • The company maintains an S&P Earnings & Dividend Quality Ranking of A.
(click to enlarge)

Valspar and Harsco dividend analysis table December 2008
Valspar and Harsco stock chart December 2008


Wednesday, December 10, 2008

Stock Buybacks On The Decline

For the third quarter of 2009, stock buybacks for S&P 500 companies declined to $89.71 billion versus $171.95 billion in the third quarter of 2007. Dividends were actually slightly higher coming in at $61.44 billion versus $61.21 billion in the third quarter of 2007.

(click to enlarge)

S&P 500 stock buyback chart as of September 30, 2008Companies appear to be more cautious with their cash as buybacks and dividends decline or remain flat, respectively. In Wal-Mart's (WMT) November conference call (PDF), the company announced they were suspending their buyback program noting:
During the third quarter, we repurchased approximately $1.3 billion of our stock, which represents approximately 21.4 million shares. As we noted during the analyst meeting, we stepped back on share repurchases in early October. We believe it is more prudent to take a pause while the financial markets settle down (emphasis added). Year to date, we have purchased almost 61.5 million shares. Under our current $15 billion share repurchase authorization, we have spent almost $10 billion to repurchase approximately 203.6 million shares.
Howard Silverblatt, Senior index Analyst at Standard and Poor's noted in the S&P press release:
"Starting in the fourth quarter of last year, companies began to retreat from stock buybacks. Year-to-date, Standard & Poor’s data shows that stock buybacks are coming in at $156 billion less than this time last year."

"Cash levels for the third quarter of 2008 were near an all-time high, so it’s not that companies can’t fulfill buyback programs. They are instead choosing to hold onto the cash, unsure of what the near-term may bring."
The below table details the buyback trend by S&P 500 sector going back to the third quarter of 2007.

(click to enlarge)

stock buyback by S&P 500 sector as of September 30, 2008

Data Source:

S&P 500 Stock Buybacks Continue At Lower Levels;
Retreat 48% in Third Quarter (PDF)

Standard & Poor's
By: Howard Silverblatt & David R. Guarino
December 10, 2008
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,3,2,2,1204842279743.html


Sunday, December 07, 2008

A Look At The Consumer

(I published a version of this article on The DIV-Net website on November 30, 2008)

The largest contributor to GDP growth in the U.S. is the consumer. The consumer accounts for nearly 70% of GDP and so goes the consumer so goes the U.S. economy. A reason for investors to keep tabs on consumer economic data is the data can provide a clue as to a potential turnaround in economic growth.

As the below chart notes, U.S. GDP has grown to over $14 trillion. At the same time, consumer debt has grown to over $14 trillion as well. The average level of consumer debt going back to 1953 is only 53%. The issue here is consumer debt has fueled a large part of the economic growth in the U.S. Since early 2007 though, consumer debt has begun to decline as a percentage of GDP.

(click to enlarge)



Consumers certainly need to live more within their means. However, with consumers finding more difficulty accessing the credit markets and continuing to reduce debt, what does this mean for the economy when it comes out of the recession?

Another economic variable investors can track to gain some perspective on the consumer is the Personal Consumption Index (PCE).

(click to enlarge)

Source: New York Times

The PCE measures the average price change for all domestic personal consumption. Updated data on the PCE Index can be found at the St. Louis Federal Reserve Bank economic data site.

So if consumer spending is potentially constrained in the next economic recovery cycle, it will be important for investors to invest in those firms that demonstrate they have the ability to grow earnings in the future. Evaluating the dividend practices of companies is one way to gain insight into a company's prospective earnings potential.


Saturday, December 06, 2008

Price Of Oil Versus Price Of Gasoline

Yesterday, WTI spot crude closed at $40.81 per barrel. By simply looking at pump prices, it is evident that gasoline prices of fallen dramatically along with crude. So how much lower could pump prices decline based on the per barrel price of crude?

(click to enlarge)


The above chart graphs oil prices along with gasoline prices. In January 2002, the per barrel price of crude was around $20 per barrel. At the same time, the average price of a gallon of gasoline was around $1.15 per gallon. Given the high correlation of pump prices to oil prices, it seems possible that near $1.00 per gallon of gasoline is a possibility. This decline in gasoline prices is equivalent to over $300 billion in tax cuts.


Thursday, December 04, 2008

Economic Conditions Not The Same As The Great Depression

There are major difference between the current economic conditions and the government's response versus those that occurred during the Great Depression in 1929-1932. The below table details some of those differences.

(click to enlarge)

Depression versus 2008 economy tableDuring the early 30's depression, the government responded by decreasing the money supply and raising taxes and tariffs. It would be helpful if the incoming administration strongly stated it would not raise taxes and tariffs as were proposed during the presidential election campaign. The below charts show the government has done everything but reduce the money supply.

(click to enlarge)

The current bailout pledges now total over $8 trillion which is over 57% of GDP.

So what does all this mean for the future direction of the stock market? Liz Ann Sonders of Charles Schwab & Co noted in a recent report:
"Confidence will also come into play in the stock market—that ultimate mechanism of sentiment. Typically, stock markets bottom about 60% of the way through recessions. We've had 13 recessions since (and including) the Great Depression, 12 of which had accompanying bear markets or major corrections. Only once (2001–2002) did the market continue to sell off after the economy began to recover.

The fourth quarter of this year is likely to post the steepest decline in GDP during this cycle, with a drop of 5% or more in the cards. The worst single quarter ever for GDP was the fourth quarter of 1958, when it declined by a whopping 10.4%. The stock market had been weak heading into that quarter, but 18 months later it was up 52%—and a steady ascent at that. That's by no means a prediction of what we might look forward to, but is a reminder of the market's tendency to price in the worst case scenario before it unfolds, not after.

So, keep an eye on the stock market. Often when it begins to rally on still-bad news, it's a good sign for a pending economic recovery. However, be careful trying to pick a stock market bottom simply based on past recession-related performance."
There are several articles that contain additional analysis and graphics on the government's bailout.

Source:

Five Reasons Why Today Is Different From The Great Depression (PDF)
Market Analysis, Research and Education
By: Dirk Hofschire, CFA
November 25, 2008
http://eresearch.fidelity.com/eresearch/markets_sectors/economic.jhtml#

Recovery Watch 2009
Charles Schwab & Co.
By: Liz Ann Sonders, Chief Investment Strategist
December 2, 2008
http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/recovery_watch_2009.html


Tuesday, December 02, 2008

Dividend Deterioration

Dividend cuts for companies in the S&P 500 accelerated in November versus the same period last year. Standard & Poor's reports:
  • November cuts aggregate $4.89 billion.
  • The three month total stands at $20.85 billion and year to date the total is $38.0 billion.
  • S&P expects 4th quarter dividend payments to decline by 10%.
(click to enlarge)

dividend actions by month as of November 2008
Outside the S&P 500 Index, S&P indicates November was the worst month for dividends since 1956-the time at which the company began tracking dividend payments. Year to date, 55 companies have cut their dividend versus 11 in the same period last year.

With companies anticipated to experience a unfavorable economic environment in 2009, dividend investors are advised to evaluate a company's cash flow to judge the stability of the company's future dividend payments.

Source:

S&P 500 Market Attributes (PDF)
Standard & Poor's
By: Howard Silverblatt, Senior Index Analyst
November 2008
http://www2.standardandpoors.com/spf/pdf/index/2008_11_SP500.pdf


Monday, December 01, 2008

S&P 500: Dividend Payers Outperform Non-payers

The dividend payers in the S&P 500 Index have outperformed the non-payers on an average return basis in November, year to date and over the last 12-months as detailed in the below table. On a cap weighted basis though, the S&P 500 Index has outperformed both payers and non-payers.

(click to enlarge)

dividend payers versus non payers performance November 2008


Dividend Aristocrats That Have Cut Dividend

(I published a version of this article on The DIV-Net website on November 23, 2008)

As noted in my post from yesterday, the Dividend Aristocrats have performed well on a relative basis versus the S&P 500 Index and the Dow Jones Industrial Average. From a dividend perspective all the dividend cuts for the Aristocrats have been those companies in the financial sector. Detail on the recent dividend actions for the Aristocrats is contained in the below spreadsheet.


Sunday, November 30, 2008

Dividend Aristocrats Outperforming Through November

A preliminary review of the year to date performance of S&P's Dividend Aristocrats shows they are outperforming the major U.S. domestic indexes. Through the first eleven months of 2008, the Aristocrats have generated a capitalization weighted return of -22.4% versus a -39.0% return for the S&P500 Index. The return for the Dow Jones Industrial Average and the NASDAQ composite index is -33.4% and -42.1%, respectively.

The spreadsheet below details performance information for each ofthe Aristocrats. It shouldbe noted the Anheuser-Busch was removed from the S&P 500 Index as of November 18th due to it being acquired by InBev (INBVF).



Saturday, November 29, 2008

High Quality Dividend Stocks Near 52-Week Low

In an environment where the economy is going through a deleveraging process, investing in higher quality firms that rely on lower levels of debt can be beneficial from an operating perspective. Below is a small list of A+ rated companies with market caps greater than $5.0 billion and debt to cap less than 35%.



























































CompanySymbolS&P RankMarket CapDividend YieldDebt/Cap% Above 52-week Low
Sysco CorpSYYA+$13.4B3.94%31.9%13.1%
Johnson & JohnsonJNJA+$161.7B3.16%23.7%12.5%
PepsicoPEPA+$85.3B3.10%31.6%14.0%
General DynamicsGDA+$19.9B2.79%14.0%8.1%
Stryker Corp.SYKA+$15.6B.86%.4%10.0%
DanaherDHRA+$17.2B.22%21.0%13.8%


Friday, November 28, 2008

Bear Market Recoveries: Returns Occur Early In New Cycle

Once a bear market cycle ends, a large portion of the returns in the next bull market occur early in the new bull market cycle.

Schwab Center for Financial Research, with data from Morningstar, Inc. (MORN) reviewed total monthly returns of the S&P 500 Index ($INX) from January 1926–September 2008. Cash is represented by total returns of the 30-day T-bill. The 15 historical bear markets analyzed are defined as periods with cumulative declines greater than 10% and durations of at least six months, and do not include the current market.

As the below table notes, a large portion of the bull market returns historically occur in the first year following the bear market.

(click to enlarge)

bear market recovery table
Given the recent market volatility, it is prudent to review ones overall asset allocation. During this review, one of the hardest temptations to overcome can be the desire to move more investment assets to cash. Certainly if funds are needed near term, cash needs to be set aside. Keep in mind though, large returns tend to occur in short bursts and early in the new bull cycle. In just the last five trading days, the S&P 500 Index is up 19.1%.

Source:

Ready for the Rebound? (PDF)
By:Bryan Olson, CFA
Charles Schwab & Co.
November 17, 2008
http://www.schwab.com/cms/P-727392.35/2008_11_SPC_Investing_Insights_newsletter.pdf?cmsid=P-727392


Thursday, November 27, 2008

Gasoline Declines From Record High

The average price of a gallon of unleaded gasoline has declined over $2.00 during the course of the last 4+ months. As the below chart notes, we are approaching levels seen in September 2001.
  • This decline in gasoline prices represents a savings of over $300 billion in gasoline costs for consumers. This is equivalent to a tax cut of the same amount.
  • U.S. driving mileage is running 89 billion miles per year less now than it was a year ago. The price decline represents only a 1.3% decline in total U.S. oil use.
  • The total decline in U.S. oil use is running roughly 5% according to the EIA. As a result, the difference between the 1.3% and 5% must be a result of less driving by individuals and/or less use by trucking companies.
(click to enlarge)

gasoline price chart as of November 26, 2008Source: Chart of the Day

Source:

Less Driving and Lower Gas Prices are Not the Important Factor
Energy Investment Strategies
By: Jim Kingsdale
November 21, 2008
http://www.energyinvestmentstrategies.com/2008/11/21/less-driving-and-lower-gas-prices-are-not-the-important-factor/


S&P 500 Stocks With Market Cap Less Than $1 Billion

As a follow up to my earlier post today on Liz Claiborne's (LIZ) upcoming removal from the S&P 500 Index on December 1, 2008, following is a list of stocks in the S&P 50 with market caps below $1 Billion. Are these stocks potential candidates to be removed from the Index?




Retail Out Of The S&P 500 Index

Yesterday, Standard & Poor's announced Liz Claiborne (LIZ) will be removed from the S&P 500 Index after the close of trading on December 1, 2008. Replacing Liz Claiborne is Dun & Bradstreet (DNB). Liz Claiborne drops down to the S&P Smallcap 600 Index.

Retail stocks have seen their market capitalization shrink due to an underperforming consumer. Is it possible other retail related stocks are at risk of being removed from the S&P 500 Index?

Following is a screen that details some consumer stocks in the S&P 500Index that have a market capitalization less than $5.0 billion.



Individual Investor Sentiment Improves

The American Association of Individual Investors reported investor bullish sentiment increased as of the period ending November 26, 2008. The bullishness level improved to 31.25% versus last week's level of 24.37%. The bull/bear spread narrowed to -14% versus -33% last week.

(click to enlarge)


Wednesday, November 26, 2008

McCormick & Co. And Becton Dickinson Increase Dividend

Both McCormick & Co. (MKC) and Becton Dickinson (BDX) announced increases in their quarterly dividends today.

McCormick & Co.

McCormick & Co. announced a 9.1% increase in the company's quarterly dividend.
  • The new quarterly dividend increases to 24 cents per share versus 22 cents per share in the same period last year.
  • The projected dividend payout ratio is approximately 41% based on November 2009 estimated earnings per share of $2.36. This payout compares favorably to the 5-year historical payout ratio of 41%.
  • MKC carries an S&P Earnings & Dividend Quality Ranking of A+
Becton Dickinson

Becton Dickinson announced a 15.8% increase in the company's quarterly dividend.
  • The new quarterly dividend increases to 33 cents per share versus 28.5 cents per share in the same period last year.
  • The projected dividend payout ratio is approximately 27% based on September 2009 estimated earnings per share of $4.88. This payout compares favorably to the 5-year historical payout ratio of 26%.
  • BDX carries an S&P Earnings & Dividend Quality Ranking of A and is one of S&P's Dividend Aristocrats.
(click table/chart for larger image)

McCormick & Co. and Becton Dickinson dividend analysis table November 2008
McCormick & Co. and Becton Dickinson stock charts November 2008


Tuesday, November 25, 2008

Investing Carnival For November 25, 2008: Ready For A Bounce?

Welcome to the November 25, 2008 edition of the investing carnival. There were a large number of submissions this week and I had to leave a few out in order to keep the carnival at a reasonable length. The articles were submitted over the course of last week. The tone of many of these articles seem to be predictive of the market bounce experienced the past two trading days.

Dividend Investing

Top dividend stocks with reasonable payout ratios (MagicDiligence - Optimizing Joel Greenblatts Value Stock Strategy)


Stock Analysis

A potentially huge reward with an asset play in Value Vision Media Inc (VVTV). (Old School Value)

An in depth analysis of Sysco Corp (SYY). (Dividends 4 Life)

Even Berkshire-Hathaway's (BRK/A) stock is suffering in this market. (Intelligent Speculator)

Is Baidu.com's recent decline a buying opportunity? (Intelligent Speculator)

Screening the Forbes Best Small Companies list for investment opportunities. (Old School Value)

Can Citigroup regain its footing? (Smart Money).

Smith & Wesson & Ruger-are they shooting blanks? (Tough Money Love » Hard Truth and Tough Love for Money Problems and Personal Finance)

The losers in the Volkswagen and Porsche merger battle. (My Simple Trading System)


Investing

A review of the book Investing for Dummies. Maybe a good read for all investors? (Living Almost Large)

Insight into performing fundamental stock research. (Finance-Information)

Financial issues impacting individuals beyond just the stock market. (KCLau's Money Tips)

A primer on the Price to Earnings ratio or P/E. (Investing School)

10 better investments than the market. (Learn The Stock Market And How to Trade)

More bold predictions from Jim Rogers. (Subprime Blogger)

Does one quarter of negative GDP growth equal a recession? (The Political and Financial Markets Commentator)

Inflation protection strategies for ones portfolio. (FIRE Finance)

Tips on staying afloat in this market. (Beating The Stock Market)

Reduce fund expenses with Vanguard Admiral shares. (Free Money Finance)

Investments for a depression like economy. (Zignals blog)

Advice on getting your investments back on track. (The Iconoclast Investor)

Investing through TreasuryDirect. (Wealth Junkies)

Is your 401(k) account safe. (The Digerati Life)

A review of the best asset allocation on a historical basis. (Ripe Trade)

When analyzing a company, read the footnotes in the financial statement. (Value Investing and Entrepreneurship by Qovax)

The importance of choosing the right asset allocation. (The Sun’s Financial Diary)


Value Investing

Obama's energy plan may benefit these stocks. (The Green Investing Blog)


Alternative Investments

Don't fall for stock option "get rich quick" schemes. (Michael James on Money)


Wealth Accumulation

10 steps to building ones wealth. (Money Blue Book)

Tips on saving money by reducing household expenses. (Money Blog)

If one consolidates their debt, they need to cut their expenses too. (Finance Tips 101)


That concludes this edition. Submit your blog article to the next edition of investing carnival using the carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

* image at beginning of post courtesy of CNN Money


Monday, November 24, 2008

Donaldson Co. Increases Dividend 4.5%

Last week Donaldson Co. (DCI) announced a 4.5% increase in the company's December quarterly dividend to 11.5 cents per share. The new dividend compares to 11 cents per share paid in the same quarter last year. The projected payout ratio, based on estimated earnings of $2.27 for the year ending July 2009, is in line with the 5-year historical payout ratio of 20%. DCI is one of the companies in the S&P 1500 that has increased its dividend for at least 10-years. The company carries an S&P Earnings & Dividend Quality Ranking of A+.

(click table/chart for larger image)

Donaldson dividend analysis table November 2008
Donaldson stock chart November 2008


Sunday, November 23, 2008

Don't Overreach For Dividend Yield

(I originally posted this article on The DIV-Net website on November 16, 2008)

The recent decline in equity prices and near record low interest rates, have enticed stock investors to focus on higher yielding dividend paying stocks. One must keep in mind though, a stock's dividend yield is not the same as comparing yields on certificates of deposit.

"After all, if one invests primarily for current income, it might seem logical that stocks with the highest yields would be best. The popularity of the “Dogs of the Dow” approach would seem to support that assumption. However, the Dow Dogs approach is designed to beat major averages through price appreciation; the high yield under that approach is merely an indicator of possible undervaluation."
The stocks that trade at higher yields tend to be the ones that are at the highest risk of a dividend cut. Ideally, stocks with lower yields and the ones that grow the dividend on a regular basis tend to be the type of stock that outperforms the market over the long run.

This year's performance of the high dividend yield approach of the Dogs of the Dow strategy offers some evidence that a high yield approach does not always mean higher total return. The year to date return as of November 21, 2008 for the Dow Dogs equals -50.0% versus the return on the Dow Jones Index of -39.3%.

The dividend-discount model is based on the assumption that dividends ultimately drive share price. If a firm doubles its dividend over a certain time, its stock price should also double if interest rates do not change.

Thus, the percentage rate of dividend growth drives and equals the expected rate of increase in share price. From that equivalence, we can derive this formula for expected percentage total return:

Expected Total Return =
Expected Dividend Growth Rate +
Current Dividend Yield

One event that is occurring with companies and the overall economy is the process of deleveraging. In this environment investors should likely look to invest in those firms that have lower debt levels. The risk of only investing in low debt level firms is when the market/economy improves, leverage can actually enhance a company's earnings, resulting in better performance in a somewhat leveraged company. For those interested, this leverage factor enhances ROE through the equity multiplier as detailed in the Dupont Model.

A few financial measures useful for dividend oriented investors to review are:
  • Common shareholder’s equity as a percentage of total capital
  • Short-term debt as a percentage of total debt (or of total capital)
  • Dividend payout ratio
  • Dividend growth rate
  • Frequency of dividend increases
  • Price-to-book-value ratio
There is no perfect model to use when evaluating dividend paying firms. However, watching the trend in the above factors, like payout ratio, frequency of dividend increase, etc., can provide clues into when a company might be anticipating earnings weakness in the future. Don't simply get trapped buying the highest yielding stocks, then suffer through a dividend cut. Company's that cut their dividend tend to see a contraction in the company's stock price.

Source:

Equity Income Investing: Beware of Yield Overreaching ($)
AAII Journal
By: Donald Cassidy
May 1999
http://www.aaii.com/includes/DisplayArticle.cfm?Article_Id=822


Saturday, November 22, 2008

Sysco Increases Dividend 9%

On Wednesday Sysco (SYY) announced it will increase its first quarter 2009 quarterly dividend by 9.09%. The new quarterly dividend increase to 25 cents per share versus 23 cents per share in the same quarter last year. A detailed analysis of Sysco can be found at the Dividends4Life website.

(click chart for larger image)


Friday, November 21, 2008

Nike's Dividend Sprints Higher

Nike (NKE) announced the company's January 2009 dividend is increasing 8.7%. The new quarterly dividend of 25 cents per share is 2 cents higher than the 23 cents per share paid in the same period last year. The projected dividend payout ratio will equal 25% based on May 2009 year end earnings of $3.99. The 5-year historical average payout ratio equals 19%. Nike carries an A+ S&P Earnings and Dividend Quality Ranking.

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Nike dividend analysis table November 2009
Nike stock chart November 2009


Historical Stock Market Corrections

The Chart of the Day detailed prior stock market corrections going back to 1900 for the Dow Jones Industrial Average. Corrections are defined as those that decline more than 15%. As the below chart notes, this correction is the fourth worst correction since 1900; however the length or duration of the correction is below the average of prior corrections.

  • Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years.
  • Of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.


Thursday, November 20, 2008

Big Drop In Investor Sentiment

Just a quick note regarding the American Association of Individual Investors' sentiment report released this morning. Individual investor bullish sentiment feel to 24.37% versus last week's reading of 38.33%. The bull/bear spread came in at -32.77% compared to last week's level of -4.17%. Along with my post on the investor sentiment cycle yesterday and this data point, maybe this serves as some confirmation that we are in the discouragement phase of the sentiment cycle.


Wednesday, November 19, 2008

Where Are We In The Investor Sentiment Cycle?

It is often said that the market is driven by fear and greed. These emotional influences tend to create the peaks and valleys that are all to typical in the stock market cycle. At the end of the day though, fundamental stock and economic factors will determine the long run performance of the market. However, in these stress periods, it is important to try and determine where the investor is emotionally in terms of market sentiment.

In a recent comment by Charles Kirk of The Kirk Report, he felt the market has entered the discouragement phase. As the below chart notes, the discouragement phase comes after the capitulation phase and begins the market bottoming process.

Investor Sentiment Cycle ChartSource: Invivo Analytics

The Invivo Analytics site contains a full discussion of The Investor Sentiment Cycle.

As the below chart of the weekly performance of the S&P 500 Index notes, most of this years loss has occurred in the last eight weeks.

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S&P 500 Index chart November 19, 2008
Could this eight week decline of nearly 35% be an indication the market has gone through the panic phase? If so, maybe the market goes through a bottoming process (discouragement phase) over the next several weeks. It would certainly be nice to see this play out and have the market start climbing that "wall of worry".


Monday, November 17, 2008

John Hussman's View Of The Market

John Hussman's weekly commentary, he notes the market is at a point where he can "begin" to take on some equity risk. He notes though:
"That's not to say that I believe stocks have “hit their lows.” We always have to allow for the market to move significantly and unexpectedly, and there is plausible downside risk from here. Our activity as investors is not to try to identify tops and bottoms – it is to constantly align our exposure to risk in proportion to the return that we can expect from that risk, given prevailing evidence."
He still has the equity in the company's Strategic Growth Fund (HSGFX) hedged 70-80%.

The commentary, The Stock Market is Not in "Uncharted Territory" begins:
One of the fallacies about the recent financial turbulence is that the markets are in “uncharted territory” and that there are no historical precedents for the volatility, panic, or economic uncertainty that we've observed. To make statements like this is to admit that one has not examined historical evidence prior to the 1990's. The fact is that we've observed similar panics throughout market history. This decline has been deeper and more rapid than most, but that is largely a reflection of the rich valuation and overbought condition that characterized the market in 2007 (see the July 16, 2007 comment A Who's Who of Awful Times to Invest).
The entire commentary is a worthwhile read.

Source:

The Stock Market is Not in "Uncharted Territory"
Hussman Funds
By: John P. Hussman, Ph.D.
November 17, 2008
http://www.hussmanfunds.com/wmc/wmc081117.htm


Lancaster Colony Increases Dividend

Today, Lancaster Colony (LANC) announced the company's December quarterly dividend is increasing 1.8% to 28.5 cents per share. This is a half cent increase over the 28 cent quarterly dividend paid in the same quarter last year. The estimated payout ratio equals 56% based on June 2009 estimated earnings of $2.03. The 5-year average payout ratio is approximately 50%. and the company has an S&P Earnings & Dividend Quality Ranking of B.

(click for larger image)

Lancaster Colony dividend analysis table Noember 17, 2008
Lancaster Colony stock chart November 17, 2008


Sunday, November 16, 2008

Spam: The New Economic Indicator

Hormel Spam ProductThe New York Times recently reported that Hormel Foods Corporation (HRL) plant that produces Spam has been operating at a furious pace to keep up with the demand for its inexpensive Spam products. Workers at the plant have been told to expect the pace to continue and will only have Thanksgiving Day and Christmas Day off in the coming months.

Through war and recession, Americans have turned to the glistening canned product from Hormel as a way to save money while still putting something that resembles meat on the table. Now, in a sign of the times, it is happening again, and Hormel is cranking out as much Spam as its workers can produce.
When the demand for Spam falls, maybe this will be a sign of better economic times ahead.

Source:

Spam Turns Serious and Hormel Turns Out More

The New York Times
By: Andrew Martin
November 14, 2008
http://www.nytimes.com/2008/11/15/business/15spam.html?_r=1&partner=rss&emc=rss&oref=slogin


Saturday, November 15, 2008

BetterInvesting's Most Active Stocks: November 15, 2008

BetterInvesting allows its members to indicate which stocks are attracting interest among club members. For the period ending November 15, 2008, 183 transactions were reported by members as attracting the most interest. The small sample of investors indicates Walgreen (WAG) is being sold rather than accumulated.

(click for larger image)

Stocks mentioned above:

General Electric (GE)
Walgreen (WAG)
Johnson & Johnson (JNJ)
Pepsico (PEP)
Cognizant Technolgy Solutions (CTSH)
Pfizer (PFE)
Fastenal (FAST)
Caterpillar (CAT)
BP PLC (BP)
Intel (INTC)


Friday, November 14, 2008

China Slowdown: A Drag On Global Growth

A large player in the global/emerging growth story has been China's economic growth. Just as China was instrumental in the growth of the emerging markets, the countries recent slowdown is impacting global economic growth as well.

(click chart for larger image)


The China government may report economic data in a more favorable light than what is actually occurring in the country. Consequently, growth could be much slower than reported. On Monday, China did announce a $586 billion economic stimulus package. This is an indication of how slow the GDP growth is in China. A few recent posts touch on the real impact China's slowdown is having on factories and unemployment.
One index to watch that might provide a clue to a pickup in global growth is the Baltic Dry Index. As the below chart notes shipping prices have declined significantly over the last several months. This is an indication that demand has fallen for overseas shipping vessels that often transport important commodities like iron ore and coal. More information on the Baltic Dry Index can be found at the below link.

Baltic Dry Index chart Nov


Thursday, November 13, 2008

When Does The Individual Investor Capitulate?

Interestingly, the individual investor sentiment as reported by the American Association of Individual Investors remains at levels that would suggest the market could correct further. This is only a technical indicator; however, the current bullishness reading of 38.33% remains above levels seen in other bear market bottoms--24.5% in 2002 and 16.5% in 2005. The current reading is down from last week's level of 44.83%. The bull/bear spread deteriorated to -4% versus last week's reading of 12%.

(click graph for larger image)


Wednesday, November 12, 2008

Lack Of Confidence Is A Major Issue Impacting The Market

Over the course of the last month and a half I have written a few posts citing the lack of confidence as a key element in the market's current weakness. To be sure, there are fundamental factors that need to be addressed to get the economy on firmer footing as well. Some of those factors:
  • reduction in consumer and government debt levels
  • unwinding of derivatives exposure
  • stopping the bailout of every company
One major issue that is pulling down confidence is the overhang of the potential new tax policies that will be coming out of Washington under the new Obama administration. Raising taxes in an environment of economic weakness historically has not proved a positive for an economy that is in recession.
  • Obama's desire to uncap the payroll tax has very negative implications for businesses and individuals.
  • Eliminating the deductibility of 401(k) contributions reduces the incentive to save. It is saving, and not spending, that more individuals need to make more of a habit.
  • Increasing benefit costs related to health care provided by employers. This policy does not promote hiring.
In times of economic weakness, raising taxes and instituting policies that discourage employers from hiring will not stimulate economic growth. President-Elect Obama and his advisers would be wise to make a statement that they will not raise taxes in any form on individuals and business during economic times like we are in currently.

Related Posts:

Washington Needs To Trim The Fat

Income Tax Uncertainty Weighing On Market

Updated 11/15/2008:

Wall Street Journal article, Targeting Your 401(k)


Tuesday, November 11, 2008

S&P 500 Index: More Changes

Standard & Poor's has been busy recently with changes to the composition of the S&P 500 Index. S&P noted in the case of General Growth Properties (GGP) that the company's market cap had declined to $128 millon making it the smallest company by market cap in the S&P 500 Index. The changes occur after the close of trading on the date noted in the table. Below are the upcoming changes to the Index.

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S&P 500 Index Changes November 12 & 14, 2008
S&P 500 Index Changes November 13, 2008

Companies mentioned:

General Growth Properties (GGP)
Cephalon (CEPH)
Wynn Resorts (WYNN)
Dentsply (XRAY)
Ashland (ASH)
Hercules (HPC)


Sunday, November 09, 2008

One Factor On My Mind With This Market

I am a bit of a contrarian when it comes to buying stocks. There are many factors I use when evaluating stock investments and a large number of them indicate some stocks are trading at compelling valuations. However, one factor that is on my mind is the fact many investment newsletters and magazine investment articles indicate investors should be buying stocks at this time. Historically, market bottoms do not occur when investment pundits are bullish.

I took a look at an article in the April 17, 2000 BusinessWeek titled, Time To Keep A Cool Head. In the article it was noted:
"The most dangerous thing an investor can do is overreact in this kind of market," says Rick Adkins, a certified financial planner with Arkansas Financial Group. Instead of panic selling when share prices are plunging, wait a few days until you can make a rational decision to sell, not an emotional one.

Reasons not to sell are often forgotten at times of market turmoil. For one, many institutional investors are "looking to tap the irrational behavior of the individual investor," says Adkins. That means savvy money managers may be waiting to gobble up the shares you sold at bargain prices. That seems to be what happened earlier this week, when Janus Capital Corp. and others began buying stocks voraciously around midday Tuesday.

...In the last decade or so, the stock market has usually rebounded within days of a big sell-off. You can't count on a fast snap-back every time, of course. But if you start dumping shares, odds are you'll buy them back later at a higher price. (emphasis added) "If you thought that the stock you bought was good value yesterday, it's likely to be a good value today unless something fundamental has changed in the company's prospects," says Harold Evensky, a partner with Evensky, Brown & Katz, a financial planning firm.
At the time the above article was written, the S&P 500 Index was off a little over 8% from its high. Subsequent to the article, the market declined an additional 30+%.

What are some of the investment advisers saying today?

T. Rowe Price. Market Turmoil: T. Rowe Price's Perspective (PDF)
“There are very attractive opportunities now,” says Bill Stromberg, director of global equities and of global equity research. “Companies in the heartland of industrial America, many technology companies, and many health care companies are thriving in this environment and reporting pretty good earnings. We’re trying to take advantage of widespread selling to pick them up cheap.
Charles Schwab & Co. 6 Tips for 401(k) Investing in Today's Volatile Market
  • I agree with this article's advice on rebalancing ones investment portfolio back towards ones target asset allocation. I think a key question is where are we in the investment cycle as noted in the below chart.
(click chart for larger image)

market cycle graph
BusinessWeek, September 18, 2008. Buy, Sell, or Stay Put? Advice From The Pros.
Stephen Wetzel, a financial planner and adjunct professor of financial planning at New York University, is far less circumspect. "I'm buying like a crazy man: value stocks, financial services, value funds, muni bonds, some international small cap. You don't get opportunities like this very often."
Certainly we have seen a substantial pullback in the global markets over the course of the last 12-months. And, having broached this topic, maybe we are at the bottom. I would be more encouraged if more bear market articles were being written though. On the other hand, selectively building positions in high quality companies that have seen their valuations decline to attractive levels, is likely an acceptable strategy at this point in the market cycle.