Why Is PepsiCo Buying Its Bottlers?

PepsiCo (PEP) announced last weekend that it has offered about $6 billion to complete its stakes in its two largest bottlers, Pepsi Bottling Group, of which it already owns 33%, and PepsiAmericas, of which it already owns 43%. The offers, made up 50-50 of cash and stock, value both firms at a 17% premium to Friday's closing prices.

I am a long-term holder of Pepsico as a superlative dividend-growth stock. The company has paid dividends since 1952 and raised them for 36 years. One of the attractions for me has been that Pepsico does not own its bottlers. So I am curious about the decision to purchase the bottlers.

Here is some background: For years, bottlers have been PepsiCo's customers. The soft drink business is unique in that the brand-owning companies do not perform the majority of manufacturing and distribution. They produce syrups and concentrates. Historically, they believed that their greatest growth would come from fountain drinks. Thus, they sold off the bottling rights, which turned out to be a good move in keeping the companies asset-light and less capital-intensive. The beverage companies just produce the concentrates and syrups. Bottlers do the manufacturing and distribution, usually with exclusive rights within a defined geographic region.

The bottlers are generally less profitable and more capital-intensive than the beverage companies they serve. They always face face strong operational challenges. Early estimates are that PepsiCo's reported results in 2008 would have had operating margin cut to 13% from 16%, and its returns on invested capital to 41% from 42%, had it owned the bottlers last year.
So why is PepsiCo buying its bottlers? To streamline and enhance its already formidable distribution capabilities and to gain ripple-effect benefits from that. PepsiCo's news release positions the offers as "strategically transforming."

As you probably know, PepsiCo is much more than a carbonated soft-drink provider. It has been moving more heavily into non-carbonated beverages as its customers' tastes change, and well over half of its sales come from snacks and other non-beverage products. PepsiCo produces, markets, and distributes myriad salty, sweet, and grain-based snacks and other foods. Among the company's many top non-beverage brands are Aunt Jemima, Cap'n Crunch, Cheetos, Cracker Jack, Doritos, Frito-Lay, Fritos, Golden Grain, Lay's, Life, Quaker, Rice-A-Roni, Ruffles, and Tostitos. PepsiCo's dominance in many of its lines give it pricing power. Last year, it pushed through price increases at Frito-Lay North America that did little to detract from volume growth. It often executes price increases by reducing the weight of individual packages rather than by actually increasing the price per package.

PepsiCo's direct store-delivery network is second to none. That said, it may be able to make it even stronger with the addition of its bottlers.

• There will be chances to cut costs through the integration of some of its distribution channels and consequent elimination of duplicate jobs. Pepsico states that the combination will create a fully-integrated supply chain and business model positioned to accelerate revenue growth. It estimates synergies of over $200 million per year, and that when these synergies are fully realized, the acquisitions will be accretive to earnings by at least 15 cents per share. Upon completion of the acquisitions, Pepsico will handle distribution of about 80 percent of its total North American beverage volume, including both its direct-store-delivery and warehouse systems. (The company did not say how long it expects the integrations to take.)
  
• The company also expects to gain more control over the distribution of non-carbonated beverages and niche products. The carbonated-beverage market is declining in this hemisphere, which has led PepsiCo to offer more non-carbonated beverages. But these usually have smaller volumes, and there has been resistance to them from the bottlers, whose business models rely on large production runs and heavy volume. Full ownership of the distributors would eliminate small-product conflicts, allow PepsiCo to experiment more, and improve its ability to bring product and package innovations to market more quickly.
  
• PepsiCo's statement also refers to improving the speed of decision making and increasing strategic flexibility. Beside the expanded freedom to create and experiment with new products, PepsiCo will be able to present a more unified face to its customers and to provide customized solutions when necessary, including bundled food and beverage offerings and improved national account coordination.
  
• Also, making this move now, with valuations lowered, may be allowing PepsiCo to pick up valuable resources at relatively low cost. Given the 50-50 stock-cash makeup of the offer and its strong balance sheet, PepsiCo does not see any financial contingency to this acquisition.
  

Pending further review of the financial outcomes, I find the qualitative benefits of this move to be convincing. It does not change my opinion of PepsiCo as a superior dividend-growth stock.

Timing Outlook Drops But Remains Positive

1. Summary: New Outlook (4/28/09) = 7.5 (POSITIVE)

The Outlook remains in positive territory for a second straight reading, but just barely at a value of 7.5. March 9 clearly represents a possible bottom in the 16-month bear market that began in October 2007--the index has stayed above March 9th’s close for 7 weeks. However, two previous potential bottoms (11/10/08 and 11/20/08) both failed to hold, and the current rally seems to have run out of steam. After venturing 30% of my available “stock money” back into the market in a series of small purchases (each backed up by a tight 8% sell-stop), I am going to pause at this point. The leveling out of the past couple weeks is cause for concern.

2. Market Performance Since Last Outlook

Last Outlook (4/14/09): 8.5 (POSITIVE)

S&P 500 last time (4/14/09): 859
S&P 500 now: 855 Change: -0%

S&P 500 at beginning of 2009: 903
S&P 500 Now: 855 Change YTD: -5%

3. Indicators in Detail

• Conference Board Index of Leading Economic Indicators: The April report, covering March, declined, marking three consecutive monthly declines. That drops this indicator to negative. +0
  
• Fed Funds Rate: The Fed Funds rate remains at 0.5%. There have been 10 cuts (with no increases) since 8/07 totaling 4.75%. There is nothing more the Fed can do with interest rates to make this indicator “better.” Of course, many other Federal programs (the stimulus bill, purchasing of Treasuries by the Fed, etc.) are injecting money into the economy. +10
  
• S&P 500 Market Valuation: According to Morningstar, the S&P 500’s P/E moves up slightly again from 15 to 15.5. At a value below 17.4, this indicator remains positive. +10
  
• Morningstar’s Market Valuation Graph is 0.86, up from 084 last time. It is inching closer to the 0.90 threshold that would take it out of positive territory. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with market’s March 9 low.) Positive. +10
  
• S&P 500 Short Term Technical Trend: The S&P 500, which staged a rally beginning March 10, has gone essentially sideways in the past couple weeks. It still displays the pattern where the index is above its 20-day simple moving average (SMA), and both are above the 50-day SMA, but the index is now just barely above its 20-day SMA. This indicator remains positive, but it will turn neutral if the index drops below the 20-day SMA. +10
  
• S&P 500 Medium Term Technical Trend: The index and its two shorter SMAs remain below its 200-day SMA. That keeps this indicator neutral. +5
  
• DJIA Short Term Technical Trend: Same situation as S&P 500. Positive. +10
  
• DJIA Medium Term Technical Trend: Same situation as S&P 500. Neutral. +5
  
• NASDAQ Short Term Technical Trend: Same situation as with the other two indexes. Positive. +10
  
• NASDAQ Medium Term Technical Trend: Same situation as with the other two indexes. Neutral. +5
  

TOTAL POINTS: 75 NEW READING: 75/10 = 7.5 = POSITIVE

Are We There Yet? (April Edition)

For long-time readers, this is the fifth or sixth time I've explored the question of whether the bear market that began in October 2007 is over. For the first time since I began this occasional series, the answer is not "no." I'm upgrading it to "maybe." As in, the bear market may be over.

What does "over" mean? Whenever you talk about a bull or bear market, you have to specify the timeframe. The bear market clearly exceeded any timeframe necessary. It started in October 2007...16 months through the end of February. So the question is, How long of an upward trend would it take to consider that bear market to be over? Three months? Six months? Most people would say that's too short. A year? Maybe. Two to three years? Most people would buy that.

But some wouldn't. I read recently a well-reasoned piece in which the author argued that the five-year "bull market" of 2002-2007 wasn't really a bull market, it was simply an interruption in a secular bear market that began with the dot-com collapse in 2000 and is still with us.

For myself, I tend to turn to the concept of investability. Is an upturn investable for most folks who are paying moderate attention? I'm beginning to think this upturn passes that test. The most recent low was March 9, when the S&P 500 closed at 677. Since then, we've witnessed a 6-week period during which the S&P 500 has risen to 841 (as I write this), an increase of 24%. The rise was steep for four weeks, then has become a rate of about 2%-per-week for the past couple of weeks.

So the common definition of a bull market as being a 20%-or-more rise over an extended period of time is already half-fulfilled: The market has risen well over 20%. The remaining part, "an extended period of time," is the open question. If the market reverses itself again, starts to go down, and drops back below its low of March 9, I think most people would say the bear market never ended, it just got interrupted. It would certainly look that way on a chart.

So I'm hedging my bets with a "maybe." Here are a few positive data points:

• My Timing Outlook, after many months of negative readings, turned neutral a few weeks ago and positive last week (see post below).
• State Street, a financial services firm that tracks buying and selling within the $12 trillion in assets it holds as custodian, said flows into U.S. equities in recent weeks have been close to the highest in 12 years, in the 98th percentile of all months they have tracked. State Street said in a note, "Institutional investors are backing this rally."
• Earnings have been, on average, a little better than expected during the reporting season that began in April.
• Word is that all the banks undergoing government stress tests will pass them.
• The market as a whole is still undervalued by most measures.
• And, of course, the trend line itself has been upward for six consecutive weeks.

Can the market turn around and decline, even crash, from here? Certainly. No matter how many reasons support a March 9th bottom and the idea that there is still plenty of upside from here, no one can predict the future. The reality is that there could be an unexpected downside to stocks that could unfold soon. Downside scenarios include:

• The economy is still in decline by most measures, although Federal government officials are seeing some "green shoots." Historically, the stock market is a leading indicator for the economy. Typically, economic measures generally get better about six months after the stock market starts moving back up.
• There could be some negative earnings surprises in store--investors don't like negative surprises or high levels of uncertainty.
• A complete reversal in investor sentiment could materialize and wipe out the gains since March 9.

Adding it all up, I get "maybe." Maybe the bear market is over. Maybe the current positive trend is investable. But I would be cautious and careful, and certainly not commit all of my "stock money" to a new bull market just yet.

Timing Outlook Turns Positive

1. Summary

The Outlook moves into positive territory for the first time in months, to 8.5, on the strength of a rally which is now in its 5th week. March 9 clearly represents a possible bottom in the secular bear market that began in October 2007. However, two previous potential bottoms (11/10/08 and 11/20/08) both failed to hold. In my Capital Appreciation portfolio, I have begun to venture carefully back into the market using small purchases of SPY (an ETF that tracks the S&P 500). I have now made three purchases, each using just 5% of my available “stock money.” Each is backed up with tight 8% sell-stops.

2. Market Performance Since Last Outlook

New Outlook: 8.5 (Positive)
Last Outlook (4/1/09): 6.5 (Neutral)
S&P 500 last time (4/1/09): 811
S&P 500 now: 859 Change: +6%
S&P 500 at beginning of 2009: 903
S&P 500 Now: 859 Change YTD: -5%

3. The Outlook's Indicators in Detail
· Conference Board Index of Leading Economic Indicators: The March report, covering February, has not been updated since last time. This indicator stays neutral, because there are not 3 straight readings in one direction. +5
· Fed Funds Rate: The Fed Funds rate remains at 0.5%. There have been 10 cuts (with no increases) since 8/07 totaling 4.75%. There is nothing more the Fed can do with interest rates to make this indicator “better.” Of course, many other Federal programs (the stimulus bill, purchasing of Treasuries by the Fed, etc.) are injecting money into the economy. +10
· S&P 500 Market Valuation: The S&P 500’s P/E moves up slightly to 15. This indicator is positive because it is below 17.4. This metric cannot get “better.” +10
· Morningstar’s Market Valuation Graph is 0.84, up significantly from 0.76 last time, but still below the 0.90 threshold that would take it out of positive territory. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market. Most recent low of 0.62 coincides with beginning of market rally on March 10.) This indicator has been moving toward neutrality during the recent rally. +10
· S&P 500 Short Term Technical Trend: The S&P 500, which staged a rally beginning March 10, now displays a classic pattern where the index, the 20-day and 50-day simple moving averages (SMAs) line up in that order. The 20-day SMA crossing upwards through the 50-day SMA is a “golden cross.” That turns this indicator positive. +10
· S&P 500 Medium Term Technical Trend: Even with the rally, now into its 6th week, the index and its two shorter SMAs remain well below its 200-day SMA. That keeps this indicator neutral. +5
· DJIA Short Term Technical Trend: Same situation as S&P 500. Positive. +10
· DJIA Medium Term Technical Trend: Same situation as S&P 500. Neutral. +5
· NASDAQ Short Term Technical Trend: Same situation as with the other two indexes. Positive. +10
· NASDAQ Medium Term Technical Trend: Same situation as with the other two indexes. Neutral. +5

TOTAL POINTS: 85
NEW READING: 85/10 = 8.5 = POSITIVE

Stay Calm During Earnings Season--Ignore the Noise

Earnings season has begun. Alcoa (AA), in keeping with tradition, kicked off earnings season yesterday with a less-than-stellar report.

The most recent fiscal quarter ended on March 31. All companies are putting the final touches on their numbers and will be announcing their results over the next several weeks. For every company that is followed by even one analyst, it will be revealed whether the company had an excellent or disappointing quarter, and whether it beat, made, or missed analyst expectations.

That means there's going to be a lot of news. Earnings season takes several weeks. As we know from SENSIBLE STOCK INVESTING, news moves prices. Investors react to earnings announcements, particularly when there are "surprises." The market tends to get jittery during earnings season, to become more volatile than normal. It has a penchant for extrapolating from the reports of a couple of bellwether companies and forming a sentiment that affects the entire market for a day. Then when a different "key" report comes out a day later, everything might reverse and go charging off in the other direction.

My advice to you is, don't get jittery. Stick to your strategies, your plans, and your sell-stops (if you use them). It is natural to be interested in news about companies you own. But whether a company beats or misses its number by a penny or two this quarter is not usually very important in the long run. What's more important are the fundamentals taken as a whole. Is your company's Story still holding up? Are its growth rates still what you want them to be? Is management still doing a good job? Is the company financially sound? Is it adhering to its normal dividend pattern?

Lots of the news created during earnings season is noise, and you should ignore it. For example, a company may beat (or miss) consensus expectations of earnings by a penny per share. Usually, from any long-term view of the company and its stock, this is unimportant. Nevertheless, stock prices often gyrate significantly as the result of such earnings "surprises."

On possible decisions to sell a stock, stick to your long-term strategies. If you have sell-stops in place, presumably they were established when you were thinking rationally. It's hard to stay rational during the news/noise bombardment of earnings season. Don't over-react. Continue to update your sell-stops once per week or so, and rely on them to make your selling decisions for you.

On possible decisions to buy a stock, the gyrations of earnings season may provide you with a better entry point than existed a few weeks ago. If a stock on your Shopping List suffers a price decline because of an earnings miss, that may give you a bargain price to pick up some shares.

The main point is to keep your wits about you during earnings season. It will be over in a few weeks, and then you can integrate the new data into your Easy-Rate Scoresheets in a relaxed, rational fashion. The main thing is to have an overall strategy and to execute it.

How Do You Tell the Difference Between a Bear-Market Rally and the End of the Bear Market?

The short answer is, you can’t, at least not while it’s happening.

Here’s the long answer. First, let’s agree to use the common definition of a bear market—a 20% (or more) decline in a broad index over an extended period of time. By that definition, we were in a bear market from October 10, 2007 until March 9, 2009. Between those dates, the market, as measured by the Dow Jones Industrial Average, fell from 14,165 to 6,547 over 17 months, a loss of 54%.

Along the way, there were several short periods when the market reversed course and went up for awhile. But each of them proved to be temporary breaks, and the primary downward trend soon resumed. The interruptions, in retrospect, were bear-market rallies (or sucker rallies, or dead-cat bounces, or secondary trends—there are various names).

In fact, by late 2008, this bear market’s length became so long, and its magnitude so great, that it began to match up with historical statistics regarding the average length of all bear markets, the longest bear markets, the largest percentage drops during bear markets, and the like. That increased the temptation of some to call the end of the bear market at the first sign of an upturn.

Late last year, there were two interruptions in the bear market that caused some pundits to declare that the bear market was over. The most recent began on November 20, 2008, when the Dow closed at 7552. From there, it went irregularly upwards for about six weeks to close at 9015 on January 6, 2009, a 19% rise. There were lots of declarations that the long bear market was over. There were also many doubters.

The doubters were right. From its high on January 6, the Dow turned back around and marched relentlessly downward until March 9, when it closed at 6547. That’s 13% below the supposed bottom on November 20. The bear market was still on. Those who had called the bottom were wrong.

Now we have another opportunity to question whether the bear market is over. Since March 9, the market has marched steadily upwards, finishing on Friday, April 3, at 7278. That’s an 11% increase over four weeks. For the month of March, the Dow rose almost 8%, its biggest monthly gain since October 2002, which turned out to be the start of the last bull market.

Was March 9 THE low? Is the bear market over?

There is absolutely no way to tell. Here’s some historical perspective from the Great Depression. There were five short, sharp rallies between 1929 and 1932:
11/13/29 - 04/17/30 (5 months): Dow 199 to 294, +48%
12/29/30 - 02/24/31 (2 months): Dow 160 to 194, +21%
06/02/31 - 07/03/31 (1 month): Dow 121 to 155, +28%
10/05/31 - 11/09/31 (1 month): Dow 86 to 117, +36%
01/05/32 - 03/08/32 (2 months): 71 to 89, +25%

Note that only one of these rallies (the first) lasted as long as five months. The rest were one or two months long. Even the five-month rally did not signal the end of the bear market. From the beginning of the first rally to the end of the last, the Dow fell from 199 to 89, a drop of 55% despite the five upturns. The Dow would eventually plunge to its 20th-Century low of 41 on July 8, 1932.

A lot depends on what time frame you choose to determine when one kind of market ends and another begins. For example, some would argue that the five-month rally shown above was itself a true bull market. After all, it was five months long and the market went up 48%. What more do you want?

What it comes down to, I think, is where you fall on the scale between short-term trader and long-term holder of stocks. A skillful day trader really doesn’t care about long-term trends. They feel they can make money on very short-term trends in either direction.

At the other end of the scale, a buy-and-holder does not want to trade very often. They do best with “secular” markets, that is, those whose primary trend lasts for a decade or more. By this reckoning, we have been in a bear market since the end of the dot-com bubble on January 14, 2000, when the Dow hit 11,723. Investors who measure this way would not count the five year run-up from October, 2002 to October, 2007 as a secular bull market. It was too short, despite the Dow’s reaching an all-time high of 14,169 on October 9, 2007, a 94% increase from its low of 7286 on October 9, 2002.

Most of us fall somewhere between these two extremes. We are not day traders, but we pay enough attention and are willing to trade often enough that we would certainly count the 2002 – 2007 run-up as a bull market. It was, for us, “investable.” That word signifies our individual comfort zone: A market (or an ETF or individual stock) is “investable” if it keeps going generally in one direction long enough that we are comfortable trading within that timeframe to take advantage of the trend. For most of us, a 94% increase over five years is investable.

Back to the original question: Did the bear market that began in October, 2007 end on March 9, 2009? Can’t answer that one for you. If a timeframe less than four weeks is an investable time period for you, you may already be back in the game. If four weeks is the exact minimum you will accept as potentially signifying a turn from a bear market to a bull, you might start creeping back into the market now. If you require a longer uptrend to conclude that the market has turned, we’re still in a bear market.

By the way, remember that the stock market is a leading indicator. So the question whether the bear market is over is not answered by referring to how bad the economy is right now. The economy is always bad when a bull market starts, which is generally six to nine months before economic statistics show that a recovery is under way.

What to Make of First Quarter Dividend Statistics?

“March Caps Worst Quarter for Stock Dividends: S&P”

So reads the MarketWatch headline on a story that was widely distributed (I saw the story in several places). The story says: “While March proved positive for equities, with the S&P 500 up 8.5% from February, the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since Standard & Poor's began keeping record in 1955....Companies announced 46 dividend cuts totaling a record $42 billion in the first quarter, with the slashing expected to cut actual payments by 18% in the second quarter, the worst since a 24% decline in the third quarter of 1958, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Last year [2008] brought 61 dividend cuts totaling a combined…$40.3 billion, while the first quarter of 2009 brought 44 more cuts totaling $42 billion.”

Here’s my problem with a headline like the one above, as well as the sentence that reads, “…the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since [S&P] began keeping records in 1955.” While the facts are correct, there are implications that:
--Dividend investors suffered a disastrous quarter in Q1 2009.
--Q1 was “one of the worst quarters” because of the dividend cuts.

Neither of these implications is correct. I don’t dispute any of the facts or statistics in the story, but rather the way they were spun.

Here’s my spin:
--Dividend investors did not suffer a disastrous quarter in Q1 2009. While it is true that many former good dividend-paying companies cut their dividends in late 2008 and early 2009, not many dividend investors who were paying attention suffered from most of those cuts: They exited those stocks ahead of the cuts.
--Q1 was a bad quarter all right, but not because of dividend cuts. It was a bad quarter because the S&P 500 Stock Index, which is a price-only index, fell 12% in the quarter.

My first point is based on my concept of the Sensible Dividend Investor. He or she is not someone who buys what used to be called “widows and orphans” stocks and sticks them in a drawer forever. Instead, Sensible Dividend Investors actively monitor their portfolios for signs of companies in trouble, dividends in peril, and the like. They don’t trade very often, because the best dividend stocks are reliable dividend payers and dividend raisers. But when a company or an entire industry is in trouble, they sell those stocks. They focus on the dividends, and if a company’s dividend prospects take a turn for the worse, the Sensible Dividend Investor takes appropriate action.

No investor could have missed the fact that the entire financial sector, particularly the banking industry, was in serious trouble last year. Although traditionally banks had been reliable dividend providers, a huge cloud settled over every bank in 2008. Here’s an example from my own experience: Bank of America (BAC). Early in 2008, I had recommended BofA as an attractive dividend stock. But after they changed their business model completely by purchasing Merrill Lynch, I re-evaluated BofA and said it was no longer suitable for a true dividend investor’s portfolio. I sold my own shares, and saved myself from their massive dividend cut as well as their wildly gyrating stock price.

In fact, the financial sector has been dominating the stocks cutting dividends since mid-2008, and that has continued to the present. In March, financial firms accounted for half of the 12 companies cutting dividend payments in the S&P 500. And these days, when banks cut their dividends, it is usually a massive cut. In March, Wells Fargo (WFC) cut its dividend by 85% and U.S. Bancorp (USB) cut theirs by 88%. In Bank of America’s case, they cut their dividend in two stages, first in half, then by 97% to a symbolic penny per share.

But no Sensible Dividend Investor should own those stocks. Not headlined in the MarketWatch article, but far more pertinent to the attentive dividend investor, is the fact that in March, seven companies increased dividends, including a 15% hike by Wal-Mart Stores (WMT) and a 12% increase by Staples (SPLS). Other notable hikes in 2009 include Colgate-Palmolive (CL) 10% , Chubb (CB) 6%, Kimberly-Clark (KMB) 3%, and General Dynamics (GD) 9%.

Among the 40 stocks in my book THE TOP 40 DIVIDEND STOCKS FOR 2009, 14 have already increased their dividends in 2009, while only one has cut. Most of the others have not reached the point in the year that an increase would normally have been announced.

My second point—that Q1 was bad because of precipitous drops in stock prices—is based on the fact that Sensible Dividend Investors own stocks for their dividend flow, not for capital gains. They enjoy capital gains, of course, but if your focus is on the dividend, price movements take on significantly less little importance. In fact, if you are in the wealth-accumulation stage of your life (i.e., not retired), you may embrace price drops. That is because price drops, by definition and all else equal, result in higher current yields. If you are buying a stock for its dividends, the higher yield that you start off with, the better off you’ll be for the entire period you own that stock…perhaps the rest of your life.

I am not being Pollyanna here. The numerous dividend cuts in late 2008 and early 2009 hurt us all, in a sense. They amount to tens of billions of dollars that are not flowing into the economy at a time when the economy can use all the money it can get. Personally, I expect 2009 will be a difficult year for dividends: (1) The awful global economy is likely to depress profits for the majority of corporations. The smaller the profits, the less money companies have to distribute. (2) Some companies will pull back on dividends, either out of necessity (they absolutely must preserve the money) or discretion (they will preserve cash and hunker down for hard times). (3) Some companies that would normally increase their dividends may freeze them for a year or two until the smoke clears.

But dividend investing is a very long-term strategy whose success is measured over years and decades, not months or quarters. From this point of view, most of the recent dividend cuts were not relevant to Sensible Dividend Investors, because they did not occur in stocks that such investors own. In the case of financial sector stocks, my guess is that they are mostly owned now by investor/speculators who are hoping for a tremendous snap-back in prices as the economy improves and the various governmental money injections around the world begin to have an effect.

Timing Outlook Strengthens, Stays Neutral

1. Market Performance Since Last Outlook

New Outlook (4/1/09): 6.5 (NEUTRAL)
Last Outlook (3/20/09): 6.0 (NEUTRAL)
S&P 500 last time (3/20/09): 767
S&P 500 now: 811 Change: +6%
S&P 500 at beginning of 2009: 903
S&P 500 Now: 811 Change YTD: -10%

2. Indicators

· Conference Board Index of Leading Economic Indicators: The March report, covering February, has not been updated since last time. This indicator stays neutral, because there are not 3 straight readings in one direction. Neutral. +5
· Fed Funds Rate: The Fed Funds rate remains at 0.5%. There have been 10 cuts (with no increases) since 8/07 totaling 4.75%. There is nothing more the Fed can do with interest rates to make this indicator “better.” Of course, many other Federal programs (the stimulus bill, purchasing of Treasuries by the Fed, etc.) are injecting money into the economy. +10
· S&P 500 Market Valuation: The S&P 500’s P/E stays the same at 14. This indicator is positive because it is below 17.4. This metric cannot get “better.” +10
· Morningstar’s Market Valuation Graph is 0.76, up from 0.74 last time, but still well below the 0.90 threshold that would take it out of positive and into neutral territory. (Historical data: All-time low = 0.55 on 11/20/08. Value at end of dot-com bear market = 0.78 in 10/02, which kicked off a 5-year bull market.) Again, this indicator cannot get “better.” +10
· S&P 500 Short Term Technical Trend: The S&P 500, which staged a rally beginning March 10, has moved above both its 20-day and 50-day simple moving averages (SMAs), but the 20-day has not yet crossed upward through the 50-day SMA. That keeps this indicator neutral. +5
· S&P 500 Medium Term Technical Trend: With the rally, now into its 4th week, the index is above its 50-day but still well below its 200-day SMA. Thus, this indicator has turned upward from negative to neutral. +5
· DJIA Short Term Technical Trend: Same situation as S&P 500. Neutral. +5
· DJIA Medium Term Technical Trend: Same situation as S&P 500. Neutral. +5
· NASDAQ Short Term Technical Trend: The NASDAQ has rallied a bit more than the other two. The index is above both its 20-day and 50-day SMAs, but the 20-day is still slightly below the 50-day SMA. Neutral. +5
· NASDAQ Medium Term Technical Trend: Same situation as with the other two indexes. Neutral. +5

TOTAL POINTS: 65
NEW READING: 65/10 = 6.5 = NEUTRAL

3. New Rating

The Outlook moves up a little to 6.5 on the strength of the three-week rally. This is the best reading for the Timing Outlook in months. Although two previous potential “bottoms” (11/10/08 and 11/20/08) were breached in late February, March 9 now represents a third possible low point in the secular bear market that began in October 2007.

I have been holding out for a 3+ week uptrend, and now we have one. I would be willing to venture some money into the market, perhaps starting simply with an S&P 500 index play backed up by a tight 5% to 8% trailing sell stop.