SELL Altria (MO) at the Market

For the extremely conservative investor the time has come to issue a SELL recommendation for Altria (MO.) The stock has performed reasonably since the Research recommendation was issued on December 9, 2008. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock essentially went up from the date of recommendation. From the current level of $17, MO is poised to reach the $20 level with no effort. However, the returns that this stock has provided within the last two months say that it is worthwhile considering alternatives.

MO was recommended when it was trading at $14.99. As of Thursday January 29, 2008 MO was quoted at $17. This equals a return of 13.11% in less than 2 months. Conservatively, on an annualized basis this would equal approximately 78% return. Selling this stock now also generates a return 1 and a half times the amount of the dividend yield if the stock was held for a whole year.

For those that are willing to take the risk of holding on to this stock, MO announced 4th quarter earnings of $0.33 per share which implies annual earnings of $1.32. This equals just enough to pay the dividend of $1.28 with little room for a dividend increase in the coming year. At this point, it is difficult to say that the dividend is secure. However, the recent acquisition of UST, an earnings powerhouse in its own right, is likely to provide some life for MO earnings in the coming years.

It is always recommended that when selling a stock, one should not place an order after hours or when the market is closed. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.

Disclosure: I hold a 50% position in MO

Industrial Production Index

As expected the Industrial Production Index fell below the level of the September 2008 low of 105.2246. In addition, The IPI pierced the previous peak of June 2000 at 104.2873. Based on this most recent move the IPI is expected to decline at least to the December 2001 level of 97.8399. Thus far, the IPI has fallen 9 of the last 11 months.

What does all this mean? As far as I can tell, we're in for at least another six months of declines in the IPI. This does not mean that the stock market is fated to do the same. As an example, when the Dow Industrials hit bottom in December 1974 the IPI hit bottom in May 1975. We'll have to see if we're only as lucky as prior periods. Touc.

The Art and Science of Cycles

The chart below was pulled from the book Cycles, The Science of Prediction by Edward Dewey and Edwin Dakin. Just so you know, the book was published in 1947 and is surprisingly well written. What is important to gain from this chart is the fact that it accurately predicted the high for inflation in 1979 (blue circles) and the low for inflation in 2006 (red circles).

There are some who feel that the use of cycles in determining trends doesn't stand up to the academic rigor of a finely researched economic or financial treatise. There are others who might say that using cycles to determine the future is hocus-pocus-gooble-dee-gook. However, the fact remains, in 1947 Dewey and Dakin published their findings that predicted that wholesale prices (inflation) would be at its highest point around 1979 and its lowest point around 2006.

These predictions takes into account all human action and reaction to causes and consequences of the conditions at the respective periods. How is this possible? I don’t know, but I find it fascinating and useful since it provides perspective that is necessary under such “crisis” conditions. Touc.

$8.5 Trillion Spent and No Relief in Sight...

The combined effort of the Federal Reserve Bank and the U.S. Treasury hasn't done much towards solving the problems in our banking system. Since my last article about the Fed's action to bailout the financial system there has been an additional $6.684 trillion put to work assisting financial institutions. In the graphic below, from the February 2009 issue of Bloomberg Markets, is a visual of the allocation of all the funds that have been committed throughout the year 2008 until November 25.

Since my last article on the Fed's action in October 2008, the stock of Bank of America has fallen from $38.13 to the current level of $10.20. If the stock market is any indication of confidence in the banking system then Bank of America shareholders demonstrated their clear understanding of the extent of the problem.

Any reduction and/or elimination of bailouts will be the first sign of a recovery in the economy. However, with Bush/Obama asking for an additional $350 billion, the 2nd half of the $700 billion TARP program, from Congress means that we're in for another six months before we can start to look for clear indications of the true state of the economy. Touc.

Source:

• Mark Pittman and Bob Ivry. "How to Get to $8.5 Trillion." Bloomberg Markets. February 2009

Research Rec.: Bank of Hawaii (BOH) at $37.76

Today's research recommendation is Bank of Hawaii (BOH). BOH is described by MergentOnline as, "...the bank holding company for Bank of Hawaii (the Bank). The Bank provides financial services and products mainly in Hawaii and the Pacific Islands." MergentOnline also points out that BOH has increased its dividend every year for 30 consecutive years.

BOH is within 3.96% of the one year low and yields 4.80%. According to Value Line Investment Survey, BOH typically trades around 14 times earnings. At a 9.77 P/E ratio, either of two things need to occur:

• BOH earnings will have to come down
• BOH will have to revert back to selling at 14 time earnings

On January 5th, the investment bank Keefe, Bruyette and Woods (KBW) downgraded BOH because of expectations of lower earnings. KBW says that 2009 and 2010 earnings will be $2.60 for each year. This puts BOH's stock price at $36.40 if it were to trade at around 14 times earnings. Conversely, BOH would trade at $56.84 if it were to revert to the mean based on 2008 earnings of $4.06 (The Bank of Hawaii has estimated fourth quarter 2008 earnings of $0.89).

From the perspective of Dow's theory, BOH has three downside targets from the prior peak of $70 in September of 2008:

• $50.35
• $30.70
• $11.05

In the years from 1990 to 1997, BOH has retraced from the peak to between the 2nd and 3rd retracement levels according to Dow’s theory. If applied to the current price action this would bring BOH down to the level of $20.87. This would be the ideal buying point however we must be ready to pull the trigger anywhere between $30.70 and $20.87.

Considering that we're in a bear market it becomes necessary to decide how much an individual wants exposure to a bank in a deflationary environment. Assuming the worst, BOH could be viewed from the perspective of the "long-term" prospects based on the dividend. At the current dividend yield of 4.80%, BOH would double in approximately 15 years. This means that if you're of the buy-and-hold mindset then you would need to retain this stock for 15 years to recoup all that you have initially invested if you reinvest the dividends. This is a more accurate measure of the "long-term" in case you're wrong about the direction of the stock price. Additionally, BOH exhibits a 7 to 10-year cycle for price movement from trough to peak.

In the accompanying chart we can see that there have been two other major bottoms in the BOH’s stock price that were accompanied by a surge in trading volume. The current volume is giving similar indications as the 1990 and 2000 lows. All we need now is a good collapse in the price to reassure us of the opportunity to buy. That opportunity might come in the wake of BOH falling below the 52-week low of $36.32 reached on November 21, 2008.

BOH’s management has consistently rewarded shareholders for their patience and is likely to continue to do so. There are many ways to examine this company, however, be sure that you’re comfortable with investing in a bear market environment similar to 2008 before deciding to make your next purchase. Good luck in your research of this company. Touc.

Bear Market Rally Targets

The current rise in the stock market is moving along at a much healthier pace than was once seen from November 20, 2008 to December 15, 2008. We are now moving at a rate that will seem to trade in an uneventful range yet move incrementally higher.

As I stated in my post on December 10th, the market has three upside targets. Of the three targets for the Dow Jones Industrial Average, we have crossed the first, at 8943, with strong movement but weak volume. As of the close of market today, the Industrials are 609.90 points away from the next critical level on the index.

The Dow Jones Transportation Average has moved above the resistance level of 3692.57 by closing the day at 3717.26. This movement matched by the Industrials is proving constructive for the direction of the market.

The overall negatives for this stock market is the fact that volume hasn't been overwhelming. We need trading volume in the stock market to pick up in order to help confirm the trend. Also, the Industrial Production Index has fallen to 106.1173 in November from 106.7786 in October. While the Industrials and Transports are supposed to be leading indicators for the economy it would be nice to see the IPI move higher from the current levels but I wouldn't be surprised to see it move lower.