Yesterday could have been worse; but it still wasn't good.
Steve Cook on Disciplined Investing


Have You Seen This?


  • Make money by accessing all our Portfolios, the supporting research and Price Disciplines using our paid subscription blog, Strategic Stock Invetments. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P by 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

Have You Seen This?

The Market

    Despite a late day rally off a very oversold condition, both indices (DJIA 9732, S&P 1027) still remain below the 9830, 1042 support level.  During the intraday plunge both Averages touched the 9645, 1009 support level which I have mentioned as a prime candidate for support.  The problem is once 9830, 1042 is broken, under our technical discipline, the trend resets from a trading range to down; meaning that we probably shouldn’t be looking at 9645, 1009 as a bottom or major support. 

    Volume picked up yesterday; and breadth improved a bit though the flow of funds indicator continued to fall (more sellers than buyers). Oddly, the VIX was down  but stopped right at its up trend line, leaving it in negative territory.  Our internal indicator still presents cognitive dissonance: of 157 stocks in our Universes, 88 remain above their comparable 9830, 1042 levels, 58 trade below and 11 are too close to call.

    Bottom line: because the Universe has been waiting for the nonfarm payroll number that was released this morning, the Market could potentially be quite volatile.  So I am going to be a chicken and wait till the close to call the trading range broken.  By that time our time and distance discipline will be more than satisfied.  If that occurs, I do have a Sell list; though if our internal indicator continues its contrary performance, I will not be as aggressive a seller as I might otherwise be.  In addition, the new down trend would be defined as of the close last night by 9268-10459, 988-1113.

    Percentage of stocks above their 50 day moving average (chart):

    Economics both domestic and international were the major focus of investors yesterday. 

(1)    auto sales, pending home sales and the ISM manufacturing index numbers were all disappointing, offset by a better than anticipated stat on construction spending [see below].  In addition, congress extended the home buyers tax credit that expired June 30 through September 30.  Hopefully that will help summer housing sales.

(2)    China and Europe reported disappointing manufacturing indices, while Spain raised funds in a bond offering that was more oversubscribed than expected.

So the case for the ‘double dip’ got stronger as the last of the May economic data told us what we already knew--May was a lousy month economically speaking; and new June stats suggest that it too grew at a slower rate than earlier this year; and the Chinese and European manufacturing numbers kept concerns of a global slow down front and center (although I have to keep emphasizing the Chinese ‘slow down’ is a lesser rate of above average growth.  For example, Goldman just reduced 2010 Chinese GDP growth estimates from +11% to +10%--hardly a reason to get beared up). 

With all that, it seems a miracle that stocks didn’t close closer to the lows of the day.  What seemed to be giving investors some optimism was (1) the positive reception of the Spanish bond offering, (2) the lower level of refunding needed after that EU $500 billion credit facility that matured today, and (3) rising euro which was being attributed to the progress of the EU currency/austerity plans.

Bottom line:  the US economic data for May pretty conclusively pointed to a slow down.  However, growth is never a smooth mathematic progression and there are plenty of examples of respites during periods of sustained economic advances.  Nevertheless, as I have said several times, another month of lousing data and we have to start raising the probability of a significant slow down.  I am still nowhere near the ‘double dip’ camp; but a downward revision is still just that--a downward revision.  That said, the longer every investor and talking head in the galaxy yaks about a ‘double dip’ or a slow down, the more likely that it is in the price of stocks.  At the moment, my worse case is that the economy limps into late 2010, where upon the elections will change the economic/political/regulatory landscape.

Whether or not that is the scenario depends on how hard and long Obama  presses His bet (irresponsible fiscal/regulatory policies) in the face of an electoral backlash.  I said early on that He was no Clinton; that is, He is an ideological purist and will go down with the ship  before He would become pragmatic and alter His economic agenda.  If that is the case and depending on how suicidal His congressional cohorts are, the Market could have a rough ride till November. 

    Great advice from Barry Ridholtz (short):

    Here is an interesting comparison of our present Market to that of 2002, the year of the last ‘slowdown in growth’ (medium):

    Thoughts on Investing--Six reasons to love dividend paying stocks from Low Sweat Investing

One big benefit of stocks that consistently raise dividends is they go up much more than other stocks do. There’s so much research on this that we’re posting it on the internet now, so check the References and Links section below.

I won’t go into all the numbers again today, but just one example is the ever-popular Ned Davis Research study that’s been tracking these stocks’ performance for over 36 years now. Dividend raisers rang up 8.7% annually compared to 6.2% for the S&P. And a really embarrassing less than 1% for stocks so chintzy they don’t pay a dividend at all. Good luck with those.

And other studies have covered other time periods, other groups of stocks, other performance measures and even other countries.

The point is, these stocks aren’t just good for their dividends, they also can be superior long-term capital appreciation opportunities, so again, just check the References and Links section for more information.

Second, the research illustrates stocks that raise dividends also raise investors’ odds of success.

Like a poker player who consistently draws better cards, investors seem to turn up stronger companies when they stack the deck with dividend raisers. After all, weak companies can’t raise dividends and outperform the market for decades. Strong ones can and do. Of course, like good card playing, good stock picking means paying attention to what you’re getting into. You can’t just look at a dividend record and count on getting lucky.

Third, these strong companies pile up profits and dividend growth across every market sector, market cap, and style box, so investors can benefit from building a well-diversified stock portfolio.

In addition to hall of famers like Johnson and Johnson (JNJ), McDonalds (MCD) and Exxon Mobil (XOM), Dividend Achievers range from aggressive early cyclicals like small cap Polaris Industries (PII) to midcap turnarounds like Mercury General (MCY) and big cap technology stalwarts like International Business Machines (IBM).

The fourth big benefit is a familiar one, rising yield-on-cost, or the cash yield based on the original amount invested.

Let’s start with a typical bond. Over ten years it will still pay out exactly the same amount. Fixed coupon, fixed payment, fixed income, same every time.

By contrast, after 10 years of rising 7% a year a dividend payment nearly doubles, without the investor putting another dime into the stock. So the yield on the original amount invested, your yield-on-cost, isn’t stuck wherever it started, it keeps going up.

And this might be one reason these stocks go up so much. The stock price rises to keep the yield at a normal level. Who can imagine JNJ, MCD, XOM and others like them yielding 15% in today’s market?

But that’s what they’d yield if the stocks hadn’t gone up along with the dividends. And that’s also the yield some long-term shareholders are getting paid on the original amount they invested years ago.

For those who live on their portfolios, or plan to, a fifth benefit of rising dividends is they help offset long-term inflation.
For example, the CPI calculator shows that for every $100 you spent ten years ago, you’d need nearly $130 to buy the same stuff now. But many dividend growth stocks boost dividends even faster than inflation. Over time, that makes a big difference in purchasing power.

Good deal, huh? You get a nice raise every year, but the stock does the work, you just show up on payday. (All right, you’re a supervisor. But that‘s really not the same as working.)

And sixth, stocks that raise dividends plunk more cash, year after year, straight into investors’ pockets, without them having to sell shares during bear markets. Check into the personal wealth destruction that results from selling stocks at low prices to raise cash. Disastrous. Ask anybody, retired or between jobs, who got stuck selling in either of the two big downturns over the past 10 years.

Of course, dividend raisers aren’t always roses. Stocks sometimes stumble, and dividend cuts can certainly happen. But occasional blow-ups might hit any investing strategy. Dividend growth just seems to give many investors a better shot at success, for all the reasons I just mentioned.


   This Week’s Data

    The June Institute for Supply Management manufacturing index came in at 56.2 versus expectations of 59.0 and the May reading of 59.7.

    May construction spending was reported down 0.2% versus estimates of down 0.8% and +2.7% recorded in April.

    May pending home sales plunged 30% (16% year over year) versus forecasts of a 13% decline.

    June vehicle sales were reported at 11.1 million versus expectations of 11.3 million and 11.6 recorded in May.

    June nonfarm payrolls declined 125,000 versus estimates of a decrease of 115,000; net of the census workers, private nonfarm payrolls rose 83,000.  The unemployment rate came in at 9.5% versus forecasts of 9.7%.


    The problem with continuing to pile on debt (medium):

    In an attempt to keep economic data in perspective, here is a number of lesser indicators that the economy is continuing to improve (all short):



Friday morning humor (100 greatest movie insults-9 minute video; very rough language):!+Mail

    Economic illiteracy in congress (short):

  International War Against Radical Islam

    The continuing war against radical Islam (medium):

    Words matter (medium):

Posted 07-02-2010 8:11 AM by Steve Cook