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Markets And Their 200 Day Moving Average

One thing is certain and that is the markets have advanced significantly this year. The adage that a rising tide lifts all boats seems appropriate as it relates to many of the market indices this year. As a result and in hindsight, an index strategy would have served investors well in 2009. The Dow Jones Industrial Average (^DJI) has gained over 20%, the S&P 500 (^GSPX)over 24% and the Nasdaq Composite (^IXIC) over 45%. When looking at the market advance since the March 9th lows, the gains are even more pronounced; the DJIA is up 61%, the S&P 500 is up 67% and the Nasdaq is up 79%. This strong advance has pushed the index levels far above their 200 day moving averages.

Source: Charles Schwab and Argus Research
For investors looking at investment opportunities going into 2010, this likely means they will need to focus more specifically on individual stocks versus indexing. Even though the broader indexes are trading far above their moving averages, some individual stocks have not participated in the rally. For example, the below chart shows the performance of Procter & Gamble (PG) versus the S&P 500 Index (^GSPX). As the above chart shows, P&G has generated a flat return on a price only basis versus a return in excess of 20% for the S&P 500 Index. As investors then, for 2010, look for opportunities in higher quality stocks that have not participated in this mostly lower quality stock rally of 2009.
Disclosure: Long Procter & Gamble

Posted by David Templeton, CFA at 3:46 PM 1 comments Labels: General Market


Unsustainable Growth In Government Debt

The growth of U.S. total government debt is on an unsustainable trajectory. At some point in the very near term, the U.S. populous needs to voice their concern about this growth to their elected representatives. This debt growth does not include the future cost of health care legislation or cap and trade legislation. In my opinion we are mortgaging our children's and grandchildren's futures.
Data Source: US Government Spending

Posted by David Templeton, CFA at 7:48 PM 2 comments Labels: Economy


Book Review: Why Are We So Clueless About The Stock Market? Although I normally do not write book reviews, I agreed to read and review Mariusz Skonieczny's book, Why Are We So Clueless About The Stock Market. Since I would have a few days off around the holidays and the new year, I suppose he made the ask to review the book at an opportune time.

I believe this book is best suited for new, or somewhat new, investors in the stock market. Mariusz does a nice job leading his readers from the beginning or inception of a stock, a company's capital structure and through the time one should consider selling a stock. The book includes a chapter on the economy including a brief discussion on the economic cycle. Mariusz's investment style seems more of a contrarian or value one. He rhetorically ask a couple of questions,
Both are important questions investors need to answer as they buy and evaluate stocks. He does provide answers to the questions in his book.

Buying stocks is not too different from buying real estate. That is, one makes money in real estate not when they sell it, but when they buy it. In other words, what one makes is based on how much they paid for it. Real estate investors have been finding that out over the last year to year and a half. So I digressed.

The book covers topics on valuing stocks based on the dividend discount model. Additionally, he shows how company leverage can add value to a company's earnings. He shows how the value that is created (or not created) is based on the financing cost and the company's return on equity or ROE. In the chapter on "Basic Capital Structure" he provides investors with a way to evaluate a company's earnings growth and whether reinvested earnings are being reinvested "efficiently" as he states.

And finally, beyond the financial numbers, he discusses what comprises a good business. Does the company have a "wide moat" around its products and market. If so, this type of company tends to have higher ROEs and thus potentially higher sustainable returns.

At the end of the book Mariusz provides several case studies or real examples that utilize the topics he covers in his book in order to evaluate specific companies.

In conclusion, I found the book an easy read that was not mired in technical details. Having said this, Mariusz provides his readers with spreadsheets useful in valuing a company's stock. Additionally, I do believe this book will provide its readers with a good starting foundation upon which to build their investment knowledge.

Posted by David Templeton, CFA at 11:19 PM 0 comments 

Top Economist Ed Hyman's And Francois Trahan's 2010 Forecast

Ed Hyman of ISI Group has been voted Wall Street's top economist for thirty straight years. In an interview with Consuelo Mack on WealthTrack, Ed and Francois provide their firm's view on both the global and U.S. economy in 2010 and 2011. A couple of takeaways from the interview: Labels: Economy , General Market


If Investing Based On Yield, Know What Makes Up The Yield

As a follow up to my post yesterday, Jim Cramer Does Not Disclose Complete Picture On Blackrock's Dividend Achievers Trust Yield, investors purchasing an investment for its yield or income payout need to know what comprises that yield.

As noted in yesterday's post, Blackrock's Dividend Achievers Trust (BDV) distributes a payout every quarter. This quarterly payout includes more than the income from the underlying investments. This type of payment is often referred to as a managed distribution. Many online sources include the entire distributions amount in the yield calculation. Some of the distribution can be a return of an investor's capital.

Investors can get a list of closed end funds that make payouts that are in excess of the income generated by the underlying investments at the Closed End Fund Association's (CEFA) website. The CEFA lists some forty CE funds that have manged distributions. For reference, these distributions are know as Section 19 payments.

Several years ago, the Gabelli Funds prepared a paper on the pros and cons of managed distributions. The paper can be read below.
Closed End Funds Managed Distribution Policy: What Is It? Labels: Dividend Return , Investments


I was driving home tonight listening to Jim Cramer's Mad Money on XM Radio when he was pounding the table on dividend paying investments. As readers of my blog know by now, I am certainly a strong proponent of dividend growth stocks. One of the recommended investments Jim cited for a worthwhile investment because of its 7.6% yield was Blackrock's Dividend Achievers Trust (BDV). What Jim unfortunately did not mention was this yield was not all income yield.

Some investments distribute both principal (an investor's capital) and income to its investor on a regular basis. For Blackrock's Dividend Achievers Trust, the "income yield" is only 3.46% and the "distribution yield" is 7.67% as of November 30, 2009. The difference between the two yields is the return of an investor's investment in the fund so should it really be counted as income? Personally, I don't think so. Below is a table taken from Blackrock's Section 19 Notice for the Dividend Achievers Fund. The SEC has been on top of these so called Section 19 distributions and the misleading reporting of yields by some investment firms. (It should be noted Blackrock does a pretty decent job of providing a link to the Section 19 Notice on its website). In a November 2009 speech by Andrew J. Donohue, a Director of the SEC, to the Independent Directors Council Investment Company Directors Conference, it was noted:

"The last challenge that I would like to discuss with you today involves disclosures associated with a fund's yield or its managed distribution plan. Closed-end funds sometimes tout a high, level dividend or a managed distribution plan to investors. Investors may incorrectly believe that the dividend rate is "yield," i.e., earned income or gain. In fact, the dividend rate often includes a return of capital (emphasis added). As directors, you must make sure that the fund's disclosures explain what the distribution yield represents and what it does not represent and that it is not confused with the fund's actual performance. In particular, if a fund with a managed distribution plan does not earn enough income to sustain a distribution, it must be clear that distributions to investors may be paid from a return of capital which has the effect of depleting the fund's assets. Moreover, in exercising your oversight, you should carefully consider whether managed distribution plans continue to be in the best interests of the fund and its shareholders.

Let me highlight one additional managed distribution plan disclosure issue for your consideration. As you know, funds are required under Rule 19a-1 to provide notice when distributions include a return of capital. In reviewing these notices, my staff has found inconsistencies between 19a-1 notices and other information posted on a fund's website. In particular, the 19a-1 notices show the return of capital while other charts on a fund's website show distributions consisting of all income. Funds have indicated to us that the reason for any differences is because the disclosures are prepared under different bases with 19a-1 notices disclosing book values and other disclosures based on tax considerations. However, fund websites do not always include an explanation discussing why the information is inconsistent in different online sections. Accordingly, I suggest that you review your fund's disclosures to make sure that the information is disclosed consistently and, if not, that the reason or reasons for any inconsistencies are adequately explained to investors."

For investors, be sure to review an investment and ascertain what comprises its yield. In addition to these Section 19 distributions, some funds use leverage in an attempt to increase a fund's yield. This increased leverage might not be so good when interest rates begin to rise and cut into the actual "income yield" for a particular fund. So don't chase an investment based solely on its yield.

Posted by David Templeton, CFA at 9:23 PM 1 comments 

BetterInvestings Most Active As Of December 20, 2009

Below is a list of companies attracting the most interest from BetterInvesting's members based on their recent buy and sell decisions. The list is based on a small, informal sampling of 145 transactions for the trailing 4-week period ending December 20, 2009.
Note: Figures in parentheses provide the previous ranking four weeks ago. (*) denotes unranked in previous period. This listing is presented as a source of stock study ideas in the current market. No investment recommendation is intended.

Posted by David Templeton, CFA at 1:17 PM 0 comments Labels: Investments


Pimco Increasing Cash Position

Pimco's Bill Gross has increased the cash level in the firm's flagship total return fund (PTTRX) to 7%. This compares to a negative 7% cash position in October. This higher cash level would indicate the firm expects interest rates to rise near term. Does this mean Pimco believes a stronger economy is ahead of us or is it simply the fact the Fed is beginning to step away from some of its fixed income market support programs? Time will tell.

Pimco’s Gross Boosts Cash to Most Since Lehman Failed
By: Wes Goodman and Garfield Reynolds
December 17, 2009 
Bullish Investor Sentiment Stuck In A Range

Today's release of the individual investor sentiment survey shows investor bullish sentiment stuck at the low 40% level over the past several weeks. For the period ending November 17, 2009, individual investor bullish sentiment was reported at 42.11%. For the last four weeks, bullish investor sentiment has had a 41 or 42 handle on the percentage.

As this indicator is a contrarian one, bullishness readings in the high 40% area would be a reason for equity investor to become more cautious based on this indicator if viewed in a vacuum. Interestingly, this week's bearishness level fell to 28.42% versus the prior week's bearishness level of 35.37%. Consequently, the bull/bear spread widened to +14% versus last week's spread of +7%.

Source: American Association of Individual Investors

Posted by David Templeton, CFA at 8:59 PM 0 comments Labels: Sentiment


A List of Dividend Growers In The S&P 1500 Index

Standard & Poor's recently assembled a list of dividend growth stocks screened from the S&P 1500 Index (SPSUPX). S&P based the below list on those companies that have paid increasing annual cash dividends for the past ten years and have an actual 2008 and estimated 2009 and 2010 dividend coverage ratio of at least 2.0 (based on street estimates divided by the current 12 month indicated dividend rate).

This list includes large, mid and small capitalization dividend growers. S&P appropriately notes that the below list of stocks are not necessarily buy candidates, but a starting point for additional research.


Posted by David Templeton, CFA at 11:06 PM 0 comments Labels: Dividend Analysis


Stock Buybacks On The Rise

In a sign that corporate America's prospects are taking a turn for the better, on a sequential basis stock buybacks increased 44% in the third quarter of 2009 for companies in the S&P 500 Index. On an absolute dollar basis buybacks totaled $34.8 billion versus $24.2 billion in the second quarter.

This increased buyback activity coincides with an improvement in "as reported" earnings. The low point in earnings came in the fourth quarter last year when earnings, or lack there of, were reported at -$202.11 billion. In the third quarter of 2009 the final tally for as reported earnings are projected to total $131.96 billion, the third straight quarterly improvement.

The negative aspect of the increased buyback activity and no corresponding increase in dividends may be reflect of the uncertain view companies have about prospects in 2010. If companies had a favorable view of the business climate in 2010, dividends may have been increased as well. Increasing dividends is a longer term commitment on a companies cash while buybacks can be suspended easily at any time. Given the uncertain impact that all the new policies coming out of Washington may have on businesses, it is understandable that businesses are cautious about the economy next year.

S&P 500 Buybacks Rebound 44%; Remain 80% off Their High (pdf)
Standard & Poor's
By: David Guarino and Howard Silverblatt 

Dividend Aristocrats For 2010

Below is the list of companies that will comprise Standard & Poor's Dividend Aristocrats after the close of business on December 18th. The changes that will be made to the list were detailed in an earlier post, Big Changes For Dividend Aristocrats Index in 2010.


Source: Standard & Poor's (xls)

Posted by David Templeton, CFA at 8:27 PM 0 comments 

Government Spending Is Out of Control

How does this spending compare to spending in past crises?

Posted by David Templeton, CFA at 6:08 PM 1 comments 
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:The three indicators needing to show more improvement are:
Jobless Claims Source: Federal Reserve Bank of St. Louis
Durable Goods Orders 
Existing Home Sales (Chart Courtesy of Calculated Risk)
Data Source: National Association of Realtors
Consumer Confidence Data Source: Consumer Confidence Board
Interest Rate Spread 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.

Posted by David Templeton, CFA at 4:50 PM 1 comments 

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:
The following ten companies will be removed from the Aristocrats list:
The annual rebalancing will take effect at the close of business on December 18, 2009.
Source: Standard & Poor's

Posted by David Templeton, CFA at 5:27 PM 1 comments Labels: Dividend Analysis , Dividend Return


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+. Posted by David Templeton, CFA at 7:39 PM 0 comments 

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:
 (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. 
Posted by David Templeton, CFA at 8:29 PM 0 comments Labels: Dividend Return


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. Posted by David Templeton, CFA at 4:11 PM 0 comments Labels: General Market , Investments


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

Posted by David Templeton, CFA at 10:59 PM 1 comments 

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.

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

Posted by David Templeton, CFA at 5:06 PM 2 comments Labels: Economy , General Market , International

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. Labels: General Market , International


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.

Posted by David Templeton, CFA at 6:45 PM 0 comments Labels: Technicals


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.

(Disclosure: Long SYY)

Posted by David Templeton, CFA at 10:26 PM 0 comments 
Intel and Lancaster Colony Increase Dividends

Catching up after some dividend increases this week.


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.
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.

(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.
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.

Still High Cash Levels May Provide Further Support For Stocks (PDF)
Fidelity's Market Analysis, Research and Education
October 22, 2009

Posted by David Templeton, CFA at 10:32 PM 0 comments Labels: General Market , Technicals


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.'" Posted by David Templeton, CFA at 1:44 PM 1 comments 

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. 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.
 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.

The Market Recovery and Outlook for Small-Cap Stocks (PDF)
T.Rowe Price Report
By: Jack LaPorte
Fall 2009

Posted by David Templeton, CFA at 11:59 PM 1 comments 
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%. 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.

Posted by David Templeton, CFA at 10:15 PM 0 comments 

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.

Posted by David Templeton, CFA at 7:44 PM 0 comments 

Dividend Payers Outperform Non Payers In October 

Posted by David Templeton, CFA at 9:26 PM 0 comments 

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.

Posted by David Templeton, CFA at 11:52 PM 0 comments 
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:
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.

Posted by David Templeton, CFA at 11:44 AM 0 comments Labels: Investments , Valuation

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% 

Bullish Sentiment At Lowest Level Since July 16th 

Supervalu Cuts Dividend

Catching up after some travel. 

Fund Flows During And After The Crisis Follow @HORANCapitalAdv Horan's Other Blogs