Dividend Paying Stocks

Lately, you can't browse investment news without hearing about dividend paying stocks. What is behind this feverish sentiment and why is it important now?

To begin, a dividend is a sum of money paid by a company on regular intervals to its shareholders. A stock's dividend is calculated by totaling the annual sum of payouts made by the company and dividing that by the current stock price. This ratio is your dividend yield. 

Companies that pay consistent dividends are usually less volatile than their cash-hoarding contemporaries. Throughout the course of the year, these value oriented businesses are run in such a way that they plan to return portions of their profits back to shareholders. Conversely, growth oriented companies take all of their profits and reinvest them directly back into the business for future expansion. Cases can be made for each side in deciding the winner of the value vs. growth stock preference, but the truth is that dividend payers typically outperform during bear markets and growth stocks typically outperform during bull markets (as seen in the graphs below). 

Why now? Investors who still want to own stocks for the growth, but don't want as much volatility should be comfortable with dividend payers. However, this begs the question: are we still in a bear market, or are we entering a new bull market? The answer to that question should play a role in your current allocation.

Sources:

www.ritholtz.com

Signs of Life

Even though it may not feel like we are making any economic progress, we are slowly clawing our way back to normal. Weekly jobless claims beat analyst estimates yet again dropping to 364,000 - the lowest reading since April 2008. Moreover, the four-week moving average is now at 380,250 claims per week. The last time we had jobless claims numbers like this was June 2008. While the overall unemployment picture still remains stubbornly high at 8.6%, we have continued to improve, slowly but surely.



Sources:
SeekingAlpha.com
Federal Reserve Bank of St. Louis

The Emotional Investor

With volatility through the roof recently, emotions have been running high in the investment community. This sentiment can be dangerous for returns! Remember this: emotions have no place in investing or speculating. Only research and facts should drive our decisions. The following charts from do a great job of showing what the emotional speculator goes through as he loses money.

Source:
www.ritholtz.com

TED Spread

The TED Spread is a common reference for determining the amount of stress banks are having raising short-term cash. Specifically, it is the difference between three-month Eurodollar contracts (represented by LIBOR) and three-month Treasury Bill yields.

Historically, it has been a good indicator of perceived credit risk in the overall economy because T-Bills are generally thought to be risk-free offerings and LIBOR measures the credit risk of lending to commercial banks. The difference is a premium for taking on additional risk.

Currently, the TED Spread sits at a new 52 week high of 56.82. Banks aren't lending to each other for a reason: they don't like the odds of repayment.

This can have serious consequences for a global economy trying to emerge from stagnation, and an even bigger impact for those countries trying to avoid a recession.


TED Spread Chart via Bloomberg:
Dec. 14, 2011


Sources:
Bloomberg.com
Bankrate.com

10 Market Rules to Remember

Here is a timeless list of "10 Market Rules to Remember" offered by legendary market analyst Bob Farrell.

For the record, Bob currently advises to use every advance in the market as a selling opportunity. He sees P/E ratios finding a trough at 8x... we are currently at 13x.

1. Markets tend to return to the mean over time.When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.  

2. Excesses in one direction will lead to an opposite excess in the other direction.Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.  

3. There are no new eras — excesses are never permanent.Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half. As the fever builds, a chorus of "this time it’s different" will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.  

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually comes.  

5. The public buys the most at the top and the least at the bottom.That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.  

6. Fear and greed are stronger than long-term resolve.Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks." 

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks ("Nifty 50" stocks).  

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend. I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July. Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.  

9. When all the experts and forecasts agree — something else is going to happen.As Stovall, the S&P investment strategist, puts it: "If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?"Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.  

10. Bull markets are more fun than bear markets. Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.

Source:

Marketwatch

www.ritholtz.com

US Oil Exports on the Rise

The changing of the tides in US oil exports and imports has caught some attention lately, and I thought it would be timely to share this graph from Bloomberg.

The US transitioned from net imports to net exports in 2010 and has been able to sustained that trend. Increased domestic production and greater vehicle efficiency have supported this move and should continue to do so for years to come. Currently, net exports expanded to a record 920,000 barrels per day in September (the latest data from the Department of Energy).

Moreover, Citigroup, Inc. recently released a statement noting that "U.S. net exports of oil products such as diesel will more than double in the next decade from record levels as slowing domestic consumption cuts the nation’s dependence on foreign energy."

Source:
Bloomberg

US Housing Prices: A Reflection of Japan?

This chart is an unsettling illustration of the similarities between the home pricing in the USA and that of Japan shifted by 15  years. Japan's real estate peaked in 1992 and was hurting for decades after. Hopefully, similar economic stagnation is not the case for the US in years to come...

Sources:

http://www.ritholtz.com
Richard C. Koo
Nomura Research Institute, Tokyo
Real-World Economics Review, Issue # 58

Fiscal union ahead for Europe?

This video gives a good description of the "fiscal union" many leaders are speaking about in order to aid Europe's current issues.

Weekly Jobless Claims

This morning brought in good employment information: the number of people who filed for initial jobless benefits came in lower than expected at 381,000, compared to the consensus estimate of 395,000. This number is down 23,000 from last week's measurement of 404,000.

As a result, the four-week moving average was reduced to 393,250. This is the lowest measurement since April.

Source:

Department of Labor

European Fear Factor

Debt problems in Europe have overwhelmed the news recently. Specifically, the rest of the world is very concerned that Portugal, Ireland, Italy, Greece and Spain will not be able to pay back their current debts. As a result, no one will lend them new money unless they are handsomely rewarded for taking on increased risk. That being the case, new bond auctions from these countries have had to offer bonds with very high yields in order to entice lenders. This graph from Bloomberg is a nice illustration of that point:

 

With Greece being at the forefront of this mess, this graph from Reuters demonstrates which countries stand to lose the most if Greece defaults on their obligations. One thing is clear, a Greek default would resonate throughout Europe and the rest of the world.

Sources: 

Bloomberg

Reuters

Weak Dollar Weakness?

The US Dollar has recently been hovering at historically low levels compared to the last several decades. Don't let that dent your pride in the stars and stripes though. Dollar devaluation entices other countries to buy American goods, driving up our exports (as an important component of our GDP) and ultimately boosting growth in our economy. Higher growth should eventually lead to corporate hiring and hopefully a sustainable recovery. While a weak US dollar isn't a panacea, adding a little water and sunlight to our economy can only help.

Rail Traffic Shows That Economy Is Growing

The Association of American Railroads released their weekly data today. While their comments weren't indicative of flourishing growth, investors can still take this as evidence of economic expansion.

"AAR today reported gains in weekly rail traffic, with U.S. railroads originating 265,304 carloads for the week ending Nov. 26, 2011, up 4 percent compared with the same week last year. Intermodal volume for the week totaled 190,866 trailers and containers, up 3.7 percent compared with the same week last year.

Ten of the 20 carload commodity groups posted increases compared with the same week in 2010, including: motor vehicles and equipment, up 42 percent; crushed stone, sand and gravel, up 30.3 percent, and petroleum products, up 28.4 percent. The groups showing a significant decrease in weekly traffic included: farm products excluding grain, down 18.1 percent, and waste and nonferrous scrap, down 10.8 percent.
Weekly carload volume on Eastern railroads was up 1.8 percent compared with the same week last year. In the West, weekly carload volume was up 5.3 percent compared with the same week in 2010. 

For the first 47 weeks of 2011, U.S. railroads reported cumulative volume of 13,710,056 carloads, up 1.8 percent from the same point last year, and 10,775,044 trailers and containers, up 5.1 percent from last year."

Sources: 
Pragmatic Capitalism
AAR

The January Effect

The January Effect is a phenomenon in the stock market driven by year-end tax harvesting. Investors frequently sell their current losers before December 31st in order to claim a capital loss for tax purposes. In turn, this money is reinvested in the market during the first week of January, causing stock prices to rise. Even if a stock has great growth prospects, price momentum matters. After all, it is what drives our profitability, or lack thereof.

Goldman Sachs Top Trades for 2012

Goldman Sachs released their top picks recently. While they didn't do so hot in 2011, their 2010 trades were more fruitful. Here is what they think for 2012:


1. Short European High Yield credit (Buying protection on the iTraxx Crossover index), for a target of 950bp (opened at 770bp) and a potential return of 4.5%, stop at 680bp

2. Short 10-yr German Bunds for a target of 2.8% (open at 2.3%) and a potential return of +4.5%, stop 2.0%

3. Go long EUR/CHF for a target of 1.35 (opened at roughly 1.2260) and a potential return of 11% including carry, stop at 1.20

4. Long Canadian equities (S&P TSX) vs Japanese equities (Nikkei), FX unhedged for a target of 120 (opened at 100) and a potential return of 20%, stop at 90

5. Long a Global Rebalancing Basket (CNY, MYR versus GBP, USD) for a target of 107 (opened at 100) and a potential return of 7%, stop at 98

6. Long July 2012 ICE Brent Crude Oil futures for a target of $120/bbl (opened at $107/bbl) and a potential return of 12%, stop at $100/bbl

Source: Zero Hedge

Structural Unemployment

14 million Americans are unemployed and yet one sector can't hire new employees fast enough. Looking at the charts below, it is plain to see that manufacturing job vacancies in the United States aren't being filled to meet demand. In fact, the October 2011 unemployment rate for manufacturing was 7.7% compared to the overall unemployment rate of 9.0% (per the Department of Labor).

Consider this, on average it takes companies about 7 weeks to fill a vacant job. Recently, hiring a new manufacturing employee has taken approximately 12 - 15 weeks.

This data supports the notion that there is structural unemployment in our economy, where American skills and American jobs are mismatched. High unemployment rates aside, think of the lost production / GDP / consumption our economy is missing out on.

Fixing structural unemployment will take time. Troops returning home will have solid military training, which may translate well into the manufacturing workplace, but that alone is not the solution. Americans will either have to outsource a segment of this supply chain or place a larger emphasis on trade skills in our educational system.

One thing is certain: manufacturing is fueling much of our economy's current growth. We need to support the strength of this sector.

This graph illustrates how job openings in the manufacturing sector have outpaced total nonfarm job openings from the depths of the recession.

Sources:
stlouisfed.org
cleveland.com

October Industrial Production Beats Estimates

Industrial production expanded by 0.7% in October, beating analyst estimates of 0.4%. However, the reading for September, initially reported at .2%, was revised down to -.1%. That being said, actual two month industrial production is right in line with analyst estimates. The graph below demonstrates how this sector continues to be a source of support for our recuperating economy.

 Specifically, this production data measures the total output of manufacturing, mining, electric and gas industries in the United States. At current levels, industrial production is still 5.3% below pre-recession levels.

The Federal Reserve published a nice breakdown of the industry groups that contribute to industrial production:

"Manufacturing output increased 0.5 percent in October and was 4.1 percent above its year-earlier level. In October, the factory operating rate moved up to 75.4 percent, a rate 11.0 percentage points above its trough in June 2009 but still 3.6 percentage points below its long-run average.
The output of durable goods increased 0.8 percent in October and has gained 7.8 percent in the past 12 months. Advances of at least 2 percent were reported in October for electrical equipment, appliances, and components; motor vehicles and parts; and aerospace and miscellaneous transportation equipment. In contrast, losses of 2 percent or more occurred for wood products and nonmetallic mineral products.


The index for nondurable manufacturing rose 0.2 percent in October. Among the major components of nondurables, the output of apparel and leather jumped 2.8 percent, and gains were also registered for food, beverage, and tobacco products; chemicals; and plastics and rubber products. Decreases were recorded for textile and product mills, paper, printing, and petroleum and coal products. The index for other manufacturing (non-NAICS), which consists of publishing and logging, declined 0.2 percent.


The output of mines climbed 2.3 percent in October, with gains in each of its major components, after having dipped 0.5 percent in September. Capacity utilization in mining moved up to 92.7 percent in October, a rate 5.3 percentage points above its long-run average. The output of utilities edged down 0.1 percent, and its operating rate declined to 77.5 percent, a rate 9.1 percentage points below its long-run average.


Capacity utilization rates in October at industries by stage of process were as follows: At the crude stage, utilization increased 1.5 percentage points to 89.9 percent, a rate 3.5 percentage points above its long-run average; at the primary and semifinished stages, utilization edged down 0.1 percentage point to 74.0 percent, a rate 7.3 percentage points below its long-run average; and at the finished stage, utilization rose 0.7 percentage point to 77.2 percent, a rate 0.1 percentage point below its long-run average."

Source: Federalreserve.gov

Trouble in the Euro-zone

This is a great illustration from Mint showing Euro-zone public debt as a percentage of GDP. You can easily see why the PIIGS are in trouble.

Q3 GDP Revision

This morning, the revised Q3 GDP (Gross Domestic Product) data was released. After revisiting the numbers, the Commerce Department lowered their initial growth estimate of 2.5 % down to an even 2%.

In economic theory, Okun's law describes the relationship between quarterly changes in GDP growth and quarterly changes in the unemployment rate. Generally speaking, reduction in the unemployment rate trails GDP growth by about 2%. Therefore, with the current economy displaying anemic growth of 2%, the unemployment rate will remain at 9% for the near term.

After digesting this information, the stock markets opened modestly lower.

Source: TaintedAlpha.com


Following a GDP growth reading of 1.3% for the second quarter, growth of 2.5% would have been a large jump.

What is Quantitative Easing?

Quantitative easing is a government monetary policy used to inject liquidity and increased lending into the system by expanding the federal balance sheet. The Federal Reserve will typically purchase government securities, thereby increasing the supply of dollars in the market. Their hope is that this will increase consumer spending and stimulate the sluggish economy.

During this unconventional process, the Fed walks a fine line of fueling the economy and creating inflation. However, with rates close to zero, this is usually not a problem.

Another result of quantitative easing is the devaluation of the currency. Because the money supply is now larger, each dollar is worth slightly less. This directly impacts the country's imports and exports in the following way: those who import goods are harmed by a weaker dollar and exporters benefit by increased demand for their less expensive goods.

Dollar Cost Averaging

One of the first-taught mantras of investing is to buy low and sell high. In doing so, an investor can realize the greatest appreciation from their purchases. The problem is that it is impossible to accurately and consistently identify market troughs and peaks. So, this begs the question: how can one most efficiently deploy their funds into the market?

Clearly there is no fail-safe method, but utilizing a system of dollar cost averaging can help investors achieve more stable prices by reducing sensitivity to the timeliness of trades.

BusinessDictionary.com defines dollar cost averaging in the following way:

"An investment strategy that seeks to minimize risk by reducing the average cost per share. Under this plan, an investor invests only a fixed amount in securities at regular intervals, regardless of the market's up or down movements."

Chances are, you already facilitate this strategy without knowing it. If you are employed have money consistently taken out of your paycheck that is automatically invested, you are dollar cost averaging.

Rather than trying to time market fluctuations, dollar cost averaging helps investors stabilize their investment's cost basis. In practice, your identical contributions will purchase less of a security when the price is high and more of the security when the price is low. Therefore, you can achieve a lower average cost for your purchases over the long-term.

Here is a nice illustration from FinanceEditor.com:

Hedging

Hedging is an important investment strategy employed to reduce risk in one’s portfolio by spreading out the risk of loss between multiple assets. Think of hedging as an insurance policy for your investment. The theory is that when asset A experiences volatility, asset B may perform well enough to offset a portion of your loss.

Many savvy investors use futures contracts, options or short positions to protect their underlying asset. Another common hedging practice is to allocate a portion of your funds to high yielding financial instruments, commodities, or real estate to combat the effects of rising inflation.