Coppock Curve Review

The last day of each month means that we can review the Coppock Curve. Below I have the data of the curve from when the index made its first reversal since hitting bottom in the month of May.

• Apr 2009: -388
• May 2009: -383
• Jun 2009: -378
• Jul 2009: -359
• Aug 2009: -321
• Sept 2009: -266

A visual representation of the same data can be found in the chart below.

If you'd like a long term perspective on the Coppock then click on the link from my end of May posting. The predictive value of the Coppock Curve over the long term has been eerily prescient. Please read my end of July notes on the Curve, as I stated that I wouldn't be satisfied with the rising trend of the index unless it went above the -260 level over a subsequent 3 month period. Without this happening I would believe that we've received a false signal as per the May 2002 "fake out." If the month of October remains around the current level then my parameters would have been met which would suggest that Dow 12,000 could be in the cards.

The market's ability to remain at current levels thus far continues to confound me, however I think that discussions of a disastrous October will be turned on its head just to perplex the critics of the market rise since March 9th. I'd go so far as to suggest that if we have a melt up then I wouldn't be surprised. Hold onto your hats everybody, here comes October.

Sidebar:

In an upcoming post, I will provide what I believe to be astounding data on Northwest Natural Gas (NWN.) For those who I have personally discussed the company with, please refrain from any action on this stock until I publish what could prove useful in your analysis of this Dividend Achiever. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Wal-Mart Stores (WMT) Altimeter

Below is a chart of Wal-Mart's altimeter. As mentioned before, the purpose of the altimeter, created by Edson Gould, is to determine the relative value of a company based on the quarterly dividend payment and the daily price of the stock or index.

The chart below is my own interpretation of WMT if the company pursued a less aggressive policy of increasing the dividend at such a high rate.

In the most recent period from 2007 to 2009, we can see that WMT is forming a similar double bottom. From this indication, we should look out for the stock to rise significantly over the next four years. The expected rise in WMT should be in spite of all the economic forecasts of a continued decline in the economy.

In the first chart, you can see that after 2004 WMT fell to an extreme level of undervaluation. The reason this occur is because WMT continued in increase the dividend at a high rate even though the company didn't have the earnings to support such increases. With diminished earnings, WMT issued more shares to raise capital to fund the dividend payments at the expense of per share earnings.

My model continues to increase the dividend every year but at a rate of 50% less than what WMT did from the period of 2004 to the present. This lowers the number of shares that need to be issued. In fact, my model would not have required the issuance of new shares to cover the dividend.

At the moment, we could consider WMT undervalued. However, keep in mind the fact that the continued issuance of shares in order to keep the dividend history intact undermines future earnings growth.

related article:

• Values Biding Time

Based on the above chart, we can see that WMT is traditionally overvalued between 1100 and 1200 level. Additionally, when WMT falls to the 550 level the company is considered undervalued. What should be noticed is the double bottom that took place in the 1995 to 1997 period. After that time, WMT took off like a rocket.

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After Hours Activity

In the table below, the pre-market volume manages to dominate all market volume during the regular market hours. The companies shown are only those with the top percentage change out of the 176 companies that have the same characteristic. The 176 is out of the 500 companies that I follow suggesting that almost 35% of the companies publicly traded are being "managed" in this manner.

In the table below, the after market activity somehow managed to offset all of the market volume during regular market hours. This is the complete list of companies out of the 500 that I follow exhibiting this characteristic today. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

South African Gold Stocks of the 1970's

If we're on the brink of a breakout to gold at $9,000 an ounce as UBS claims (source, Financial Times, requires registration after 2 free viewings) then let the party begin. By my own calculations, after halving my worst case scenario, gold could go as high as $9,414.16. Yeah, I know, make an outrageous claim and cement your fame. However, I have a logical explanation for my belief that a run up in gold is possible.

Confidence in my math on how gold could plausibly get to $9,000 is actually less important than the wait that we're in for to get to such a level. After all, the rise from $35 an ounce in 1969 to $800 an ounce in 1980 took a lot of twists and turns. I personally believe that we'd see a collapse in the price of gold and other related commodities before we move to the insane levels that I mentioned earlier.

There is one thing that is uniquely absent from this run up in gold that was present in 1969. South African gold stocks offering alluring dividend yields. Could you imagine getting paid 14% to invest in gold stocks that were at the early stages of a commodity bull market. In the table below, published in Richard Russell's Dow Theory Letter, you will see the South African gold stocks and the dividend yield that was paid out at that time (yellow column.)

This being a blog about dividend paying stocks, I wish I could have been around to partake in the South African gold stocks that sported such attractive yields. The downside of course was that the dividends were usually paid on an annual basis. Which was fine since Richard Russell was saying that you should be accumulating the stocks almost from the very beginning of the run up in gold in 1968 and 1969. Some of my friends, I wasn't born at the time, look back fondly to those days and always say that what they remember most about investing in gold stocks at that time was the dividends in the South African golds.

If you compare the yields on gold stocks today to the 1970's you'd think we were on different planets. As an example, Barrick Gold (ABX), a "domestic" producer, has a dividend yield of 1% while AngloGold Ashanti (AU) has a paltry yield of 0.40%. DRDGOLD (DROOY), the old Durban Deep, has the massive yield of 1.4%. In the list of gold stock provided by Richard Russell, only 3 stocks sported no dividend. None of the publicly traded South African gold producers have dividend yields that provide a margin of safety.

In an earlier posting, I scoffed at the notion of gold stocks paying a dividend just to get investors into the market. Despite that concern, it doesn't stop me from believing that if we are really in a long term bull market in commodities (inflationary period) then it would certainly be nice to get compensate for the wait.

Keep your mind open to the prospect that even if some gold stocks are paying a dividend just to get speculators in, there might be a chance that the current run up in gold is a repeat of the early stages of a genuine gold bull market. If you happen to find gold stocks with such outrageous yields then let me know, I'm always interested (only those with earnings please.) Touc.

*See my note on commodities in the comment section of my September 12, 2009 posting.

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Air Products & Chemical (APD): Sell at the Market

It is now time to recommend that Air Products and Chemicals (APD) be sold at the market. The stock has severely underperformed since the research recommendation was issued on September 29, 2008. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. It is hoped that the stock was researched and purchased well below the initiation price.

APD's stock price got crushed right after the research recommendation was issued which is exactly what we want to happen. Despite the massive decline in the stock price, APD continued to raise the dividend. APD is up an astounding 82% from the low in November. In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 345 days say that it is necessary to consider alternative opportunities.

APD was recommended when it was trading at $71.43. As of the September 9, 2009 close, APD was quoted at $75.56. This equals a compounded return of 9% in almost 12 months. Selling this stock now generates a return of 3.75x greater than the amount of the dividend yield. Additionally, the 9% gain exceeds the return on a 30-year treasury purchased on September 29, 2008 by 2.18x.

As I have indicated in the purposes and function of this site, the goal is to:

• maximize the annual yield of each trade.
• reduce time between buying and selling of each stock.
• exceed the annual yield of government guaranteed alternatives in each trade.

Research recommendations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, I prefer holding only 2-3 stocks at a time.

Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the research recommendation was made (please avoid making this mistake.) I aim for mediocrity in my returns, therefore I am happy with 9-12% annual gains. However, since codifying my approach to investing in 2005, I have had annual returns of 14% and above every year since.

It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. 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.

Please revisit Dividend Inc. for editing and revisions to this post.

Fannie Mae (FNM) and Freddie Mac (FRE) Fraud

In my article titled "Delisting of GSEs Looms Large" published on February 21, 2009, I discussed the fact that as Fannie Mae (FNM) and Freddie Mac (FRE) remained under $1, the prospects were that we'd either see the companies delisted from the NYSE or that the price would skyrocket. Not long after writing the article, the stock of FNM and FRE fell as low as $0.35 on March 9th. In that February article, I said the following:

"Look for a boosting of the share price to ridiculous levels (anything above $1) or go literally to zero in the next delisting notification process."

Soon after falling t0 $0.35, Fannie Mae and Freddie Mac briefly, on a closing and intraday basis, went above $1 on March 19th and then promptly fell from there. According to the New York Stock Exchange, spend six months under $1 and you get delisted. As strange as it may seem, September is exactly six months away from the month of March.

One reader of this blog, Ron, poignantly remarked, "...it seems to me the exchanges are constantly bending their own rules about delisting, extending grace periods, etc. Especially in this case the govt will probably be leaning on the exchanges not to delist." My response was, "...there is little need to do this (bend the rules.) If you're the government, and you don't know anything about fiscal responsibility, you'll more than likely feel compelled to waste the money and artificially inflate the stock price." Furthermore, I specifically stated that this was going to be "one of the biggest speculations in history."

Well, as promised, the U.S. government proved to be as gullibull as has been the case since the beginning of time. In an article titled "Fannie, Freddie Avoid Delisting as Price Triple" published by Bloomberg.com, you get the sense that there is a collective exhaling about the notification that the companies would not be delisted. Strangely, FBR Capital Market's Paul Miller seemed indignant at the thought that the Fannie and Freddie stock price went up. Miller, a banking analyst, said that the rise was "unjustified" and that there was "no fundamental value remaining" in the two GSEs.

I say to Mr. Miller (with tongue firmly in cheek), the threat of being delisted was a completely justifiable reason for Fannie and Freddie stock to go up in value. The government had already gamed the markets by reverse splitting AIG, so it would be challenging to commit the same fraud twice on the investing public in such a short time.

Also Mr. Miller, if Fannie and Freddie are delisted, the market for all bad mortgages cannot be absorbed by the taxpaying public through the GSE conduit. That means these two companies are incredibly valuable. Mr. Miller, maybe Fannie and Freddie are not valuable to you but they are definitely valuable to the banks that are receiving bailouts in the front door and dumping their trash on the taxpayer through the back door. Silly Mr. Miller, still talking about notions like fundamental values and such.

We have witnessed the all too familiar quality known as predictably irrational behavior of the government and the financial markets. In many respects, Ron was right, the rules were bent to favor those in powerful positions. When the NYSE says "The World Put Its Stock in Us," they should have also added that it is the best exchange that money can buy. After all, the NYSE should be held criminally for allowing such blatant fraud to reign on their exchange. Instead, they looked the other way in the face of clear manipulation and malfeasance.

It is just our luck that history repeats so well and so often in financial markets. This is the reason why the addressing of this matter of the delisting of the GSEs was so predictable. The maneuvers that I've described have happened so many times in the remote and distant past with far more inferior technology that it's laughable. The more things change the more they remain the same...and that ain't no cliche in the financial markets. Touc.

related articles:

• Delisting of GSEs Looms Large
• The Common Refrain, To Our Detriment
• A Scheme By Any Other Name
• Crossing the River Styx
• Our Protectors, Encouraging Malfeasance

Please revisit Dividend Inc. for editing and revisions to this post.

Dow Theory

In reading The Stock Market Barometer by William Peter Hamilton, I find that there is significant contribution to the topic of Dow Theory. It is Hamilton’s book that led to the even better The Dow Theory and Dow’s Theory Applied to Business and Banking by Robert Rhea. One area of contention is my belief that Charles H. Dow was absolutely right about double tops and double bottoms. Hamilton, in reference to double tops and double bottoms, says:

“In the same editorial (Wall Street Journal, 1/4/1902) Dow goes on to give a useful definition from which legitimate inferences may drawn. He says: ...

‘It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points. It is often difficult to judge whether the end of an advance has come because the movement of prices is that which would occur if the main tendency had changed. Yet, it may only be an unusually pronounced secondary movement.’

This passage contains, by implication, both the idea of ‘double tops’ and ‘double bottoms’ (which I frankly confess I have not found essential or greatly useful) and the idea of a ‘line,’ as shown in the narrow fluctuation of the averages over a recognized period, necessarily one either of accumulation or distribution.”

Hamilton, William Peter. Stock Market Barometer. Harper and Brothers. 1922. page 32.

In my May 15, 2009 article, I pointed out how important double tops and double bottoms have played a role in defining the direction of the Industrials and Transports. So important is the role of double tops and double bottoms that they have accounted for 72% of the major bull and bear moves in the stock market. The current market action, since May 1st, has been in favor of double tops and bottoms in the Transports index portending the change in the market direction in the intermediate term.

As you can see from the chart below, there have been two double tops and two double bottoms. So far, both double bottoms (B and C) and one double top (A) have been followed by sizable moves in the Transportation and Industrial index. Currently, we're faced with the double top indicated as D1 and D2. From what I can tell, if the decline from D2 goes any further below the August 17th low then we may retrace up to 75% of the gains from C2 to D1. This assessment is based on the prior correction of A2 to C1 from the rise of B2 to A2. On the way down to C2 there are smaller support levels however their significance is not as pronounced as the percentage change from A2 to C1. We should assume the worst case scenario and expect that the Transports will go to 3239.36. Falling to points C1 and B1 would be the next order of operation.

Interestingly, Charles H. Dow says that the action of double tops and double bottoms is most commonly associated with market manipulation. In Hamilton's Stock Market Barometer there is a July 20, 1901 Wall Street Journal excerpt where Dow says:

"Another method [for detecting manipulation] is what is called the theory of double tops. Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance."

Hamilton, William Peter. Stock Market Barometer. Harper and Brothers. 1922. page 36.

The method described by Dow is commonly executed by institutions and other large money interests. The term that is most often used today is called a trial balloon. If successful, the money interests can gauge small investors willingness to sell or buy stocks and then execute a bull or bear raid. Today, it would seem unheard of for the editor of the Wall Street Journal to suggest there is manipulation and then go so far as tell how to detect it. And yet, the words of Charles H. Dow ring true today as they did in early 1900.

Note: On August 25th I said that the great Dow Theorist Richard Russell was wrong about his call of a new or renewed bull market. Well, after placing a call to Russell and talking to his staff the bull market indication was taken away the very next day and a non-confirmation was iterated. I'm sure that Mr. Russell got many calls on that error so I don't think that I swayed him personally (though I'd love to think that I did.)

My goal wasn't to have the bull market indication taken away, instead it was to demonstrate that a non-confirmation needed to be worked through. For this reason I still stand by my belief that the bullish move (within the context of secular bear market) from the March 9th low isn't over unless we resolutely pierce the 8146 level on the Dow Industrials. Touc.

Dow Theory Updates