1. Summary
The Timing Outlook remains positive at 8.5. This is the 18th consecutive positive reading, essentially coinciding with the market rally that began on March 10. The rally has lasted nine months. In that time, the S&P 500 has risen 62% without so much as an 8% correction along the way.
As I’ve said many times in the past, this market is news-driven. News comes mainly from two sources: (1) Government statistics and other reports about the economy (such as unemployment figures or the default last month by Dubai World on its loans). (2) Earnings and revenue reports from companies, with a focus on how figures compare to expectations and the companies’ own forward-looking statements. I call this “net news flow.” When the news is, on balance, good, the market tends to go up. When it is not good (such as the Dubai default), the market tends to go down. When it is net neutral, the market makes little moves up and down.
The Q3 earnings season just ended. The news was generally good. Around 75% of companies beat earnings expectations, and around 60% beat revenue expectations. Forward-looking statements were mixed, but overall sounded more positive than a quarter ago and much more positive than a year ago. In Q3, according to government reports released Tuesday, corporate profits were up 11% for the quarter and 16% since the end of last year—encouraging rates of increase considering how bad things looked just a year ago.
Economic news in the past week was generally positive. Examples:
· The Conference Board’s consumer confidence report Monday took everyone by surprise, rising to a level not forecast by even the most optimistic. Most forecasters had expected a downturn.
· Retail sales improved 1.3% from October to November, almost double the gain that had been expected. On a year-over-year basis, retail sales were up 1.9%.
· And consumers did this without taking on additional debt. For the 9th consecutive month, the level of outstanding consumer debt (excluding real estate loans) decreased.
· For the first time in more than a year, the level of inventories held by businesses increased. While modest, October's 0.2% gain was a welcome surprise, given the expectation of another decrease. Furniture and accessories, electronics, and appliance stores led the way. Analysts cautiously interpret the rise in inventories as positive: Retailers are building depleted stocks in anticipation that they will be sold.
The fine print: The market can turn on a dime. As always, sell-stops or some other form of downside protection is recommended on long stock positions. I generally exclude from this those stocks held for their dividend distributions rather than for price appreciation.
2. Market Performance Since Last Outlook
(“now” figures are as of close Friday 11/11/09)
Last Outlook (11/29/09): 8.5 (positive)
S&P 500 last time (11/29/09): 1091
S&P 500 now: 1106 Change: +1%
S&P 500 at beginning of 2009: 903
S&P 500 now: 1106 Change YTD: +22%
S&P 500 at close 3/9/09: 677
S&P 500 now: 1106 Change since 3/9/09: +63%
3. Indicators in Detail
· Conference Board Index of Leading Economic Indicators: Unchanged, no new report since last time. Index has had seven consecutive monthly increases. Positive. +10
· Fed Funds Rate: No change. The Fed Funds rate remains near zero. Positive. +10
· S&P 500 Market Valuation: (Source: Morningstar’s calculation of P/E based on operating earnings.) The current P/E of the S&P 500 is 20.0. This is in the neutral territory of 17.4 to 21.2. +5
· Morningstar’s Market Valuation Graph. This indicator continues to meander small distances around 1.0, as it has been doing since late July. It now stands at exactly 1.00 Thus the market is “fairly valued” by this indicator. (Interesting 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. All-time high = 1.14 at the end of 2004.) Neutral. +5
· S&P 500 Short Term Technical Trend: The S&P 500 chart is currently in its most favorable configuration: Index > 20-day SMA > 50-day SMA > 200-day SMA. For a couple of days last week, the index did drop below its 20-day SMA, but rose back above it on Thursday and Friday. Positive. +10
· S&P 500 Medium Term Technical Trend: Positive. +10
· DJIA Short Term Technical Trend: Exactly the same situation as with the S&P 500, including the two-day drop below the 20-day SMA. Positive. +10
· DJIA Medium Term Technical Trend: Positive. +10
· NASDAQ Short Term Technical Trend: The NASDAQ chart displays essentially the same pattern as the other two. Positive. +5
· NASDAQ Medium Term Technical Trend: Positive. +10
TOTAL POINTS: 85 NEW READING: 85 / 10 = 8.5 = POSITIVE
Sunday, December 13, 2009
Tuesday, December 8, 2009
The Top 40 Dividend Stocks for 2010--Getting Closer to Publication
Preparing the new edition of THE TOP 40 DIVIDEND STOCKS is a little like the NCAA basketball tournament. First, the Selection Committee--that would be me--must decide who is even eligible. Theoretically, all stocks, worldwide, are eligible. But because this is a book on dividend investing, the very first step is to select a starting universe of dividend-paying companies with half-decent records. I did that a couple months ago, ending up with about 700 companies. That's my starting universe.
Next, I put those companies through what I call "Stage 1" testing. I applied five ground-rule requirements. Each stock must have:
--Increased its dividend distribution in each of past 5 years.
--Current yield of at least 3% (2.5% is allowed for stocks that have raised their dividends at least 20 years in a row).
--Positive return in 3 of past 5 years.
--Total return over past 5 years of at least even.
--3-year percentage increase in dividend payout of at least 16% total (12% is allowed for members of the 20-year club).
Those five simple tests (eased a little bit so as not to lose borderline candidates) reduced the starting universe of 700 down to 169 stocks. Then in November came Stage 2. I appplied the same five tests to those 169 stocks, with no easing this time. The tests were applied rigorously. That got the number down to 108. These are the Semi-Finalists, sort of like the Sweet 16 round of the basketball tournament.
The December task for the Selection Committee (me) is to reduce that list again to what I call the Finalists. I am working on that right now. What I do is "score" those stocks using a partial version of the complete Easy-Rate system. This allows me to eliminate those stocks that, while they may be very good investments, are not the championship calibre of the Top 40. I try to identify 50 to 60 Finalists. I do this by recording the score for each of the stocks, then sorting the list by score. The stocks sort themselves out, from obvious winners to stocks that may now even fall short of the original tests from the first stage. For example, a stock's rising price may have driven its yield below the acceptable minimum.
I will take a first shot at identifying the Top 40 by the end of December. But the final selection will take place in the first week of January, when I have complete 2009 data to work with. By then, I will have written all of the Finalists' Stories and prepared their Easy-Rate sheets that will appear in the book. One final pass through the latest data will allow me to make any necessary changes to my first crack at the Top 40. When I know exactly who the winners are, I will update all their Easy-Rate sheets and combine them with the text.
Ah, the text. Throughout the year, I have been collecting information and tidbits to update the text. I start with last year's text, of course, but a good portion of it--more than 25%--gets changed for the new edition. New statistics and charts are added. The scoring system has been further refined this year, to place a little more emphasis on high-yielding stocks. I completed a first draft of the new text in November. Later this month, after I have identified the Finalists as explained above, I will go through the text again and complete the second draft.
Just as with the Top 40 stocks themselves, I will make one final pass through the text in January, with complete 2009 information available. Tables will be prepared showing how 2009's Top 40 stocks did and presenting the 2010 Top 40 in a variety of ways for easy access and use.
Finally, when they are merged, the text, the Top 40 list and its tables, plus an Easy-Rate sheet for each stock, will form the complete e-book. I hope to launch it on or about January 20. And then, I'm going on vacation!
Next, I put those companies through what I call "Stage 1" testing. I applied five ground-rule requirements. Each stock must have:
--Increased its dividend distribution in each of past 5 years.
--Current yield of at least 3% (2.5% is allowed for stocks that have raised their dividends at least 20 years in a row).
--Positive return in 3 of past 5 years.
--Total return over past 5 years of at least even.
--3-year percentage increase in dividend payout of at least 16% total (12% is allowed for members of the 20-year club).
Those five simple tests (eased a little bit so as not to lose borderline candidates) reduced the starting universe of 700 down to 169 stocks. Then in November came Stage 2. I appplied the same five tests to those 169 stocks, with no easing this time. The tests were applied rigorously. That got the number down to 108. These are the Semi-Finalists, sort of like the Sweet 16 round of the basketball tournament.
The December task for the Selection Committee (me) is to reduce that list again to what I call the Finalists. I am working on that right now. What I do is "score" those stocks using a partial version of the complete Easy-Rate system. This allows me to eliminate those stocks that, while they may be very good investments, are not the championship calibre of the Top 40. I try to identify 50 to 60 Finalists. I do this by recording the score for each of the stocks, then sorting the list by score. The stocks sort themselves out, from obvious winners to stocks that may now even fall short of the original tests from the first stage. For example, a stock's rising price may have driven its yield below the acceptable minimum.
I will take a first shot at identifying the Top 40 by the end of December. But the final selection will take place in the first week of January, when I have complete 2009 data to work with. By then, I will have written all of the Finalists' Stories and prepared their Easy-Rate sheets that will appear in the book. One final pass through the latest data will allow me to make any necessary changes to my first crack at the Top 40. When I know exactly who the winners are, I will update all their Easy-Rate sheets and combine them with the text.
Ah, the text. Throughout the year, I have been collecting information and tidbits to update the text. I start with last year's text, of course, but a good portion of it--more than 25%--gets changed for the new edition. New statistics and charts are added. The scoring system has been further refined this year, to place a little more emphasis on high-yielding stocks. I completed a first draft of the new text in November. Later this month, after I have identified the Finalists as explained above, I will go through the text again and complete the second draft.
Just as with the Top 40 stocks themselves, I will make one final pass through the text in January, with complete 2009 information available. Tables will be prepared showing how 2009's Top 40 stocks did and presenting the 2010 Top 40 in a variety of ways for easy access and use.
Finally, when they are merged, the text, the Top 40 list and its tables, plus an Easy-Rate sheet for each stock, will form the complete e-book. I hope to launch it on or about January 20. And then, I'm going on vacation!
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