The Dow Jones Industrial Average, the most established US stock market index, finally hit a post-September 2008 high Monday, joining its junior mates, the S&P 500 and the Nasdaq Composite, which have been vaulting higher ever since a key reversal on December 1st.
The DJIA is at 11,454, up 44 points, a nose over its November 5, 2010 level of 11,451.53.
The S&P 500 at 1pm was at 1,245.27, up 4.87 and the NASDAQ Composite was at 2,637.17, up 0.63 points.
The lesser-followed, highly cyclical Dow Jones Transportation Average, was down Monday at 5,078 but generally traveled in loftier ground, had key component FEDEX announcing they would move 223 million shipments worldwide this holiday season, up 11% from last year (half from on-line and catalogue retailers).
As one would expect from the carnage in the bond market (the US 10 year note yielded 3.36% Monday morning, but was yielding 2.53% two months ago), the Dow Jones Utilities Average is in a minor downtrend; fixed income vehicles lose value to adjust to higher income flows/rates demanded.
Bonds had been rallying strongly yesterday morning and we were busy buying Canadian REITs to enjoy some income over the Holiday season, but that is the subject of another report.
The S&P/TSX index up here in the Great White North, was trending higher at 13,333.7, up 94.2 points, close to a twin peak of 13,367 set December 7, on the back of a lower USD (euro 1.3413 up 2 cents) higher oil price ($88.20 up 41 cents) and higher gold bullion ($1,396.50 up $11.60)
Where do we go from here? I am a firm believer in “the trend is my friend” and the convincing shrug-off of the Irish EU bailout and successful vaccination of the European credit contagion.
Without preempting The BCMI New Year market forecast to be released January 3, 2010, I would like to make a few observations:
For the broad stock market (S&P 500) to go substantially higher into the 1,300 plus range, we would have to revisit levels seen in the Summer of 2008, although admittedly, that was a period of rapidly declining confidence in the US economy and the stock market, as opposed to an emerging bull market fighting against rampant Perma-Bearism, Anti-Governmentism and Gold-Buggism.
I think I coined some newly-minted bad grammar there.
Where were other market measures during the Summer of 2008? I took a look at the charts, courtesy of Lind Waldock.
1) Bonds were actually lower than now (yields higher) with the 10 year T-Note futures priced at $112-114 versus the current $ 121' 45". That should tell you the stock market can probably handle another $7 down move in bond prices as we experienced from the $128 recent high.
2) The USD (trade-weighted index) was lower at 72-74 during the Summer of 08, versus the recent 80 level (down to 79.61 today). A lower USD is a positive for the stock market generally, and therefore the stronger USD, if it reappeared during another bout of Eurocredititis, would be a market headwind.
3) Oil and agricultural products were much higher during the early Summer of 2008. The tremendous rise in these commodities was probably another plank that sent the US economy walking over the edge into the recessionary abyss.
4) Gold, interestingly enough, was much lower than currently (near $1,400 US/oz), with the precious metal backing off from its first ever foray above $1000 in March 2008 to trend slowly lower to $900.
5) Technological innovation, a key generator of wealth in a post-crisis economy as outlined clearly in the works of early 20th century economist Joseph Schumpeter, has been active in buoying valuations. The Internet and wireless revolution has quickened its pace from the Summer of 2008, with tech giants such as Apple (AAPL) and Google (GOOG) creating more value in the NASDAQ and S&P 500 price indices.
We analyzed the Dow Jones Industrial Average's top ten components over this past Summer and concluded the stocks were inexpensive with a P/E of only 13.2 based on 2011 estimates.
The charts of the DJIA “Top Ten” components are not the brightest across the Board. And we have seen specific business problems creeping into the fortunes of Boeing (BA), J&J (JNJ), 3M (MMM) and others. However, lack of progress in climate change talks has boosted ExxonMobil (XOM) and Chevron (CVX) to new highs. At the end of the year we are going to update our EPS forecasts and provide a 2011 forecast for the DJIA, so influential to other markets around the world.
Canfor Pulp Income Fund (GM:CFPUF) did indeed announce their policy towards distributions next year, on Friday evening announcing an expected 35 cent quarterly dividend, or a $1.40 annual rate, beginning with payment in May 2011.
The Trust also announced an extra 30 cent distribution (income not return of capital) with its regular distribution of 25 cents for December (ex date for 55 cents in total December 29).
We believed the 9.52% yield with this level of dividend at Friday’s close of $14.71 to be attractive and place the new corporation in an above-average position relative to other trusts of similar risk profile. We would expect the corporation to trade at an 8.5% yield or $16.47.
The 55 cents is a bonus and we would be accumulating the units at current prices ($14.66) if it were not for the expected selling pressure that could occur due to the forced disposition of the new shares (Canfor Pulp Products Inc) otherwise issuable to US non-qualified share holders, expected to proceed in January.
We would be sellers of Canfor Pulp Income Fund above $16 and buyers below $14.50 until it goes ex-distribution. We are not particularly keen to own more cyclical stocks going into the Holiday and the first week of January. As previously reported, we believe the Euro Credit Crisis could explode again in early January and stock markets are toppy and vulnerable.
AbitibiBowater emerged from bankruptcy and was listed for when-issued trading on Friday on the TSX (currently trading at $21.90 on low volume). We have followed the Company extensively but have not reviewed the new balance sheet of the Corporation, which is valued at about $2 billion in equity. Therefore, we have no immediate comment on the relative merits of the company or its stock.
Disclosure: I am long GM:CFPUF.