Stock List Rating Report

This is a 1-year performance recap based on the most popular stock lists that appear on SeekingAlpha.com.  Based on the March 19, 2010, the most popular stock list was generated by Dividends4Life's "9 Dividend Stocks Building Future Yield."  Because this is only a one year review, we're willing to accept that there may be no relationship in the short term to the potential long term performance.  However, we're attempting to determine if the author is on to something in their efforts.

Company	Symbol	3/19/2010	3/18/2011	Gain/Loss
Birner Dental	bdms	$16.24	$19.62	20.81%
Warwick Valley Telephone	wwvy	$13.29	$14.90	12.11%
Lennox	lii	$42.84	$50.97	18.98%
PepsiCo	pep	$64.58	$63.24	-2.07%
Astro-Med	alot	$7.35	$7.69	4.63%
Mead Johnson	mjn	$50.33	$55.90	11.07%
Guess? Inc.	ges	$44.23	$38.27	-13.48%
Air Products	apd	$72.59	$88.00	21.23%
Prospect Capital	psec	$10.94	$11.87	8.50%
			Average	9.09%
			Median	11.07%
Dow Industrials		10,741.98	11,858.52	10.39%
S&P 500		1,159.90	1,279.20	10.29%

Based on the total return performance of the list, the average gain was 9.09% while the median return was 11.07%.  Although the stock list's average return didn't exceed the performance of the Dow Jones Industrial Aveage or the S&P 500 of the same period, the median return implies that this list offered reasonable opportunity to exceed the market return if the buyer used discretion when purchasing the stocks.

2009 Year End Review

The following is the performance of stocks that were part of my research recommendations and the percentage increase since the recommendations. In some instances, I bought the stock at the time of the recommendation and at others times I delayed my purchase. It is clear that, for either long term investors or short term traders, throughout the year, my recommendations came at or near the respective lows for 2009.

By clicking on the stock symbol you can view the chart of when the recommendation was made and what happened to the price afterwards. It should be noted that while the overall market bottomed on March 9, 2009, the stocks that I issued research recommendations for reached new lows on different dates during the year.

• Bank of Hawaii (BOH) up 20.66%
• Helmerich & Payne (HP) up 63.33%
• Meridian Biosciences (VIVO) up 18.12%
• Matthews International Corp. (MATW) up 18.73%
• Bard Corp. (BCR) up 14.76%
• H&R Block (HRB) up 36.82%
• Cardinal Health (CAH) up 53.11% (adjusted for CareFusion spinoff)
• Weyco (WEYS) up 5.66%
• Northwest Natural Gas (NWN) up 7.91%
• Aqua America (WTR) up 8.49%

If bought as an equally weighted portfolio, the average gain would have been 24.76%. In my experience of buying and selling most, but not all, of these stocks, my personal gain has been 30% for the year. I currently have a 25% position in WTR and a 25% position in NWN and 50% in cash. The percentage gain in these stocks excludes the dividends paid throughout the year, which all companies dutifully distributed.

The full list of Sell Recommendations can be found at the following link:

http://www.newlowobserver.com/p/sell-recommendations-and-realized-gains.html

Within each link you'll find the initial piece that was issued regarding the individual stock in question.

What About Utilities?

Recently, a reader mentioned a strong interested in utility stocks. In particular, the prospects of Consolidated Edison (ED) as an investment choice. The following are my thoughts:

For an apples-to-apples comparison, I would probably consider Southern Company (SO) instead of ED. Southern is "only" 19% above the low as compared with ED at 30% above the low. Maybe the market affords a greater premium to ED which would explain the run-up in price.

However, I have done a back-of-the-envelop, apples-to-oranges comparison of ED and my most recent "utility" research recommendation of AquaAmerica (WTR). Although you have expressed a strong interest in the reg. electric utilities, I feel that ED may not be as compelling, at this time, as AquaAmerica (WTR), a regulated water utility. The following are some of the reasons why:

• WTR is within 5% of the new low while ED is within 31% of the new low.
• Although the Dividend4Life article on ED (written on July 21, 2008) has a fair value of $45.15, the percentage increase if the stock were to go to fair value would be a little over 6.39% (the Valueline fair value is $46). Interestingly, after July '08 the stock peaked at $46 in September 2008. Subsequently, ED fell to a low of $32.56 in March of 2009.
• This contrasts with the Valueline fair value, for WTR at $19.29. This implies a potential increase of 19.98%. With a dividend of 3.6% and potential increase of 19.98%, you have a 23.58% return to look forward to. ED, on the other hand, provides a combined potential return of 11.99%. Because we cannot expect either stock to accomplish fair value, the best we can do is take the one with the most potential.
• The Valueline multiple for the historical mean price for WTR has increased 18% (1.35 to 1.60) since 1997 while the multiple for ED has decreased by 30% (1.21 to 0.85) over the same period of time. This means that ED mean price has not managed to increase overall as time has passed. WTR has managed to gain shareholder interest as time has passed.
• IQTrends.com says that WTR is undervalued when it is yielding 4.4%. This means that the downside risk is to the $13.18 level, a decrease from the current price of 18.09%. For ED, IQTrends says the stock is undervalued at 7.5%. This would mean that ED would have to fall to $31.47, a decline of 25.85%.
• WTR has a S&P rating of A while ED has a S&P rating of B+.

Obviously, there is no telling which of the two will perform better. Additionally, both companies are in regulated industries. If WTR isn't 100% regulated now it will become more regulated at the prospect of water being depleted. The nice thing about water is that it is constantly being renewed on location, in some cases to a lesser extent. For an electric utility like ED, the ability to access coal, oil, and nuclear power is being more restricted every day.

Since both companies are huge borrowers of debt, I am concerned about the impact of a sudden interest rate spike. Such an interest rate increase would crush both companies regardless of the qualitative element described above.

If the high yield of ED is the only concern then, without a doubt, buy the stock. However, if the goal is high yield with an equal payout ratio and potential capital appreciation then WTR is a better purchase at this time. ED will definitely be on my radar as the price comes down. Touc.

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Use Dow Theory to Avoid Bear Markets

I would like to express a few thoughts upon reading Richard Russell's July 24, 2009 observations which you have quoted in your blog, and in particular related to his following words:

"....for a long time I believed that the best way to avoid the 'being wrong' problem was compounding. Compounding worked wonderfully for years after WW II, until the horrendous bear market of 1973-74. After 1974 compounding your assets worked well until the year 2008.

Let's say you are compounding your assets (reinvesting your dividends and interest) beautifully until a full-fledged primary bear market comes along (1973-74 and again in 2008). Within a year or two your assets are cut in half, and all your compounding has gone to waste.

What's the answer? For me, the answer is to follow the Dow Theory."

At the outset, we can see what Russell is saying: stay out of the bear markets, which also implies stay away from the bear market rallies as they tend to be unpredictable as to their reversals. Such rallies are usually not spotted by the Dow Theory in time to take any relevant action anyway.

The reason why he has made the above statements, I believe, is the fact that one should not be in stocks during bear markets. When a stock keeps declining in price week after week, month after month, what rationale is there in reaching out for dividends -- even if they were at a hefty annual rate. The bear markets devour wealth at a much bigger clip.

The Dow Theory is a technical approach to allow us to ride the bull markets and thus participate in acquiring a piece of the increasing wealth of the nation's corporate stock. This is when the compounding of dividends has any relevance. It also makes us focus on preserving capital, and letting go the search for dividends, during the bear markets.

When the preservation of capital is paramount, the return on money is not a criteria to be used for investing. If we are savvy enough to explore other asset classes, we would usually find a bull market in progress somewhere. As the saying goes: There is always a bull market somewhere. One example: Russell found a gold bull market in the making in 2001, advised the readers to get in and cajoled them to stay in all the way to-date.

Russell's views of July 24 shown above, which he has stated in alternate fashion in other writings, can be substantiated by evidence. For instance, after the Dow Theory gave a sell signal in the middle of 1929, if one had stayed out of the stock market altogether until the next bull signal, they would have preserved their capital while foregoing the search for dividends. If on the other hand, they had tried to ride the bear market rally until March 1930 which was a 50% retracement, they would have been wiped out subsequent to that tipping point. In this regard at least, the current scenario has a great resemblance to that period with our current 50% retracement.

It is reasonable to state that buy-and-hold, with or without dividends reinvested, is not a safe strategy when there is a bear market raging unless we have found a few extremely promising businesses with excellent entry points that are likely to keep growing despite the fact that everything around them in the stock market is on a crash-and-burn course. This requires finding excellent businesses that are selling at say 50 cents on the dollar -- as Warren Buffett has been doing over the past half century to a large extent. This is why Buffett has summarily rejected all technical analyses (including the Dow Theory) and has marched onward to his own drum.

Russell says, "For me, the answer is to follow Dow Theory" which means to me, "Follow the Dow Theory and stay out of the stock market's bear phases and their rallies; forgo dividends and preserve your capital during such times-- or if you must invest, find a bull market somewhere else." Otherwise, our approach will resemble trading in and out during a secular bear market -- which is what we are in right now.

Written by V.S.

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Research Recommendation: Aqua America (WTR)

Today's research recommendation is AquaAmerica (WTR). According to Yahoo!Finance's water utilities review, WTR is ranked as the second largest water utility based on market capitalization.

The most important point about this research recommendation is that WTR has fallen to a brand new low during market hours on Friday October 30th. This low may soon match the 2-year low of around $14.50 set in mid-October 2008. This is fascinating because the actual lowest point after the market peak of 2006 at $30 is no longer on our last 52-week radar. However, we will watch to see if the ultimate low of $14.50 is reached.

According to Value Line Investment Survey, WTR normally trades around 1.6 times the per share dividend divided by the "interest rate" (1.6x $0.51/interest rate). Valueline doesn't tell us by which interest rate we should apply to the company, so I have decided to apply the 30, 20, and 10 year U.S. Treasury rate. The following are the mean prices that WTR would trade at for each interest rate:

• 30 year rate- $19.29
• 20 year rate- $19.47
• 10 year rate- $23.93

Based on the 30 year rate, WTR is selling 19.91% below the historical mean value. I chose the $19.29 value since it was the most conservative figure.

However, according to Investment Quality Trends, WTR is considered undervalued when it is selling for $12.27 or less. This indicates that WTR is not currently undervalued but could easily get to the $12.50 range if market conditions continue on the downside. Additionally, WTR has a large debt load and a high dividend payout ratio of 74%. This means that the stock could only "afford" a decline in earnings of 25% before the company has to borrow or issue more shares to service the dividend.

According to Dow Theory, the following are the most important downside targets to watch for:

• $14
• $11.25 (fair value)
  
• $9
• $6.50

These targets are supposed to act as support levels. Support levels are points which the stock falls to but should not go below. If the stock goes below one support level then we should expect the stock to decline to the next target level.

When you look at the 5 year chart of WTR, one support level that is significant is the $15 level. This happens to be the most obvious level that the stock needs to hold above. Falling below $15 could indicate the negative nature of the sentiment for WTR.

Although this is a water utility and water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold.

Take your time to consider this Dividend Achiever for the good and the bad attributes. Your careful analysis of this company might compel you to purchase the stock. It is my hope that the stock falls further before your next acquisition. Touc.

• AquaAmerica Sell Recommendation
  
  

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Stock Market Projections

Q: What's your prediction on when a retest of the old lows will happen and what level are you projecting? And what do you mean by capitulation, a term typically associated with market lows, not market highs?

A: First, the word capitulate has been used, in many instances, in the wrong way. According to the Online Etymology Dictionary, the wordcapitulation originally meant “an agreement.” Capitulation later morphed into the modern word that means “to surrender.” In either case, capitulate means that two sides come to terms, reach an agreement or one side surrenders to the other.

When the folks on CNBC use the word capitulate, they blatantly show their bias for “the bulls” (you knew this already) by using the term capitulate to show that they want “the bears” to "surrender." So popular has the term capitulate been used to refer to the bears surrendering that the new meaning is to give up at the bottom of a bear market move.

As you read the beginning of my article on October 15, 2009, you’ll notice that I said that Dow Theory is all about confirmations. Confirmation is another kind of agreement. In this case, the Transports have retained a classic non-confirmation of the upward move in the Industrials. That being the case, capitulation (in this instance) means that either the Industrials confirm by falling instead of rising or the Transports rise instead of falling. Again, capitulation is what we’re seeking, regardless of the direction.

Dow Theory doesn’t attempt to provide a time frame for when a particular event is going to take place. However, doing some cycle analysis points to the possible lows we might see in the near term.

There are two types of new lows that I see for the future of the Dow Industrials. The first is based on the premise that the Industrials can maintain the current upward trajectory. In the chart below, I have indicated point A and point B. If the market falls below the red trendline then we could see the Industrials fall to the corresponding X, Y, and Z levels on the way to 8100.

The second type of market low is based on the premise that the Dow fulfills the Wave principle and falls below the upward trending line (red) to the old support level 8100 and then 6440. A true Wave move down to the old low would bring the market below 6440. However, the last time this was fulfilled, in the period from 1970 to 1974, the market only fell 8.5% below the previous low of 631.16 on the Dow Industrials in 1970. Additionally, the Industrials ran up from 631.16 in 1970 to 1051.70 in 1973, an increase of 118% of the previous peak. As more time passes I expect the index to fall to 5474 if we do manage to complete a Wave formation on the downside.

After I ran the numbers, the cycle analysis method indicates that from January 24, 2010 to February 15, 2010 is the next expected low. From a purely technical analysis standpoint, the lows are expected between the December 9, 2009 and March 1, 2010. It is interesting to note that both methods arrive at a similar time frame. Therefore, we should be willing to accept the most conservative estimate and that would be the period from December to March.

In my last attempt to divine the future, on April 3, 2009, I had said that the Dow Industrials would be at 10,360.02 by late August 2009. In that same posting, I said that the Transports would be at 3,748.40 by mid-October 2009. I came pretty close on all accounts. This was done using the cycle analysis method mentioned above. Again, the projections that I’m making are haphazard guesses at best.

Finally, cycle analysis, the Wave principle and technical analysis in general are not part of Dow’s Theory for reading the overall trend of the markets. Although I can make a convincing case that they are all derived from Dow's observations. Such a flippant remark will have to be explained at a much later date.

Dow Theory

Dow Theory is all about confirmations. What happens in one index should occur for the other index. Without confirmation, the theory says, then all bets are off in terms of the preceding direction of the index. Today's action in the Dow Industrials was impressive, with the index hitting a brand new high since the March 9, 2009 low. Not to be outdone, the Transports were in a mood to go to new highs as well. As a critic of the markets and one who practices Dow Theory, I feel that the new highs are not completely to my liking.

First, let's review a little about what Dow's theory has done for us lately. From a literal and practical perspective, Dow Theory has definitely pointed the way to the increase in the market since June 23rd and possibly since my March 20, 2009 posting. So far, the March 20th article has been 100% accurate about the direction and extent of this market move upward. It is worth rereading that article to glean the nuances about Dow Theory that is seldom found anywhere else. However, attention to the details of the changes in the Transports and Industrials on March 9th made it possible for me to feel confident about my research recommendation of March 10th.

Additionally, Dow Theory served its purpose quite well when, on November 12, 2007 in Barron's, Richard Russell was explicit in his interpretation of Dow's Theory calling for a vicious bear market. A greater piece on the instructions to get out of stocks hasn't been written since WSJ editor William Peter Hamilton's "Turn of the Tide" call of the market peak of October 25, 1929 (using Dow Theory, of course.)

The chart below is a continuation of the chart that I posted on September 2, 2009. In that article, I expressed the view that future market movement was clearly being transmitted in the Transportation Index. At the time, it was clear that the Transports were exhibiting double tops and double bottoms as a means to provide support and resistance levels. Each test of double bottoms were easily resolved by the Transports moving above prior double tops. As we now know, every new high in the Industrials, since the March 9th low, has been grudgingly accompanied by new highs in the Transportation index. This is powerful stuff since the Transports have acted as the proving ground for any moves upward. Basically, we've needed the Transports to co-sign on the Industrials claims that this is a bull market. Up to this point, the Industrials have had their checks cashed. However, the current market moves hasn't had the full endorsement of the Transports based on the November 4, 2008 peak.

On September 11, 2009, I spoke at length about that fact that the Transports couldn't seem to go above the November 4th peak. Although both indexes have gone to new highs, the Transports have been able to close above 4,071.81. Without this barrier being crossed resoundingly, the bull market will be on hold. The chart below shows how close we are to a true confirmation of a continuation in the cyclical bull market trend within a secular bear market. Note that the volume in the Transports has been in a declining trend since March. This is in stark contrast to the volume on the Industrials, NYSE, and S&P 500 which has been relatively flat since mid-June. The declining volume in the Transports tells us to party while we can because when the music stops there'll be a big mess to clean up afterwards (a major retest of old lows.)

While most might be focused on the Dow Industrials or S&P 500, the Transports tell us what we need to know. Despite the fact that confirmation of this index is likely, even though the economic conditions don't seem to match the markets outlook, we should continue to watch closely for any signs of capitulation. Touc.

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

Research Recommendation: Northwest Natural Gas (NWN) at $40.94

As I attempt to gather as much information on Northwest Natural Gas (NWN) before deciding to actually buy NWN, I found one bit of information that was almost astounding. As I have mentioned before, NWN has increased it's dividend every year for 53 years in a row. I have also talked about the fact that NWN will probably do everything in its power to maintain that dividend increasing history. So it is no surprise that the company announced on October 1, 2009 that they will be increasing the dividend for the 54th year in a row.

In today's research recommendation of NWN, I will cover the issue of cyclicality, the Coppock Curve, natural gas prices, and Dow's theory as it relates to the stock. I have compiled this information as I consider buying NWN. It is hoped that you thoroughly review NWN from all angles before committing any money to this accomplished Dividend Achiever.

When someone asks me about any cyclical stocks that I might be able to suggest, I often stammer at the thought. In fact, I'm clueless as any true cyclical stocks. However, after a considerable review of NWN, I can prove that it is definitely a true cyclical stock. First, NWN has exhibited a pattern of hitting a relatively low price between the months of January and May since 1970.

The stock hitting a low during the first five months of the year occurred 87% of the time. New lows during the months of February, March and April took place 78% of the time within the period from January to May. The month of February comprised 33% of the new lows between January and May. From the numbers that I ran, February and April are the most optimum month to consider buying this stock.

Next up is the Coppock Curve for NWN. In the chart below, you can seen that the Coppock Curve along with a 14-month trendline. After falling below the zero line, the rise crossing over the trendline indicated a ideal buying point on the first day of November 1994 at an adjusted price of $7.67. Subsequently, the stock reached an adjusted high of $16.74 in December of 1997.

The next point when the Coppock Curve was crossed by the 14-month trendline was in February 2000. If you bought the stock on the first day of March 2000 at the adjusted price of $12.70, you would have seen the shares rise to an adjusted price of $52.19 on September 18, 2008. The rise from March 2000 to September 2008 is in spite of the bear market which began in October 2007. Currently, NWN's Coppock Curve has just crossed above the 14-month trendline. All indications are that this is a buying point based on the Coppock Curve.

Next up is the natural gas wellhead price from 1977 to the present. In the chart below, I have indicated the points where, based on the Coppock Curve, the price crossed above the 14-month trendline. It appears that the Curve accurately called the bottom in the price, almost to the very lowest point possible. From this indication, it appears that the natural gas wellhead price is about to rise from here.

Finally, we'll look at the prospective upside and downside targets for NWN based on Dow's Theory.

Upside:

• $42.31
• $48.01
• $53.71
  

Downside:

• $36.20 (fair value)
• $30.30
• $18.50

All of the data points that I have mentioned should be included in your fundamental analysis of this stock. Pay particular attention to the downside targets since this is your best gauge of the risk you might be taking.

It appears that management feels confident about the prospects for the company down the road based on the most recent dividend increase. However, as the number of years of consecutive dividend increases ratchet higher the probability of a dividend cut increases. I am putting this stock on my personal watchlist so that I can buy it at the most optimal price, hopefully lower than the current level. Touc.

related Articles:

• NWN Altimeter

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Coppock Curve Review

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

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

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

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

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

Sidebar:

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

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Wal-Mart Stores (WMT) Altimeter

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

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

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

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

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

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

related article:

• Values Biding Time

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

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After Hours Activity

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

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

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South African Gold Stocks of the 1970's

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.

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

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

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

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

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

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

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

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

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

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

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

related articles:

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

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

Dow Theory

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

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

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

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

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

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

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

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

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

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

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

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

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

Dow Theory Updates

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