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

Walgreen Co. (WAG): Sell at the Market

It is now time to recommend that Walgreen Co. (WAG) be sold at the market. The stock has severely underperformed since the research recommendation was issued on September 24, 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.

WAG has been on a steady rise since hitting a technical double bottom on March 9th 2009. At the current rate, WAG could easily breach the $39 level in the next few weeks. WAG is up an astounding 59% from the low in March. In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 338 days say that it is necessary to consider alternative opportunities.

WAG was recommended when it was trading at $31. As of August 27, 2009, WAG was quoted at $33.83. This equals a compounded return of 11.03% in 11 months. Conservatively, this would equal approximately 11.91% return. Selling this stock now also generates a return of 6.23x greater than the amount of the dividend yield if the stock was held for that extra month.

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.

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.

Sell Bard Corp. (BCR) at the Market

It is now time to recommend that Bard Corp (BCR) be sold at the market. The stock has performed moderately since the research recommendation was issued on April 23, 2009. 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.

BCR has formed a powerful accumulation base which could indicate that the stock is headed much higher. BCR is among many of the medical device manufacturers that are being underpriced due to the debate about healthcare reform. In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 126 days say that it is necessary to consider alternative opportunities.

BCR was recommended when it was trading at $71.28. As of August 26, 2009, BCR was quoted at $78.31. This equals a compounded return of 10.11% in a little over 4 months. Conservatively, this would equal approximately 29% return. Selling this stock now also generates a return of 10.64x greater than the amount of the dividend yield if the stock was held for a whole year.

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 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.

Sell Sysco (SYY) at the Market

It is now time to recommend that Sysco (SYY) be sold at the market. The stock has underperformed since the research recommendation was issued on December 17, 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.

SYY has formed an upside down head and shoulders pattern which could indicate that the stock is headed much higher. SYY is the ultimate hedge against inflation and it may go as high as my first target price of $27.58. In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 253 days say that it is necessary to consider alternative opportunities.

SYY was recommended when it was trading at $23.60. As of August 26, 2009, SYY was quoted at $25.34. This equals a compounded return of 10.85% in a little over 8 months. Conservatively, on an annualized basis this would equal approximately 15.65% return. Selling this stock now also generates a return 2.59x greater than the amount of the dividend yield if the stock was held for a whole year.

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 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.

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.