Industrial Production Index

In my previous discussion of the Industrial Production Index (IPI), I clearly made a mistake in my interpretation of the “price” action of the index. On March 16, 2009, I said that if the IPI fell below 97.8399 then we would face the equivalent of economic “dark ages.”

In looking at the movement of the index, I dismissed the peak of 95.3271 on May 1998 and the trough of July 1998 as a significant technical support/resistance level for the index. This appears to be a critical oversight since the June 2009 low in the IPI at 95.4571 appears to have created a temporary support level. Even though the difference between 97.8399 and 95.4571 is only 2.32%, I feel it is necessary to identify this issue in my analysis as a potential learning opportunity.


Now for the shameless self-promotion, in my January 27, 2009 analysis of the IPI index, I said, "Based on this most recent move the IPI is expected to decline at least to the December 2001 level of 97.8399." This observation was about as accurate as you could get. Additionally, I said, “…we're in for at least another six months of declines in the IPI.” This assessment was off by 1 month which isn't bad. As mentioned before, the IPI hit a temporary bottom in June 2009. Some folks who snicker at the thought of technical analysis being applied to an economic indicator that isn’t even a critical component of the U.S. economy have every right to question the method. However, the fruitless effort, in this instance, “seems” to have been useful.

Finally, let’s look at where I think the IPI index is possibly going from here. In the 90-year history of the reporting of the IPI, there has been only one declining period in which the index had temporarily gone up and then down more than once (fake out.) We’ve already had one fake out of the index when it sharply rose in October of 2008 and then continued downward. I don’t see (revealing my limitations) this index falling below the current trough of 95.4571 until it does a Dow Theory retrace of at least one, and possibly all three, of the following upside targets:

• 101.1035
• 106.7499
• 112.3963

Implicit in my discussion of the IPI is that we are at a turning point for the economy. Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners. Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market. I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past. However, from the standpoint of an economist the recession is over provided the IPI June low is sustained over an extended period of time.

Again, the IPI index generally lags the stock market by 6 to 9 months. Therefore, the index could continue to rise while the stock market has reversed to the downside. We’ll have to see just how much the most recent trough remains in place.Touc.

Monday's Article:

Dow Theory

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

Freddie Mac (FRE) Trading Notes

When it comes to the cornering of a stock there are two kinds, those that fail and those that succeed. The essential element that causes the failure is the inability to get the public to "buy in" to the market action. The movement of Freddie Mac (FRE) today appears to be on the side of those who are behind the cornering of the stock.

Market activity for Freddie Mac (FRE) was off the charts today, rising $0.49 or 66% in the pre-market session on almost 18 million shares and rising another 37% on 391 million in the regular hours of trading. This equals a combined increase, from Friday's closing price of $0.74, of 128%. (pre-market data below)Chart Source: Nasdaq.com

There is a distinction between the price movement of FRE and AIG. Although both are moving on syndicates' pre-market prompting, the FRE cornering of the stock may have the ability to succeed at keeping the price high for an extended period of time. Notice in the chart below that the accumulation/distribution of the stock had gone from the extremely negative low of -319 million (red arrow at point A) to a positive figure (green arrow at point A) based on the activity of today's trading.

Chart Source: Schwab.com

Contrast the movement of FRE's accumulation/distribution with the that of AIG. While both accumulation lines hit their lowest point on July 24th, the day after the Dow Theory bull market confirmation, AIG has not yet broken above the accumulation line (red circle.) Additionally, as AIG has gone up in price the volume has trended down.

Chart Source: Schwab.com

The AIG run does not look "sustainable" over the long term unless the accumulation/distribution improves along with a rising price and rising volume. For traders, it is expected that FRE will have a pullback, however there may be legs on this speculation as compared to AIG.

Because we're in a cyclical bull market within an even larger bear market I would consider these stocks as pure speculation regardless of the "potential" upside. Let's see which of the syndicates that are running these stocks up in pre/post market activity comes out the winner. From what I can tell, the FRE gang is miles ahead of the AIG crew in this race. This should be interesting to watch. Touc.

related articles:

• February 21, 2009

AIG Trading Notes

Today, AIG traded up a whopping 20.46% on volume of 101,064,355 shares. On the surface of it this seems like a resounding vote of confidence for a company that is 80% owned by U.S. taxpayers. However, beneath the surface lies a murky story waiting to be told.

The story waiting to come out is that on Thurday August 6, 2009, AIG had a closing price of $22.53. During "Pre-market" trading Friday August 7th, AIG went from $22.53 to $27.37, a gain of 21.48%. The volume of shares traded during the "Pre-market" was 5,785,607 (after hour thumbnail.)

Once the regular hours of trading began on Friday August 7, 2009 the price of AIG actually fell from the $27.37 pre-market level to finally close at $27.14. Again, the regular hours of trading volume was 101,064,355.

What does all this mean? Over 5 million shares moved the price from $22.53 to $27.37. Once the regular market opened the public battled it out to come to the conclusion that the $27.37 wasn't the right price. Over 100 million only impacted the price by $0.23 lower than what 5 million was able to do by increasing the price over 20%.

My conclusion is that the public has less confidence in the future prospects for this company, and possibly the stock market, than the pre-market participants would have us believe. I also noticed that in after-hours trading the price rose an additional $0.08 on volume of 244,363 shares. Ain't it funny, 244,363 shares can raise the stock $0.08 while 100 million results in a loss of $0.23. The pre-market and after-market traders are gaming the system.

It appears that if you want to be a "trader" then you need to be entering and exiting the market before or after regular market hours. Otherwise, I would be cautious about dealing in this stock and any other stocks that are so easily managed based on so few participants. Conversely, if you're a "long term" investor then be ready to sell on a moments notice using market orders only. If you use a stop order to sell at the price of $27 then it is likely that you could get stopped out at $24 instead of $26.99 or thereabout if the stock trades down in the pre-market on Monday (wouldn't be surprised if this happens.) Touc.

Source:

• Nasdaq Quotes. (Link to AIG quote on NASDAQ system)

Sell Bank of Hawaii (BOH) at the Market

It is now time to recommend that Bank of Hawaii (BOH) be sold at the market. The stock has performed modestly since the research recommendation was issued on January 12, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock took a huge dive in early March, it is hoped that shares of BOH were bought somewhere below the recommendation price.

From the current level, BOH is likely to continue higher as the current deflationary spiral ends and an inflationary environment begins. If you believe that inflation is coming down the road then the Japanese economy has typically performed better during inflation. Growth in the Japanese economy has typically meant growth in the Hawaiian economy. Additionally, BOH has held up very well in the banking crisis that just past and is poised to reach the $45 level, especially because we just got a Dow Theory cyclical bull market signal (within a larger secular bear market.) In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 207 days say that it is worthwhile considering alternative opportunities.

BOH was recommended when it was trading at $37.76. As of August 6, 2009, BOH was quoted at $40.98. This equals a total return (dividends plus appreciation) of 11.36% in a little over 7 months. Conservatively, on an annualized basis this would equal approximately 19.47% return. Selling this stock now also generates a return 4 times greater than the amount of the dividend yield if the stock was held for a whole year.

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.

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

After-Hour Conundrum

The first after-hour profile is Applied Material (AMAT). In the screen shot below we see that AMAT has a market capitalization of $18.3 billion. During market hours on August 5th, we see that the stock traded down by 1.51% or $0.21. Over the last 3 months, AMAT has had average daily volume of 21 million shares.

In the screen shot below, we see that in after-hour trading AMAT traded up by exactly $0.21 bringing the price right back to where it started in the beginning of the day. Notice that during the after-hour trading it took only 160,000 shares to offset 12,303,994 shares traded during regular hours. Also notice that four trades equaled 73% of the total after-hour volume.

What I'd like to know is this, who is holding 48,252 worth of AMAT shares valued at $663,465? Why does anyone who owns so many shares try to sell them at a time when they wouldn't likely get the best price available? Who is matching up these trades?

Next up is Cognizant Technology Solutions (CTSH). Below we see that CTSH traded up by $0.99 on trading volume of 9,503,064. However, during after-hour session we can see that CTSH trades back down by $0.99. It only took 99,202 shares to get the price exactly back to where it started earlier in the day.

Again, notice that someone with 43,700 shares worth $1,468,966 decided that after-hours was the best time to unload the shares. Not to be outdone, someone else with 32,400 shares valued at $1,109,768 feels like getting rid of their shares.

Conclusion

From my experience routing trades to the floor of the NYSE in the mid-90's, these transactions are suspect. After all, who would try to unload so many shares without disrupting the market price. In the case of Cognizant Solutions, the 43,700 shares sold was 44% of all after-hour trading. such a large proportion of trading volume would normally spike the price up or down dramatically. Strangely, there was someone willing to obtain the odd number of shares after-hours. This is a highly unusual transaction for so many shares at a time when the market is so illiquid. In fact, most of the After Hours Activity that I have posted show similar patterns.

My suspicion is that institution(s) are accumulating short/long positions as the price of the stock rises during the regular hours. Once the market closes, the same institution sell/buy the shares to/from themselves or a related party. Additionally, options for the stock could have been purchased, sold or written in anticipation of the expected change in price after-hours. This is definitely something that is worth investigating further to determine how these transactions are being carried out. Not to mention the fact that the shares are rising and falling by exactly the opposite amount that took place during regular market hours.

It is likely that all the data on after-hour trades will be wiped clean for tomorrow's trading. However, I'll be ready with an update of the companies that have an after-hour close that is the exact opposite of the regular hours of trading on my After Hours Activity section. Then you'll be able to verify exactly what I have demonstrated. Touc.

Sources:

• NASDAQ: After Hour Quotes (http://www.nasdaq.com/)
• Yahoo! Finance (http://finance.yahoo.com/)

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

Sell Matthews International (MATW) at the Market

It is now time to recommend that Matthews International (MATW) be sold at the market. The stock has performed reasonably since the research recommendation was issued on March 31, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock took a tiny dip in mid-April, however the recommendation was essentially at the low for the stock price. From the current level, MATW is poised to reach the second upside target of $40.77, especially because we just got a Dow Theory cyclical bull market signal (within a larger secular bear market.) In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 126 days say that it is worthwhile considering alternative opportunities .

MATW was recommended when it was trading at $29.04. As of August 3, 2009, MATW was quoted at $31.95. This equals a return of 10.25% in a little over 4 months. Conservatively, on an annualized basis this would equal approximately 29% return. Selling this stock now also generates a return 11 times greater than the amount of the dividend yield if the stock was held for a whole year.

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.

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

Achiever Alert: Pitney Bowes (PBI)

Yesterday (July 30th) in after-hour trading, Pitney Bowes (PBI) fell by $1.89 or 8.04% to close at $21.61 due to downward revisions of future earnings. This may be the situation where the stock becomes severely underpriced by the markets.

After a quick read, I found out that PBI normally trades around 7.5 times cash flow according to Valueline Investment Survey. If we use full year 2008 cash flow of $4.66 then we'd arrive at a mean price of $34.95. This suggests that PBI is trading 38% (a nice Fibonacci and Dow Theory number) below the mean price. As a Dividend Achiver, PBI has increased the dividend every year for 25 years in a row at a 10-year CAGR of 5.5%. According to Investment Quality Trends, PBI is undervalued at a price of $29 with a yield of 5%.

PBI has many issues that cannot be ignored. The debt situation is not very favorable to the company, especially since PBI provides the financing for their consumers. PBI could have overextended credit on the upswing of the previous cycle and is now getting hit by the double whammy of companies having difficulty paying back their debt as well as a stalled economy that has reduced the demand for their postal equipment. PBI also has a high dividend payout ratio of 73% based on trailing twelve months earnings.

My expectation is that PBI will fall further when the market opens. As long as the Dow Theory bull market indication isn't reversed and depending on the extent of the decline, I would consider buying PBI. Of course, I'm hoping for a situation where the price goes all the way down to the $14 or $15 level established in 1992. I strongly recommend that you watch this stock and do your research. Touc.

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

Sell Cardinal Health (CAH) at the Market

It is now time to recommend that Cardinal Health (CAH) be sold at the market. The stock has performed reasonably since the research recommendation was issued on June 4, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock took a small dip in the early part of July, but changed direction after July 10th and hasn't looked back. From the current level, CAH is poised to reach the $43 level considering that we just got a Dow Theory cyclical bull market signal (within a larger secular bear market.) In the pursuit of "seeking fair profits" the returns that this stock has provided within the last fifty-four (54) days say that it is worthwhile considering alternative opportunities.

CAH was recommended when it was trading at $29.95. As of July 28, 2009, CAH was quoted at $33.03. This equals a return of 10.28% in less than 2 months. Conservatively, on an annualized basis this would equal approximately 61% return. Selling this stock now also generates a return 228% greater than the amount of the dividend yield if the stock was held for a whole year.

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.

Please revisit Dividend Inc. for editing and revisions to this post.
This blog is being featured on www.condron.us, I hope you find this useful.

Dow Theory

The Dow Jones Industrials and the Dow Jones Transports both broke above previous highs on July 23rd. As shown below, the previous highs that were exceeded were the June 12th high of 8799.25 for the Industrials (blue line) and the May 6th high of 3404.11 for the Transports (red line.) Based on the fact that both indexes went to new highs on the same day would normally mean that we are in a new bull market. However, because Dow Theory considers trading volume as well as price, the fact that trading volume has been declining throughout the most recent price rise means that there isn't broad participation by either institutional or retail investors. Therefore, I would label this a cyclical bull market which can change direction to the downside without warning.

The following are the upside and downside targets for the Dow Industrials:

Upside:

• 9,626
• 10,302 (fair value)
• 11,588

Downside:

• 8192.89
• 7754.68 (fair value)
• 7316.49

At this point it becomes challenging to suggest buying any stocks that have already run up in price since the March 9th low. Direct exposure to the Dow Industrials or Transports might be the best way to take advantage of further moves upwards. I prefer the individual stocks with the largest weighting in the respective indexes. However, most investors probably would feel more comfortable with the exchange traded funds (ETF) DIA or IYT. ETFs aren't my cup of tea but they are alternatives to picking individual stocks.

If you've followed my blog for any amount of time then you'd know that I'm all for selling stocks that are relatively high (up from the March 9th low) and researching Dividend Achievers that are at or near a new lows. Right now there are only three Dividend Achievers within 10% of their 1 year low. The companies are Wal Mart (WMT), Bard Corp. (BCR), and Abbott Labs (ABT). I'm not comfortable with Wal Mart as explained in my June 18th posting. Additionally, I don't expect to be investing more than 50% of my portfolio during this period unless a company gets extremely underpriced. Good luck with your investing. Touc.

Dow Theory Updates

Our Protectors, Encouraging Malfeasance

Every time I try to do a little investigative work I'm sidetracked by new and more interesting facts. In this case, the new and interesting information that I came across is about the Public Company Accounting Oversight Board (PCAOB). It appears that the PCAOB is the organization or agency that was set up after the Enron and WorldCom fiasco to ensure that someone was watching the accounting and auditing firms. Don't forget that Arthur Andersen (AA) was thrown under the bus as an attempt to assuage an outraged public after Enron.

As part of the Sarbane-Oxley legislation PCAOB was created in 2003 to, "...oversee the auditors of public companies in order to protect the interests of investors..." Now remember, the PCAOB is a private, non-profit organization that requests a bulk of their funding from the SEC. Yeah...I know, the SEC is that other agency that also "...protects investors..." When I take a look at the folks who run this organization I am hopeful that the usual suspects aren't in charge. Ahh, lo and behold, the chairman of the board is none other than a former partner of Ernst & Young LLP (EY), one of the largest accounting and auditing firms in the world. I am irked at the fact that the agency set up to protect me from auditing malfeasance has as their leader a former partner of EY.

Well, maybe these folks are really trying to changes things. So the first thing I do is go to the section on enforcement. I know this has got to be the juiciest section of the website. After all, look at all the drama that has gone on in the last 2 years. As I look down the list of disciplinary proceedings that have taken place since the PCAOB was created I see only one company, Deloitte & Touche LLP, that I recognize out of the 22 cases listed. That doesn't make sense at all.

I decided to take a look at the Deloitte & Touche LLP (D&T) case since I suspect that the other firms were easy prey for the PCAOB. The case against D&T was in regards to the accounting irregularities that were associated with Ligand Pharmaceuticals (LGND). Ligand was forced to restate their financial reports for 2002, 2003 and 2004. In the summary against D&T, it was claimed that D&T knew of the irregularities and failed to comply with PCAOB auditing standards.

The penalty for the offense that D&T committed was a fine of one million dollars ($1,000,000) for not recognizing "...approximately $59 million less in revenue" or a reduction of 52% in revenue for the year 2003. Notice there was no statement of inflating revenue or falsifying the documents. Instead it was simply a matter of recognizing or not recognizing $59 million dollars. Considering that the amount in question is more than half the revenue generated for the year, I think this was more than just a lack of recognition.

Now that you have the quick and dirty of the situation let's craft a little perspective around the enforcement piece. The PCAOB fined D&T $1 million for (not) recognizing $59 million on the balance sheet of LGND. This represents 1.7% of the amount that was "falsified." However, as a result of the restatement of earnings, the market capitalization of LGND fell from $2.6 billion in April of 2004 to $649 million in March of 2005. This equals a loss in market capitalization of $1.9 billion.

The punchline to all of this is that if you add the "falsified" amount to the loss of market capitalization in LGND stock then investors lost a total of $2 billion. This makes the $1 million fine to D&T equal to 0.0005% (5/10,000th) of the amount that was lost by investors. In many respects, this kind of penalty encourages the auditing firms to continue to do what they've been doing all along.

Although I am not surprised by my findings I'm still disgusted at the amount of time and money that is wasted on an agency that draws down $157 million a year to not have any impact on the process of increasing the quality of auditing and the firms that conduct such activities. I find it hard to believe that the PCAOB could only find 22 instances where enforcement action was necessary in the years since its creation. If the wording of the disciplinary action against D&T was about "not recognizing" then the last two years was irrefutable evidence of other auditing firms not recognize problems in companies like Bear Stearns, Fannie Mae, Lehman, etc. Touc.

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

Research Recommendation: Weyco Group (WEYS) at $22.26

Today's research recommendation is Weyco Group (WEYS) because the stock price fell within 10% of the 52 week low during intraday trading. According to Standard and Poor's, Weyco Group, "...distributes, wholesale & retail, men's branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands."

WEYS has increased its dividend for 28 years in a row which gives us ample information about the quality of the company's management. Essentially, WEYS has survived 4 recessions of varying degrees since 1980 (current recession excluded.) As recently as May 28, 2009, WEYS has increased the dividend by a little over 7% from $0.14 per quarter to $0.15. This indicates that management believes that although the current recession could get worse the company will survive.

On the balance sheet we find that WEYS has little or no long-term debt, return on assets were 8.9% in 2008 which seems to be fitting since we've been in a recession since December 2007. Normal return on assets seem to be around 11% on the low end. Return on equity for 2008 was at 10.7%. Prior to 2008, return on equity was around 13% on the low end. A major concern regarding this company is the fact that it has such low trading volume. If there were to be a mass exodus then getting out at a reasonable price would not be possible.

From a technical standpoint, I like to look at WEYS from the worse case scenario. In this regard there is no better vantage point than the decline from the top in 1972 to the bottom in 1974. This is a period when the stock went from a high of $0.75 to a low of $0.20, a decline of 73%. If such a price decline were to take place from the most recent high of $41.99 then the assumed bottom would be at $11.34.

Applying Dow Theory to WEYS gives us the following upside and downside targets:

• Upside
• $23.95 (fair value)
• $29.95
• $41.99

• Downside (focus on the downside risk)
  
• $17.93
• $11.34
• $5.91
  

If we were to invest in stocks the way that Charles H. Dow would then we would buy half of the intended amount now and purchase the second half if the price declines. For example, let's say that you wanted to invest $4452 in this company. What you would do is buy $2226 worth of stock now (approximately 100 shares) and hold the stock if the price goes up. If the stock goes down then you would invest the remaining $2226 at the next level that you felt was ideal. This approach works well regardless of the market that you're in as long as you set aside the amount that you intend to invest before making the first purchase. Also, after making the first investment never invest the second half somewhere else.

The purpose of my research recommendations is to point out quality Dividend Achievers that are near 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. It is hoped that the stock price declines further so that the valuation meterics are in favor of the buyer. 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. Touc.

ETF: Indiscriminant Risk

In the past, the purpose of having a mutual fund manager was to have someone with an intimate knowledge of stocks and the economy choosing companies that should be invested in. Each mutual fund company was distinct in that they had their own approach and interpretation of the market cycle and size of the company that they would invest in. Within a certain category, like small cap stocks, a fund manager would decide which companies to own. Because the rule had always been to "diversify" away the risk, many different stocks would be selected in the event that a decline would come.

Unfortunately, as Americans appetite for investing grew it became clear that a large majority of mutual fund managers could not beat the major stock indexes. The logical question became, what is the point in investing in a fund that can't beat the index? Why not create a fund that does exactly what the index does instead? In response, the Vanguard Group created the S&P 500 index fund. This fund was intended to replicate the movement of the S&P 500 index by holding a proportional amount of stocks that mirrored the index with a minimal fee.

Initially, the idea of not trying to beat the index gained traction. After all, more than 70% of actively managed funds couldn't beat the least diversified index (Dow Jones Industrials) in any given year. In addition, 90% to 95% of managed mutual funds couldn't string together 3 years in a row of beating the S&P 5oo. Almost as a way to throw in the towel on the concept of managed mutual funds, a proliferation of index funds started to pop up.

Prior to the creation of the Vanguard S&P 500 Index fund, there was relatively few changes in the number of indexes in existence. After the creation of the S&P 500 Index fund there was a sudden jump in the number new indexes being created. Once an index was created an index fund was created to track that particular index. The goal was to have a fund that could track the index without having a manager make the decisions as to what to buy and sell. Of course, not even the new index funds could beat the indexes because there was the matter of "management" fees. After all, these things don't run themselves.

As I hinted at before, ETFs pose a tremendous risk to the stock market and the portfolios of the respective ETF will be remembered for the fact that due to a liquidity drain all the stocks held will collapse regardless of value. With little cash on hand and an "automated" form of management there will be a crash on the most liquid stocks because the relatively illiquid stocks won't be able register a bid.

ETF: Mediocrity with No Pretense of Value

We're really in for it when this finally devolves. The following paragraph is the introduction to the Operation of Exchange-Traded Funds in the Federal Register:

"All ETFs trading today operate in a similar way. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares (‘‘ETF shares’’) at net asset value (‘‘NAV’’). Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks called ‘creation units.’ A financial institution that purchases a creation unit of ETF shares first deposits with the ETF a ‘‘purchase basket’’ of certain securities and other assets identified by the ETF that day, and then receives the creation unit in return for those assets. The basket generally reflects the contents of the ETF’s portfolio and is equal in value to the aggregate NAV of the ETF shares in the creation unit. After purchasing a creation unit, the financial institution may hold the ETF shares, or sell some or all in secondary market transactions."
Securities and Exchange Commission Exchange-Traded Funds; Proposed Rules. Federal Register. March 18, 2008. Vol. 73, No. 53. page 14620.

My translation to the above is:

A financial institution can buy "creation units" or IOUs of questionable value from an Exchange-Traded Fund (ETF.) The acquiring institution can use a basket of stock of equally questionable value to pay for the IOUs. If for some reason the acquiring institution can find someone else to unload the IOU on then it can be sold in part or in whole on the secondary market.

I admit that I'm unfairly maligning the meaning and/or intent behind the language in the SEC's proposed rules for the way an ETF operates. However, there can't be no denying (double neg intentional) that this arrangement sounds a lot like the old collateralization of mortgage debt. Additionally, this is awfully similar to the way unit investment trusts operated from 1926 to 1929. The structure of a scheme like this only works when the market continues higher or new money floods in.

Exactly what do I see wrong with the SEC language? The above text allows firms that have stock of negligible value (or a value far less than what was originally paid) exchanged to another firm that gives "creation units" which are put into the accounts of retail clients who are not interested in dealing with the failure of actively managed mutual funds. At some point after the creation units have been designated to retail clients the financial institution can then sell the creation units to willing buyers on a secondary market.

Who would be willing to buy these creation units? Well, if enough interest is drummed up through advertising and buttressed by positive press then other financial firms can justify buying these units with the hopes of selling to a new wave of retail buyers.

The blowback from something like this is on par with the unwinding of a derivative contract gone bad. I hope that my skewed interpretation of this is due to the fact that it is now 3:30am. Touc.

related article:

• December 16, 2008

Values Biding Time

"Values go on increasing, while the market
rests..."
Samuel A. Nelson. The ABC of Stock
Speculation. Fraser Publishing. 1999. originally published
1903.

I think that this is the greatest gem of knowledge ever dispensed on the stock market. So what if the price of a stock is going nowhere? In fact, all things being equal, if the price is falling so much the better. To my thinking, value is accrued with the passage of time. With a steady dividend payment, especially a rising dividend, wealth is accruing at a rapid rate. Throw in a little inflation and you've got an honest to goodness asset.

A graphical example of value being accrued over time is the 13-year chart of Wal-Mart (WMT) below. If you ever come across a similar chart pattern then it would be worth your time to examine the company financials to verify the true value. Here is what I found out when I tried to confirm if Wal-Mart was actually increasing in value:

• Number of shares outstanding have decreased about 1% each year (good)
• Dividends increased every year for 33 years (good)
• Return on Equity in the high-teens (good)
• Above historical high dividend yield, according to IQ Trends (good)
• Long-term debt has doubled in last 10 years (bad)

The price pattern on Wal-Mart reflects a concern by investors, starting in 2000, that the consumer economy was going to be in trouble. If the price goes above $70 or goes below $45 then we'll have some advanced warning about what may be around the corner for the U.S. and Chinese economy. Seems that this company is a leading or more reliable indicator (for the time being).

In general, Wal-Mart's stock is not being recognized for the simple fact that the company can generate positive earnings. Although WMT's debt really bothers me, company management may be clever like a fox by amassing huge amounts of debt now to be paid off later with inflated dollars.

As much as this company appears to be increasing in value, I can't get the image of F.W. Woolworth's (the original five and dime store and former Dow Industrials component) out of my mind. Woolworth's was the equivalent of Wal-Mart but couldn't last even though it was offering rock bottom prices to the public.

Despite my concerns about WMT, I am looking for other Dividend Achievers with similar price patterns of trading in a "narrow" range. The longer the range, like 1906 to 1924 and 1966 to 1982 for the Dow Industrials, the more values are guaranteed to have increased. Touc.

Sell Meridian Biosciences (VIVO) at the Market

It is now time to recommend that Meridian Biosciences (VIVO) be sold at the market. The stock has performed reasonably since the research recommendation was issued on March 26, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock initially went down, but once the reporting of the swine flu came out the stock recovered all the losses and then started going higher. From the current level VIVO is poised to reach the $23.33 with little effort. However, the returns that this stock has provided within the last seventy-eight (78) days say that it is worthwhile considering alternatives.

VIVO was recommended when it was trading at $18.21. As of Friday June 12, 2009, VIVO was quoted at $20.35. This equals a return of 11.75% in almost 3 months. Conservatively, on an annualized basis this would equal approximately 54% return. Selling this stock now also generates a return 286% greater than the amount of the dividend yield if the stock was held for a whole year.

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.

Sell H&R Block (HRB) at the Market

It is with regret that I have to recommend that H&R Block be sold at the market. The stock has performed reasonably since the research recommendation was issued on May 19, 2009. 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 HRB is poised to reach the $19.15 level with little effort. However, the returns that this stock has provided within the last eighteen (18) days say that it is worthwhile considering alternatives.

HRB was recommended when it was trading at $14.42. As of Friday June 5, 2009 HRB was quoted at 16.06. This equals a return of 11.50% in a little more than two weeks. Conservatively, on an annualized basis this would equal approximately 233% return. Selling this stock now also generates a return 288% greater than the amount of the dividend yield if the stock was held for a whole year.

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.

Research Recommendation: Cardinal Health (CAH) at $29.95

According to MergentOnline, "Cardinal Health is a provider of products and services for the healthcare industry." Cardinal Health (CAH) has increased its dividend every year for 12 years straight.

Cardinal Health (CAH) is in a declining trend and is about to do a technical triple bottom. If successful, the stock of Cardinal Health will have a tremendous move up from the $27.75 level. On the other hand, if CAH cannot hold above $27.75 then the downside could take the stock to $9.60.

In June of 1997, Value Line Investment Survey said that with CAH trading at $25 the stock was expected to go to $50 by 2002. By 2002, CAH had gone to $70. In the Value Line dated May 29, 2009, CAH is conservatively expected to go to $85. If we cut that $85 in half we get $42.50 which is 42% above the current quoted price. Value Line has a mean price-to-cash flow ratio of 16. Based on 2008 cash flow figures, CAH is now selling 62% below the historical average price-to-cash flow ratio. Either the books are being cooked or this stock is ridiculously underpriced.

Applying Dow Theory to CAH gives us the following upside and downside targets:

• Upside
• $43.04
• $58.33
• $73.63

• Downside (focus on the downside risk)
  
• $28.70 (prior fair value based on 4/92 to 12/98 range)
  
• $23.80
• $9.60
  

If we were to invest in stocks the way that Charles H. Dow would then we would buy half of the intended amount now and purchase the second half if the price declines. For example, let's say that you wanted to invest $6000 in this company. What you would do is buy $3000 worth of stock now (approximately 100 shares) and hold the stock if the price goes up. If the stock goes down then you would invest the remaining $3ooo at the next level that you felt was ideal. This approach works well regardless of the market that you're in as long as you set aside the amount that you intend to invest before making the first purchase. Also, after making the first investment never invest the second half somewhere else.

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. Touc.

It Isn't Easy Being Green

One person that I think small investors of today can learn a lot from is Hetty Green. Mrs. Green, born Henrietta Howland Robinson in 1834, increased her investment holdings from $6 million in 1865 to $100 million, in cash, by 1900. And while the average investor doesn’t have six million dollars to start with, the lesson to be learned is far greater than the amount an individual has to invest.

The goal for this “infamous” investor was “to make and keep 6% every year.” How was this accomplished? Hetty Green never aimed for the “big hit” or large gains in the stock market. Instead, she sought reasonable gains which were secured and then rolled over to “real estate mortgages, government and municipal bonds, and other safe, income-oriented investments.” The money was moved out of the safe investments when the stock market was at extreme panic lows.

There are two points about the preceding paragraph that I feel are important. First, seek reasonable gains or “fair” profits. Never set out to beat the stock market. The market will fail to perform at some point, either individually or as a whole, and that is the opportunity to buy the stocks that you want. As you’ll see in the section About This Site, I only seek to exceed the rate of return on “guaranteed” money while all stocks purchases are done after the price has reached an extreme on the downside. Seeking “fair” profits implies that an investor considers selling a stock after achieving the goal of exceeding the return of “guaranteed” money rates.

The second point is that without panics or crashes small investors have little chance of succeeding in the stock market, especially through use of mutual funds and ETFs. Real wealth in stocks is built on understanding values and then seizing those values, en mass, whenever possible. Most great “speculators” have secured their wealth by investing during panics and with the selection of very few companies, typically 3 or 4. With the government constantly trying to smooth out the business cycle what ends up happening is a concerted effort to keep the wealth of the nation in the same powerful hands with the guise of protecting the average citizen.

Unfortunately, there was a tremendous price for Hetty Green to pay in order achieve such outstanding gains. Mrs. Green was known to avoid spending money at every turn. As an example, when her son was in need of medical attention on his leg, she concocted her own remedy. Her son later had to have his leg amputated due to the lack of proper medical attention.

After getting married to Ned Green, a well known speculator, Hetty's image didn't improve. In fact, Hetty Green was known as the "Witch of Wall Street." With her black dress and hat, miserly ways along with above average financial success didn't endear Hetty to the male dominated confines of Wall Street. However, her 9.50% after-tax returns certainly couldn't be ignored. Touc.

Sources:

• Fisher, Kenneth L. 100 Minds That Made The Market. Business Classics. 1993.
• Lewis, Arthur H. The Day They Shook the Plum Tree. Harcourt, Brace & World. 1962.

All the Data That Seems Fit to Print

As a person who follows the stock market and the economy, I find it surprising that the National Bureau of Economic Research (NBER), as opposed to Dow's Theory or the stock market, is looked to in determining when we're in a recession or a recovery. The evidence is resoundingly against having NBER guide us to clarity in the economy.

My first example of why the NBER isn't a great guide for the state of the economy starts with the November 2001 press release telling us that the peak in the economy took place in March 2001. This would be great if we were informed in May or June of 2001. I mean, none other than Ben Bernanke was on the team that issued the press release. Contrast that with Dow's Theory which gave a bear market indication on February 22, 2000. The difference between the NBER peak in the economy and the Dow Theory indication was 9 months. The stock market, as represented by the Dow Jones Industrial Average, peaked in January 2000.

On July 17, 2003, the NBER announced that the bottom in the economy occurred on November 2001. This was a full one year and eight months after the fact. The stock market bottomed September 2002 while Dow's Theory gave the indication that the economy had bottomed on June 3, 2003. It seems that what is useful is the most accurate and timely not the most spurious.

Finally, on December 1, 2008, NBER announced that the peak in the economy had occurred on December 2007. During the week of June 16, 2008, Dow's Theory indicated that the bull market was over. This was six months before the actual announcement by the NBER. The stock market peaked in October of 2007.

How useful are the NBER announcements of when a peak or trough occurred in the economy? Judging by the extreme lag in time when the public is notified, there seems to be little use of a committee that tells us almost two years after the fact that we're in a recession. As we go back in time we can easily see that the averages (Dow Industrials and Transports) discount everything while the NBER selectively chooses when the data seems to fit. Touc.

Dow Theory Updates

Research Recommendation: H&R Block (HRB) at $14.42

H&B Block (HRB) is one of the leading tax preparation companies in the U.S. On Monday May 18th, HRB reached a new 52-week low at a price of $13.73. HRB has increased its dividend every year for 11 consecutive years in row. Prior to cutting the dividend by 31%, from 1995 to 1997, HRB had increased the dividend payment 13 years in a row.

According to Value Line Investment Survey (dated 5/22/2009), HRB is selling under the average price-to-cash flow of 12 times. Using the full year cash flow of $1.84 for 2007, HRB has a mean price of $22.08. At the current price, HRB is expected to increase by 35% if it were to revert to the mean.

Unless we're going the way of an even "Greater" Depression, this stock has an exceptional amount of potential. HRB has rid itself of the toxic waste of subprime mortgages that it once owned. Unlike the major banks, which recently had to water down their stock, HRB has maintained the same number of share outstanding. This means that any earnings in the future will be dramatic compared to the last two years.

According to Morningstar (dated 4/24/2009), HRB faces lawsuits related to the former mortgage unit that was involved in subprime lending. Additionally, HRB has accumulated massive amounts of long-term debt as well as sub par return-on-equity and return-on-assets in 2007 and 2008.

Applying Dow Theory to HRB gives us the following upside and downside targets:

• Upside
• $19.15
• $24.57
• $30
• Downside
• $7.71

By falling to $13.73 intra-day, HRB pierced a prior technical support level ($13.90). If HRB can hold at the current levels then a 24% gain to the $19 level would be easy to accomplish. HRB seems like a great company to investigate for your next investment purchase. It is my hope that the stock price can continue to fall so that the shares can be acquired at a better price. Emphasis should be placed on the downside risk of HRB going to $7.71.

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. Touc.

Financial Panic Chronicles

On October 6, 1929, it was reported that BodenKreditAnstalt would be merged into CreditAnstalt in a deal valued at $17,000,000 or $211,000,000 in 2008 dollars. The merger of the number two bank into the number one bank was due to the low capital position of BodenKreditAnstalt after WWI and the excessively loose credit standards that essentially put the bank on the ropes.

At the time, the deal was pushed through by the Austrian government and had to be backed by F.M. Rothschild and several London banks. In an effort to boost confidence, the Austrian government guaranteed all bank deposits.

After the initial stock market decline from September 3, 1929 to November 13, 1929, the stock market rallied 48% to the peak on April 17, 1930. For many, the rise in the market seemed to provide some reassurance that the financial system had been restored. Unfortunately, because a bank's financial strength is closely tied to the value of the stock price, the subsequent worldwide financial meltdown from April 18, 1930 ensured that any, and all, bad loans from the BodenKreditAnstalt/CreditAnstalt merger would be next to impossible to resolve.

CreditAnstalt, ladened with the bad debts of BodenKreditAnstalt, soon suffered from it's own problem lending and falling stock price. CreditAnstalt, founded by S.M. von Rothschild and banker to the Hapsburg empire, was now in need of a lifeline. London banks, the Bank of England, Germany's Reichsbank, Bank for International Settlement and the Bank of Austria all threw money at CreditAnstalt starting in May of 1930 in a failed attempt to shore up the problem. The ultimate failure of CreditAnstalt in 1931 led to the worldwide banking crisis and bank holidays in the U.S. that same year.

According to the New York Times, the failure of CreditAnstalt, Austria's largest bank, lay squarely on the shoulders of the government effort to merge BodenKreditAnstalt. The newspaper aptly stated:

"The troubles of the CreditAnstalt are quite unanimously ascribed here to the unsound policy pursued in 1929, when the crippled BodenKreditAnstalt was attached to the larger concern."

"Vienna's Market Calm in Bank Crisis." New York Times. May 18, 1931. p. 31.

Similar tactics have been displayed with the government imposed mergers of Bear Stearns with J.P. Morgan, Bank of America with Merrill Lynch, and Wachovia with Wells Fargo. How do I know that these mergers were forced on the acquiring institutions by the government?

• On the Bob Brinker radio show in an interview, available until 5/15/2009 (Saturday, 3pm-4pm hour), with the fawning Patricia Crisafulli, author of House of Dimon, it was stated emphatically that Jamie Dimon, CEO of J.P. Morgan, said that "we were asked (by the government) to do this. Bear Stearns was never something we would have gone out to buy..."
  
• The Bank of America and Merrill Lynch deal has been recently exposed by BofA CEO Ken Lay Lewis as a sort of "strong-armed" tactic by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.
  
• I cannot say for sure that the deal between Wells and Wachovia was government forced. However, it is my observation that the Wells deal with Wachovia was simply a PR ploy to get the public to believe that Wells was healthier than Citigroup and therefore better positioned to take on new reponsibilities. This strategy was crafty and similar to forcing $225 billion on nine "select" banks as a way to mask who is really the weakest. Citi was already known by the public to be a zombie bank so Wells was the target of a spin campaign by regulators.

The passing off of one troubled institution to the next, in the hopes that the headache would go away, did not resolve the problems associated with the bad lending practices or malinvestment from prior periods. The fact that this approach to solving the problem has been repeated throughout the G8 nations and beyond leaves little room for error. The blowback from such policies could set off a financial storm of unimaginable length and depth. All it would take is one slip up, in a far flung region, that could set the dominoes in motion. Touc.

Values According to Samuel A. Nelson

S.A. Nelson is credited with coining the term "Dow's Theory." In fact, Nelson tried to convince Charles Dow to write a book about his articles in the Wall Street Journal but did not succeed. After failing to get Dow to write a book, Nelson wrote his own based on Dow's writing. The book titled ABC of Stock Speculation neatly lays the groundwork for Dow's Theory to be recognized and interpreted throughout history.

In one excerpt from the book A Treasury of Wall Street Wisdom, Nelson says:

"...stocks have recovered after artificial depression and relapsed after artificial advances to the middle point which represented value as it was understood by those who bought or held as investors."

This means that if an index or stock that has fallen below the halfway point of the previous advance or risen above the halfway point of a previous decline, then the index/stock is either undervalued or overvalued. If the index/stock has fallen close to the prior level of where the advance started and the index/stock is still fundamentally sound then the index/stock could be considered extremely undervalued. Likewise, if the index/stock has risen far above the prior high then it is considered overvalued.
 

When I start to consider investing in an individual stock, I only want to know if the price of the stock has reached a new 1-year low. From this vantage point, I can determine if the stock is trading at an extreme relative to the halfway point of the previous advance and decline. Again, this approach can only work if the company is generally in fair condition. This means that earnings exist, the dividend payout ratio isn't too high and management has a track record of rewarding the shareholders and etc.

The halfway point of the previous advance or decline is the point at which "long-term" investors would consider the stock or index fairly valued. Traders can take advantage of this fact and use it to their benefit. In the chart below, I show the Dow Jones Industrial Average since 1997.
What is important to notice is that the artificial advance and artificial depression meet at the halfway point of 10,302.31 (dark blue horizontal line.) If drawn backwards to the point when the Dow first went above 10,000, we can see an enormous amount of time spent at or around 10,302.31. This indicates that, for now, "long-term" investors fairly value the market at the 10.3K level.

Dividend Achiever Notes

In all of the market turmoil of the last two years, it is interesting to note that three Dividend Achievers are above their 2007 highs. The three companies are:

• Lancaster Colony (LANC) 39 years of div. increases and within 6% of top
  
• Family Dollar (FDO) 32 years of div. increases and within 6% of top
  
• Ross Stores (ROST) 14 years of div. increases and within 7.84% of top
  

Not far behind are the following companies:This blog is being featured on www.condron.us, I hope you find this useful.

• Suburban Propane (SPH) 10 years of div. increases and within 18% of top
  
• Valspar (VAL) 30 years of div. increases and within 17% of top
  

One way to look at these stocks is that if you bought them at their prior highs then you have lost little or nothing during one of the worst bear markets in history.

Another way to look at these stocks is that they are the most likely sell candidates since it is clear that they are selling at relatively high levels. Ross Stores (ROST) has the most interesting chart pattern because it has gone down to the $23 level 5 times since 2004 at regular intervals and moved up from there. This might mean that ROST can be considered a buy candidate at $24 or a short sell candidate at the current level. I hope to be on top of ROST when and if it hits $24 again. Touc.

Dow Theory

With the Dow Jones Transportation index closing above the 3204 level and the Dow Jones Industrial index closing above the 8281 level we have received the confirmation that a new resistance level is in place. This means that the Dow Jones Industrial index will go up to the point 9000 while the Transports will go up to 3717. Unfortunately, NYSE volume is not supporting the upside move so the indication is that we're still in a bear market.

From the standpoint of a trader, the Tranports would go up 16% while the Industrials would go up 8% from the current levels. If I were to "trade" this potential move, the best one would be on the Dow Jones Transports Index. The exchange traded fund that mirrors the DJT is IShares DJ Transport Average (IYT). For an investor who is concerned about being forced to hold for an extended period of time the following Dividend Achievers are within 10% of their 1 year low:

• H&R Block (HRB)
• Abbott Labs (ABT)
• Becton, Dickinson (BDX)
• McCormick & Co. (MKC)
• Wal-Mart (WMT)

These five companies are great if you're willing to accept the downside risk. The downside risk is that we're still in a bear market and although these might be great companies the market can turn down at any point, which would bringing down the price of these relatively undervalued companies. Touc.

Dow Theory Updates

Seeking Fair Profits in Investment Portfolios

Charles Dow, founder of the Wall Street Journal, once said:

"...secure stock at a time and at a price which will give fair profits on the investment."

The most essential piece in this concept is the idea of fairness in stock investing. For some, this idea might seem like a quaint notion however it exemplifies an essential quality that is necessary for all stock market participants. What exactly is "fair profits?" Dow covers this concept over and over again. Dow says:

"A 10-point decline under such conditions would be almost certain to bring in a bull market more than 5 points recovery and a full 10 points would not be unreasonable..."

Another example of how to determine what is fair is said in this way:

"A much more practicable theory is that founded on the law of action and reaction. It seems to be a fact that primary movement in the market will generally have a secondary movement in the opposite direction of at least three-eights of the primary movement. If a stock advances 10 points, it is very likely to have a relapse of 4 points or more. The law seems to hold good no matter how far the advance goes. A rise of 20 points will not infrequently bring a decline 8 points or more."

In the preceding examples, when a stock or index is rising or falling, we should be able to expect a decline or rise to retrace at least 38% to 50% and quite possibly 100% of the move. To be fair, we should be willing to accept that we'll never catch the exact bottom. Therefore, we should content ourselves with getting between 15% to 25% of any movement.

To better illustrate how this concept works, let us use the peak of the Dow Jones Industrials on October 2007 at 14,164.53 to the most recent low of 6440.08 on March 9, 2009. According to Dow's theory the market should go back to the 9375.37 for a 38% reaction (bear market rally) or 10,302.31 for a 50% reaction (bear market rally). Since we cannot say for certain that the decline is over at the 6440.08 level, the best we could do is to buy as the market is moving up, when Industrials and Transports go up together on strong volume.

What would I buy if I were investing based on the expectation of a rebound in the stock market? The best option for "trading" purposes is to buy the Diamonds (DIA) which are supposed to replicate the movement of the Dow Industrials. However, I prefer individual Dividend Achiever stocks which pay me while I wait. On March 10th, I bought Helmerich and Payne (HP) when both the Industrials and Transports reversed their direction. At $22.56 the price of HP was reasonably low. Not knowing where the top would be I sold my position in HP at $26.22 on March 26th for a gain of 16%.

After I sold HP, the stock went as high as $34.50. Basically I gave up the opportunity to receive a 53% gain. However, Dow's idea of "fair profits" means that I must be satisfied to receive the 16%. While I could have bought Citigroup (C) or Bank of America (BAC) I couldn't justify putting my money into stocks that weren't transparent and had discontinued their dividend increasing policy. After selling HP, I bought Meridian Biosciences (VIVO), a Dividend Achiever that had reached a 1 year low on the same day.

In the example that I've just given it is important to know that according to Dow, a gain of 5% was considered to be "fair profit." I guess if "guaranteed" money rates can easily be exceeded in a stock transaction then it might be worth the investment. Touc

Dow Theory

The movement of the Dow Jones Industrial Average and Transportation Average was extraordinary on Thursday March 30th. According to Dow's Theory, the indices only needed to close above 8280.58 for the Industrials and 3203.74 for the Transports. Both averages traded above these levels during the day but could not hold on for the close.

As I said in my previous posting of March 27th, if these levels can be breached the stock market is likely to go to the 3717.26 level for the Transports and the 9086.21 level for the Industrials. This would have been a stepping stone towards reaching the 10,000 level in the Dow. However, the action of the Transports and the Industrials was somewhat alarming. Both indices crossed above both levels by a wide margin but closed below the most important Dow Theory levels. It is hoped that the market can establish a trading range around the current levels. Otherwise, we're about to face significant resistance that could push the market back to the 6400 level. Touc.

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.