The $12 Trillion Bailout

The tally on the bailout has reached the $12 trillion mark. At this point, I'm no longer a fan of letting the system work out the problems of the past few years. $12 trillion better work or we're toast. After all, as a nation, we've bankrupted any semblance of credibility that our financial system had. If our situation gets any worse, a la Japan, then we won't have any means to backstop the problem.

My prior bailout tallies:

• $8.5 Trillion Spent and No Relief in Sight
• The Fed's $1.8 Trillion Lifeline Didn't Work
  

Source:

• Mark Pittman and Bob Ivry. "Financial Rescue Nears GDP as Pledges Top $12.8 Trillion." Bloomberg.com. Accessed April 28, 2009.
  

Graham and Dodd On Market Timing

The following is my critique of a passage of the investment "bible" Security Analysis by Graham, Dodd, and Cottle. This book is credited with providing Warren Buffet with the knowledge and background on how to accurately assess stocks. Although I know this book is basically about number crunching, my concern is how this book treats the question of timing of the purchase of stocks. In this regard, Security Analysis says:

Timing Consideration in Investment Policy- The old rule for the ordinary investor was that he should buy sound securities when he had funds available. If he waited for lower prices he would be losing interest on his money; he might “miss his market,” even if prices declined, in any case, he was turning himself into a stock trader or speculator. Much of this view retains its validity. However, the time when the investor should clearly not buy common stocks is during the upper range of a bull market.

Benjamin Graham, David L. Dodd, Sidney Cottle. Security Analysis, Fourth Edition. 1962. Page 70.

The first sentence says that a person should buy stocks when they have the money irrespective of values. To this point the word “sound” securities is not clear. I guess that a “sound” security is one that is not expected to go out of business based on “traditional” valuation methods. The second sentence says that a person who “waits” for lower prices would be losing interest on his money even if prices decline. By waiting, the prospective investor would become a trader or speculator. However, Graham and Dodd then go on to say that an “investor” should not buy in the “upper range of a bull market.” By trying to determining the “upper range of a bull market,” isn’t this the same as what they said a speculator or traders does? Anyway, how does one know what the upper range of a bull market is if they aren’t familiar with technical analysis? This suggests that a person must be familiar with technical analysis first and then apply fundamental analysis afterwards provided that the market isn’t in the upper range of a bull market. Strangely, this approach requires an investor to analysis the market at a time when values and earnings are most uncertain. Furthermore, stocks at this point are more susceptible to rumors and hope rather than facts and realistic expectations.

Another challenge is the fact that middle and lower ranges of a bull market is when the fewest individual investors participate. This is the equivalent to the first and second stage of a three stage bull market. The last stage or third phase of a bull market, characterized as the “upper range,” is distinctly known for individual investor activity and participation. For this reason, Graham and Dodd ask the impossible of the individual investor by telling them not to buy in the “upper range” of a bull market. If the recommendation is that timing doesn’t matter then Graham and Dodd should stick to this position. By following up their remark that timing doesn’t matter with a suggestion of times not to buy based on the level of the market leaves a mixed message. They should say, “don’t worry about the market, instead worry about the valuation of the company. Valuation will always suggest when to buy.” This would have re-enforced the message rather than confuse or misinform the reader.

Since I know the book Security Analysis is considered the bible of value investing this issue is certainly secondary but it does point to the overwhelmingly subjective way that the matter of timing of investment purchases is treated. However, the fact that timing is discussed at all, with their own view as to the best time to buy, is an indication that timing really does matter. If nothing else but to determine when not to buy. Interestingly, when Graham and Dodd say that you should avoid buying in the “upper ranges of a bull market” requires that you know where the middle and lower ranges are. So what method do you suppose using to determine this? If, somehow, you can determine the upper, middle and lower ranges of a bull market then why would you necessarily care about valuations? Wouldn’t you just throw all of your money in at the lower end and sell once reaching the upper end?

These may seem like the boneheaded questions of a fool, however Graham and Dodd go further in the next paragraph to suggest that it is impossible for the average investor to time the market. I will give my thoughts about the next paragraph on timing the purchase of a stock in my next post. Touc.

Related article: Graham and Dodd On Market Timing, Part II

Research Rec.: Bard Inc. (BCR) at $71.28

C.R. Bard Inc. (BCR) is the latest Dividend Achiever to reach a 52-week low today. According to Yahoo!Finance, Bard Inc. is "engaged in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide."

Bard Inc. (BCR) is one of the most efficient medical device manufacturers that I know. This is represented by both double digit return on equity and return on assets since 2001 as verified by Morningstar.com. The company's low debt position gives it lots of room to weather the future economic turmoil that might be on the horizon. Additionally, BCR has a very low dividend payout ratio of 16%. According to MergentOnline.com, BCR has increased its dividend every year for 37 consecutive years in a row.

According to Dow's Theory, the following are the upside and downside targets for BCR.

Upside Targets:

• $79.83
• $90.72
• $101.61

Downside Targets:

• $60
• $40
• $10
  

On the upside move there is significant resistance at the $85 level. Therefore it is well worth considering your willingness to hold this stock if it reaches $84. On the downside there is significant support at the $60 level. We can only hope that this stock falls further to increase the value component of this stock.

The purpose of my research recommendations is to point out quality Dividend Achievers that have reached a new 52-week low. From this point begins the research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the 2nd year of an 18-year bear market. A bear market that I expect to trade in a range between 16,000 and 5,000. The bear market will be considered over when the Dow Transports and Dow Industrials exceed their respective peaks on high volume or the dividend yield on the Dow exceeds 6% or higher. Touc.

Dow-Jones Let the Dogs Out...And Got Bit

After considerable pondering on the subject, I have come to the conclusion that the 89% decline in the Dow Industrials from 1929 to 1932 had little to do with the economic state of the nation. In fact, a simpler explanation lies behind the cause of the decline in the Dow which was thankfully never repeated since. A good portion of the blame should rest squarely on the shoulders of Dow-Jones, subsidiary of News Corp.

First, this is not an article to explain away the various levels of overvaluation in the market of 1929. It was clear then, as it is clear now, that the stock market was extremely overvalued. Also, the explanation that follows isn't the only reason for the decline of '29 to '32. We all know that various economic and political events pushed our economy and stock market to the known limits in the shortest period of time. In this article, I'm trying to point out or explain the reason for the extent of the decline in the stock market. I am hopeful that readers of this article will be open to a "different" perspective on this reasonably unique period which might broaden the minds of the reader rather than convince the reader to buy or sell their stocks.

As a person who tries to examine the Dow Jones Industrial Average from every angle, I have often wondered what the impact of the changes to the index would be if the changes to the index were never made. For example, where would the index be if AIG (AIG) wasn't added to the index on April 2004? How about if Bank of America (BAC) was never part of the index? Bank of America was added to the Dow on February 2008. What about if Microsoft (MSFT), Intel (INTC), and Home Depot (HD) weren't added to the index in November of 1999? Where would we be if Citigroup (C) and Hewlett-Packard (HPQ) weren't added to the index in March 1997?

These questions have significant bearing on why the index has fallen so much in the last year and a half. It is worth noting that the selection of these stocks were at or near the peak in the respective industry groups that these companies are members. As an example, when Bank of America was added to the index in 2008 it replaced Altria (MO) and/or Honeywell (HON). Both of these companies, when compared to BAC, fared much better in the time after being taken out of the index. In fact, Kraft (KFT), a successful spinoff of MO when it was taken out of the index, was added back into the index on September 22, 2008 replacing AIG. Unfortunately, once KFT was added to the index it promptly fell from its relatively high price of $34.97 to the current level of $22.55.

The decision to take AIG out of the index and put KFT into the index couldn't have happened at a worse time. After all, the Dow Jones Industrial Average is a price weighted index. This means that the higher the stock price, the greater the impact the stock would have on the overall movement of the index. Essentially, the people at Dow-Jones traded a low priced stock with little impact on the index for a high priced stock that was susceptible to falling during a crummy economy. Furthermore, by choosing KFT, Dow-Jones ensured that the index would fall further because high quality stocks like KFT are the last to go when the market hits the skids. And so, KFT promptly fell 33% after being added to the index. Being a relatively high priced stock in the index, KFT had a much more significant impact on the Dow Industrials than the 90% decline in AIG over the same period.

Effectively, what I am describing is a "buy high and sell low" strategy that Dow-Jones exhibited in recent years. Which got me wondering, how did they manage during the "Great" Crash of 1929? Well, the results were what I would consider to be astonishing. The untimely inclusion of companies like KFT, C, HPQ, INTC, MSFT, AIG, BAC and HD were nothing new. However, what was unique about the period of 1929 to 1932 was the number of changes to the index that took place in such a short period of time. A total of 18 companies were taken in and taken out of the Dow.

Never before and never since has the Dow had so many companies added and dropped as constituents of the index. The only other period that came close was the period from 1899 to 1901, when the index had 9 companies added and dropped from the index. As demonstrated earlier, the timing of the selections were not the most optimal. As one company was added at a relatively high price the outgoing company with a low price, which would have had little impact on the downside, was given the boot. This resulted in a vicious cycle which propelled the index much lower than was otherwise necessary.

I contrasted the period of 1929 to 1932 with other known bear markets like 1906 to 1924, when the Dow languished around the 100 level, and the period from 1966 to 1982, when the Dow traded at or below 1000. In each case, the number of changes to the index was marginal, at best. The 18 year period from 1906 to 1924 had only 13 changes or 1.38 changes per year. The 16 year period from 1966 to 1982 had only 4 changes or 0.25 changes per year. This is contrasted with the 1929 to 1932 period which had 6 changes per year.

If looked at from the perspective that Dow-Jones is always going to "buy high and sell low" then we can reasonable assume that much of the decline in the Dow from 1929 to 1932 was due primarily to the constant changes to the index. Frequent changes to the index causes "the market" to grope about for a bottom (no pun intended) that doesn't exist. It appears that Dow-Jones learned the lesson that "buy and hold" works better than trading in and out. However, the timing of their changes to the index has caused more pain to last much longer than if they just let sleeping dogs lie. Touc.

Keywords:

• delist
• delisting
• delisted
• replaced
• Travelers
• GM delisted
  
• Citigroup
• Cisco
  

The Importance of Dividends

On January 3o, 2006 I bought a stock that was, until recently, a Dividend Achiever. When I bought the stock it was selling for $16.21. At the time, the stock was yielding a little over 5% annually. My only consideration for selling the stock ,as with all Dividend Achievers, was if the company reduced or cut the dividend payment.

Fast forward to April 17, 2009. Today the stock has closed at a price of $9.50. Under normal circumstance this would be calculated as a loss of 41.39%. However, due to the dividend payments over the given period of time the total loss ended up being only 17.84%. All of this occurred during the single worst uncorrected down move in stock market history.

Given the current market conditions, the company has been forced to cut its dividend payment by 33%. The company might be taking the appropriate action at the right time, however the dividend cut means that I will no longer be able to hold this stock.

The key concept that should be gained from this demonstration is the fact that even in the worst of times, a company that has a consistent policy of dividend increases will be better able to sustain your capital through hard times. Had I not selected this (former) Dividend Achiever I would have been out the 41.39%. Instead, I walk away with a relatively marginal loss considering the price and date that I started my investment. This should be the lesson to all investors about practicality and importance of dividends. Touc.

Bear Market Rally Targets

My previous article on November 26, 2008 had projected that the Industrials were expected to go to the 10,836.11 and the Transports should go to 4126.56 by early May and August respectively. Because both indices have fallen further since that date, I need to update my figures to reflect the upside targets and the approximate timing of the targets.

• Industrial Average: 10,360.02 by late August 2009
• Transport Average: 3,748.40 by mid-October 2009

In the same article that I wrote about the Industrial and Transports, I gave my projections for the gold stock index, the XAU. At that time, using Dow's theory, I said that the gold stock index would go to 136.40 by late February or early March. On March 19, 2009 the XAU index hit 136.53. As of the close of market today the XAU sits at 134. My cycle analysis tells me that the trend for the gold stock index is supposed to go down from here. However, if we're in a bear market rally then we could see the XAU go much higher in the near term. So far, I can only guess that the accuracy of my prediction for the XAU gold index is nothing more than luck. Touc.

Unemployment figures compared to Bear market of 1966-1982

As we approach the 2nd year of our 18 year bear market, it is worth comparing the unemployment rate between this bear market and the last most comparable bear market. It is my opinion that the last comparable bear market was the period from 1966 to 1982. If our economy and stock market has a further free fall then I'd have to adjust my comparison to that of the period from 1929 to 1954.


When we look at the Bureau Labor of Statistics data on unemployment we see that both 2007 and 1966 share the characteristic that the respective periods were not all time lows for unemployment. In the case of 1966, the absolute low was in mid 1953 while the absolute low for the period preceding 2007 was in late 2000. The implications of this concept are that thus far everything that we're experiencing in this bear market is going according to planned regardless of the efforts of policy makers.

Next, I'd like to do a side-by-side comparison of unemployment from the low in unemployment in 1953 to the period of the peak in the stock market in 1966. Likewise we will compare the amount of change in unemployment from 2000 to the current date. Then we will observe the commonalities and contrasts between the two periods.

At the lowest levels in 2000, the rate of unemployment has increase by 113% as of Feb. 2009. During the same period of time from the low in unemployment in 1952, the unemployment rate increased 141% in the equal amount of time until 1961.