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.

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

Research Rec.: Helmerich & Payne (HP) at $22.55

Today I bought the oil driller Helmerich and Payne (HP) at the price of $22.58. If you remember, I recommended this stock on September 29, 2006 at the price of $23.03. After the recommendation, I issued a sell recommendation of the stock on August 12, 2008 when the stock was selling around $53.95. I missed calling a sell recommendation at or near the top when the stock was selling for $77.24 in June of 2008.

Keep in mind that my current purchase is strictly speculation due to the fact that we're still in a severe bear market. This means that when, and if, the market and economy continue to go lower, the demand for oil and its price will go down further. However, according to Dow's theory the following upside targets for HP's stock price are:

• $37.08
• $47.12 (50% principal)
• $57.15
• $77.24

We can expect that a bear market rally would bring the stock price at least to the $37.08 level. However, we should never forget the downside risks this stock is likely to face. My expectations of the downside are based on the earnings falling by 50% which would not impact the dividend at all. A decline of earnings should bring a decline in the price of the stock. It is safest for us to assume that the price would fall at least half of the most recent low of $17.01. If you're willing to accept a decline of 62% then this is a great speculation (as opposed to investment) in a quality dividend paying stock. According to MergentOnline, HP has increased the dividend for 31 years in a row.

Some would argue that I should highlight the relevance of peak oil, future inflation due to the government stimulus, increased aggregate demand, and other assorted factors that affect oil. While these matters are important the reality is that the markets rule the day. What I do know about inflation is based on the chart below. I pulled from BigCharts.com the price movement of Helmerich and Payne (HP), Coure D'Alene (CDE), Agnico-Eagle (AEM) and the Dow Jones Industrial Average from the period of 1973 to 1983.

Notice how HP was able to beat out the traditional favorites during inflation like Agnico-Eagle, a gold mining company. Also notice how HP hammered the best precious metal bet on inflation, silver, as represented by CDE. As expected the Dow Jones Industrial Average was a none factor as an investment but was used as a point of reference. If we're headed towards massive levels of inflation, after the wipe out of assets in the current deflation, then HP might be the best of the best when that time comes. 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.

Research Rec.: Sysco (SYY) at $23.60

Today's research recommendation is Sysco (SYY). There are many reasons to like this stock however we're going to address the problems first.

Currently, the overall market is still in bear mode. There have been no clear signs that we're out of the woods yet. SYY has managed to double it's debt position during the years 2005 and 2006. SYY's debt to equity, according to Yahoo!Finance is around 57% which is pretty high in an environment where the capital markets are hesitant to finance even the best run organizations.The long term technical pattern of this stock has formed a massive head and should pattern which indicates that the stock price could fall further. Any decline below the long-term support level of $20 will bring the stock price down to the $9 level at minimum.

Now, let's focus on the redeeming elements of a company that has increased it's dividend every year for 31 years in a row. First, SYY is a surprising inflation hedge. Value Line Investment Survey says that, "...inflation accounted for roughly six percentage points of the total sales gain of 7.1% for the full year (2008)." When I compared the price performance of SYY against Agnico-Eagle (AEM), Newmont Mining (NEM), and Couer D'Alene (CDE) I found that from the period of 1970 until 1983, SYY was slow to get started in reacting to the inflation of the 70's and early 80's but in the end it beat all of these gold and silver stocks by a mile. According to Morningstar.com, on a total return basis, CDE came closest by peaking with a 192% gain in May of 1983 while SYY peaked with a 465% gain in January of 1983.



With a 4% dividend, SYY is yielding twice what Geraldine Weiss, founder of Investment Quality Trends, believes to be an undervalued yield. The payout ratio of the dividend is of particular concern in a deflationary environment like this and SYY has a 46% payout ratio which isn't great but it isn't all that bad either. Essentially, the current payout ratio indicates that SYY could have its earnings cut in half and still make the dividend payment.

According to Value Line Investment Survey dated October 31, 2008, SYY normally sells for 15 times cashflow. For 2008, SYY recorded a cashflow of $2.46 per share. This means that SYY "should" revert back to the mean price of $36.90 at some point in the future.

When Dow's theory is applied to SYY, I could only come up with the following figures for the upsided:

• $27.58
• $31.00
• $34.42

and the downside:

• $9.97
• zero

With SYY within 13% of the low, this stock is well worth considering for the Bear Market Rally that we're in. However, if you're of the mind that inflation is coming down the road, with all this liquidity being injected into the economy, then SYY might be a good "long-term" hedge against inflation. Good luck with your research of this interesting opportunity. Touc.

Market Cycles

In the right hand column I have added the cycles for three different markets. The cycles that I have added are for the stock market, real estate market and inflation. These three are necessary for anyone who is interested in investing, saving or spending their money in the "long-term." As far as I'm concerned the long-term is only as long as you're willing to wait for the next cycle top. If a person doesn't have the time to wait until the next cycle top then they should be in the most conservative "guaranteed money" vehicles that are available. I have a section on the lower right hand column that quotes the most current money market and certificate of deposit rates that can be obtained.

First is the stock market which has, in general, a full cycle of 33 years from peak to peak or trough to trough. In the most recent period, the stock market had a run from the bottom in 1974 to 2007 (33 years). The period when the Dow went from 100 to 1000 took 32 years. When the Dow went from 1000 in 1983 until 10,000 which was accomplished in 17-19 years or half the 33 year cycle range.

Another perspective on the stock market cycle could be viewed from the length of prior bull and bear markets. In the preceding bear market when the Dow stayed at or below 1000 from 1966 to 1982 lasted for 16 years. The bull market in the Dow from 100 in 1942 until the high of 1000 in 1966 lasted for 24 years. When the Dow was at 100 in 1906 and didn't cross over 100 permanently until 1925 lasted 18 years. Obviously there are many ways to view the stock market cycles. I have chosen to use 33 year cycles until better or more convincing information comes along.

Next, we have the real estate cycle. There is only one source that I rely upon for real estate and that is Roy Wenzlick. Mr. Wenzlick's insights and statistical analysis of St. Louis and national real estate is unparalleled. The way that I found Roy Wenzlick was while thumbing through the 1987 book, "The Wall Street Waltz," by Kenneth Fisher. In the last paragraph referencing Mr. Wenzlick's real estate cycle chart we have this quote from Mr. Fisher, "The next long cycle trough isn't until 1990, which means that real estate has some bad years still coming- perhaps until 1992." When you add 18 years to 1990 or 1992 you get the next real estate cycle bottom in 2008 to 2010. As we are already in 2008 the bottom might be in however I'll opt for 2009 or 2010 just to play it safe. How prescient is that? What's more fascinating is that Mr. Wenzlick passed away in 1989 but his research on real estate is still useful. Mr. Wenzlick called almost all real estate cycle peaks and troughs since the initiation of his Real Estate Analyst newsletter in 1932.

Finally, we have the inflation cycle which has an inverse relationship to the interest rate cycle. The inflation cycle is much longer than the prior two cycles and lasts 50 years from peak to peak or trough to trough. As some readers will remember, our last peak in inflation was around 1980. From 1980 we have seen inflation slowly fall from double digit figures to our current level of nearly zero. Presently we are on track towards 25 to 27 years of a reversal in inflation. The only thing left before we're on that path is to get past the next couple years of disinflation/deflation.

A good book to refresh yourself on where we have come from and where we are going to, in terms of inflation, is titled, "Is inflation Ending? Are You Ready?" This book, written by Forbes columnist A. Gary Schilling, was published in 1983 and predicted everything that has happened since. The chapter titled "Apocalypse Now? The Risk of a Financial Collapse" is interesting since the subsection headings have titles that are eerily relevant to today. Some sample titles are:

• Thrift institutions: Why Merging the Strong and the Weak May Be Throwing Good Money after Bad (WaMu, IndyMac and Citigroup)
• Municipalities: Will Defaults Throw the Market into Turmoil? (California, anyone?)
• Financial Markets: Speculative Excesses Could Cause a Panic (Bear, Lehman, Merrill)
• Money Market Funds: The threat of a Redemption Stampede (recent breaking of the buck)

If you could have read this book back in 1983 then you probably wouldn't be surprise by any of the headlines that we see today.

The cycle information that I have provided on the right hand column is intended to be for reference purposes. I expect that as time passes these cycle periods will be reviewed and changed according to the quality research and data that I come across. I feel that as investors we should put all of our investments in perspective especially relative to the "big picture." Investing, saving or hoarding any other way would be spitting into the wind. Touc.

Sources:

• Fisher, Kenneth. "Wall Street Waltz." Contemporary Books. 1987. page 132.
• Shilling, A. Gary and Sokoloff, Kiril. "Is Inflation Ending? Are You Ready?" McGraw-Hill. 1983. page 151.

Something to ponder...

The chart above depicts the wholesale inflation rate from 1749-1980. The wonderful chart comes from The Wall Street Waltz by Kenneth L. Fisher manager of Fisher Investment and columnist at Forbes. What I would like to point out is that during this war we have experienced relatively little inflation. In fact, no other congressionally approved war except for Gulf War I did we not have to feel the consequences in the way of significantly higher prices at the pump and other basic necessities.

Please take a look at the rate of inflation before and after each warring period in U.S. history. During the period of the American Revolution inflation jumped 300%. During the War of 1812, inflation increased approximately 70%. The Civil War experienced inflation spike of 80%. World War I saw a surge of inflation by 115%. World War II had an increase of inflation of 100%. A small increase in inflation occured during the Korean War tallying a 12% jump which was a continuation of the WWII inflation. Finally, the Viet Nam War resulted in an inflationary spike of 290%.

What are the causes of these large spikes in inflation? The huge amount of government spending to finance each of these wars. The current war is no exception. Why didn't we get hit with high inflation during or after that last Gulf War? Government spending was put in check by a relatively quick end to the war. Also, the U.S. economy was in the middle of it's 18 year boom. While the booming economy wasn't a guarantee, in retrospect we could easily give an explantion as to the factors contributing to it.

Since we're not feeling the inflationary heat right now we can only expect that, at some point soon, we will experience inflation on the level of what happened during and after the Viet Nam War. If, for some reason, we're able to stave off inflation somehow I expect that we'll see the impact somewhere else in the world. Matters of inflation do not exist in a vacuum. Keep in mind that on every equation both sides need to be equal. The only difference in the world of economics is that it takes time for the equation to be reconciled.

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