David Van Knapp - Seeking Alpha 'David Van Knapp' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/david-van-knapp Topped Out? http://seekingalpha.com/article/168720-topped-out?source=feed 168720 Has the market rally ended? Is it time to take profits off the table, to go to cash, or to go short? Time to go into the woods where the bears hang out?

This has been a great rally: The S&P 500 is up 60% since March 9. But it has gone backward in two of the past four weeks, including -1% last week. Hence this article.

]]> Sun, 25 Oct 2009 23:58:32 -0400 David Van Knapp David Van Knapp submits:

Has the market rally ended? Is it time to take profits off the table, to go to cash, or to go short? Time to go into the woods where the bears hang out?

This has been a great rally: The S&P 500 is up 60% since March 9. But it has gone backward in two of the past four weeks, including -1% last week. Hence this article.


Complete Story »]]> DIA IBM QQQQ SPY David Van Knapp China Mobile: Dialing for Dividends http://seekingalpha.com/article/162753-china-mobile-dialing-for-dividends?source=feed 162753 Summary: For several years, China Mobile (CHL) has been a very good and reliable dividend growth stock. However, in 2009 it held its dividend essentially flat, breaking an annual string of increases stretching back several years. While the company has strong financials, a good valuation, and its dividend appears safe, at the present time the company should be considered a watch-list stock rather than a “buy” as a dividend stock.

Type of Company and Stock: In Morningstar’s Style Box, China Mobile is classified as a large value company. China Mobile is the largest mobile carrier in the world, providing wireless voice and value-added services in mainland China and Hong Kong. Its stock is traded on the New York and Hong Kong stock exchanges. It has a current dividend yield of about 3.2%. Its website is accessible here.

]]> Tue, 22 Sep 2009 10:10:55 -0400 David Van Knapp David Van Knapp submits:

Summary: For several years, China Mobile (CHL) has been a very good and reliable dividend growth stock. However, in 2009 it held its dividend essentially flat, breaking an annual string of increases stretching back several years. While the company has strong financials, a good valuation, and its dividend appears safe, at the present time the company should be considered a watch-list stock rather than a “buy” as a dividend stock.

Type of Company and Stock: In Morningstar’s Style Box, China Mobile is classified as a large value company. China Mobile is the largest mobile carrier in the world, providing wireless voice and value-added services in mainland China and Hong Kong. Its stock is traded on the New York and Hong Kong stock exchanges. It has a current dividend yield of about 3.2%. Its website is accessible here.


Complete Story »]]> CHL David Van Knapp The Rally Really Was Sustainable http://seekingalpha.com/article/161753-the-rally-really-was-sustainable?source=feed 161753 Note: The predecessors to this article are:

In the two articles cited above, I put forth the proposition that the S&P 500 could hit 1050 by October 12, 2009. The first article described how I reached that target and date: I simply tacked together two “bull markets” as defined by the widely respected Ned Davis Research.

]]> Wed, 16 Sep 2009 05:33:21 -0400 David Van Knapp David Van Knapp submits:

Note: The predecessors to this article are:

In the two articles cited above, I put forth the proposition that the S&P 500 could hit 1050 by October 12, 2009. The first article described how I reached that target and date: I simply tacked together two “bull markets” as defined by the widely respected Ned Davis Research.


Complete Story »]]> IBM QQQQ SPY David Van Knapp Realty Income: Follow-Up on Barron's Article http://seekingalpha.com/article/161620-realty-income-follow-up-on-barron-s-article?source=feed 161620 This is a follow-up to Barron’s article Sunday (Sunday, September 13, 2009), as well as to my article, “Realty Income: Excellent Dividend Growth REIT” published on June 29, 2009.
Barron's article made both positive and negative comments about Realty Income (O). Among the positive points (parenthetical comments are mine):
  • The company, which pays dividends monthly, has paid 469 consecutive dividends since it began paying dividends (it just declared #470, payable September 15).
  • Its current yield is almost 7% (actually about 6.6%).
  • The company maintains an image of conservatism and reliability, although it discloses little about its tenants. (Its history of conservatism is more than an image, it is baked into the company’s culture.)
  • Realty Income has kept it occupancy rate above 96% despite the recession and the pressures facing its retailer tenants.
Among the negative points:
  • Approximately 19% of Realty Income's shares have been sold short.
  • An unnamed fund manager (who is a short seller) believes that up to one-third of current tenants are particularly stressed.
  • CEO Tom Lewis has said that a decline in occupancy rate beyond Wall Street expectations could tighten the company’s ability to raise, or maintain, its dividend.
  • Realty Income shares look overvalued, trading at about 14 times the company's projected 2009 earnings compared to its peer group at about 10.
  • The firm's slogan--"the Monthly Dividend Company"—is “gimmicky.”

I am still a strong believer in Realty Income (O) as an excellent holding for stock investors focused on a long-term dividend growth strategy. I own the stock in both a publicly published portfolio as well as in my personal account.

Let’s look at some facts. First, there is no question that the current picture for commercial real estate (CRE) is weak. Indeed, many pundits believe that a collapse in CRE is going to be a main factor that stifles the economy back down and leads to a double-dip recession.
That said, Realty Income is not your average investor in CRE. They maintain disciplined practices and a corporate culture that will help insulate them from the worst outcomes of a deteriorating CRE market. Realty Income does not lend money to retailers outright, nor does it build CRE. Instead, it buys existing retail buildings—the “outbuildings” around malls, for example—and leases them back to the original owners under long-term (typically 15 to 20 year) “sale-leaseback” arrangements. Its tenants—leading national and regional retail chains catering to middle and upper-end markets—are responsible for nearly all property maintenance and operating expenses, minimizing Realty Income’s expenses with respect to the properties it owns. The rental contracts have rent escalator clauses.
Thus, Realty Income provides the retailers with immediate access to capital to fuel their own business growth. In essence, Realty Income allows the retailers to outsource the ownership of their real estate. Realty Income collects the rents, paying some overhead and interest charges as its own operating expenses. Most of the remaining cash is distributed to shareholders, monthly. Owned properties have generally been paid for with cash and are unencumbered by mortgage debt.
One important practice of Realty Income that received no attention in the Barron’s article is the company's careful screening procedure for property acquisitions. When considering whether to acquire (or retain) particular properties, Realty Income requires a record of strong cash flow with a margin of safety above and beyond the lease obligation. This is called “rent coverage.” No doubt, some of its retailer/tenants are struggling, and a few will go bankrupt over the next few years. But unless the retailer goes out of business, it is unlikely to close individual stores that are generating good cash flow. When it reorganizes, it will almost always reaffirm leases on those profitable stores—the ones owned by Realty Income.
Another solid practice is that when making an acquisition, Realty Income does not base what it is willing to pay on the tenant’s profitability. Rather, it figures a “fair value” for the property itself and does not overpay. Many of its “peers” lack this discipline. Vacant properties can then be re-leased or disposed of for close to what Realty Income paid for them.
So, Realty Income runs its business with strong discipline and vigorous margins of safety at every step. Might they miscalculate, and might some of those margins of safety fail to hold? Certainly, but the care with which the company is run suggests that severe negative outcomes at Realty Income are less likely than at perhaps any other CRE operation. Its occupancy rate has slid a fraction, but it is still at 96% in its 2,300+ properties.
Barron's remarked that the stock looks overvalued. I agree with that. Since my earlier article, the shares have run up from $23 to almost $26, a 13% increase, and its valuation metrics have increased also. The stock is up almost 17% this year. For a dividend growth investor, that is no reason to sell. The value in the company’s shares lies in their ability to spin out the monthly dividends with regular increases, not in their absolute share price. I might not buy any new shares at the moment, but I certainly intend to hold on to what I own.
As to the insider selling, I do not see that as very meaningful. Restricted stock grants (not options) comprise a large portion of executive pay at Realty Income. It is not surprising that several executives sold stock given the price’s recent run-up. About 1.6 million shares are still owned by insiders.
Finally, there is nothing gimmicky about Realty Income’s devotion to producing dividends for its shareholders. Indeed, that is the company’s publicly stated mission, it is how the company portrays itself, and it has delivered on its promise monthly for almost 40 years. The company states, “Our mission of providing dependable monthly income for our shareholders requires that we maintain a conservative financial structure that supports responsible growth and generates a strong cash flow.” It would be hard to find a company more singularly focused on delivering dividends to shareholders. It has never missed a dividend payment since it began them in 1970. Given that it distributes monthly, this is little short of remarkable. It has raised its dividend twice already in 2009, and viewed quarterly, there have been 47 consecutive quarterly increases—almost 12 years. The company has announced no plans to pay dividends in stock shares rather than cash, which some troubled REITs have done.
Disclosure: Long O.
]]> Tue, 15 Sep 2009 12:42:59 -0400 David Van Knapp David Van Knapp submits:
This is a follow-up to Barron’s article Sunday (Sunday, September 13, 2009), as well as to my article, “Realty Income: Excellent Dividend Growth REIT” published on June 29, 2009.
Barron's article made both positive and negative comments about Realty Income (O). Among the positive points (parenthetical comments are mine):
  • The company, which pays dividends monthly, has paid 469 consecutive dividends since it began paying dividends (it just declared #470, payable September 15).
  • Its current yield is almost 7% (actually about 6.6%).
  • The company maintains an image of conservatism and reliability, although it discloses little about its tenants. (Its history of conservatism is more than an image, it is baked into the company’s culture.)
  • Realty Income has kept it occupancy rate above 96% despite the recession and the pressures facing its retailer tenants.
Among the negative points:
  • Approximately 19% of Realty Income's shares have been sold short.
  • An unnamed fund manager (who is a short seller) believes that up to one-third of current tenants are particularly stressed.
  • CEO Tom Lewis has said that a decline in occupancy rate beyond Wall Street expectations could tighten the company’s ability to raise, or maintain, its dividend.
  • Realty Income shares look overvalued, trading at about 14 times the company's projected 2009 earnings compared to its peer group at about 10.
  • The firm's slogan--"the Monthly Dividend Company"—is “gimmicky.”

I am still a strong believer in Realty Income (O) as an excellent holding for stock investors focused on a long-term dividend growth strategy. I own the stock in both a publicly published portfolio as well as in my personal account.

Let’s look at some facts. First, there is no question that the current picture for commercial real estate (CRE) is weak. Indeed, many pundits believe that a collapse in CRE is going to be a main factor that stifles the economy back down and leads to a double-dip recession.
That said, Realty Income is not your average investor in CRE. They maintain disciplined practices and a corporate culture that will help insulate them from the worst outcomes of a deteriorating CRE market. Realty Income does not lend money to retailers outright, nor does it build CRE. Instead, it buys existing retail buildings—the “outbuildings” around malls, for example—and leases them back to the original owners under long-term (typically 15 to 20 year) “sale-leaseback” arrangements. Its tenants—leading national and regional retail chains catering to middle and upper-end markets—are responsible for nearly all property maintenance and operating expenses, minimizing Realty Income’s expenses with respect to the properties it owns. The rental contracts have rent escalator clauses.
Thus, Realty Income provides the retailers with immediate access to capital to fuel their own business growth. In essence, Realty Income allows the retailers to outsource the ownership of their real estate. Realty Income collects the rents, paying some overhead and interest charges as its own operating expenses. Most of the remaining cash is distributed to shareholders, monthly. Owned properties have generally been paid for with cash and are unencumbered by mortgage debt.
One important practice of Realty Income that received no attention in the Barron’s article is the company's careful screening procedure for property acquisitions. When considering whether to acquire (or retain) particular properties, Realty Income requires a record of strong cash flow with a margin of safety above and beyond the lease obligation. This is called “rent coverage.” No doubt, some of its retailer/tenants are struggling, and a few will go bankrupt over the next few years. But unless the retailer goes out of business, it is unlikely to close individual stores that are generating good cash flow. When it reorganizes, it will almost always reaffirm leases on those profitable stores—the ones owned by Realty Income.
Another solid practice is that when making an acquisition, Realty Income does not base what it is willing to pay on the tenant’s profitability. Rather, it figures a “fair value” for the property itself and does not overpay. Many of its “peers” lack this discipline. Vacant properties can then be re-leased or disposed of for close to what Realty Income paid for them.
So, Realty Income runs its business with strong discipline and vigorous margins of safety at every step. Might they miscalculate, and might some of those margins of safety fail to hold? Certainly, but the care with which the company is run suggests that severe negative outcomes at Realty Income are less likely than at perhaps any other CRE operation. Its occupancy rate has slid a fraction, but it is still at 96% in its 2,300+ properties.
Barron's remarked that the stock looks overvalued. I agree with that. Since my earlier article, the shares have run up from $23 to almost $26, a 13% increase, and its valuation metrics have increased also. The stock is up almost 17% this year. For a dividend growth investor, that is no reason to sell. The value in the company’s shares lies in their ability to spin out the monthly dividends with regular increases, not in their absolute share price. I might not buy any new shares at the moment, but I certainly intend to hold on to what I own.
As to the insider selling, I do not see that as very meaningful. Restricted stock grants (not options) comprise a large portion of executive pay at Realty Income. It is not surprising that several executives sold stock given the price’s recent run-up. About 1.6 million shares are still owned by insiders.
Finally, there is nothing gimmicky about Realty Income’s devotion to producing dividends for its shareholders. Indeed, that is the company’s publicly stated mission, it is how the company portrays itself, and it has delivered on its promise monthly for almost 40 years. The company states, “Our mission of providing dependable monthly income for our shareholders requires that we maintain a conservative financial structure that supports responsible growth and generates a strong cash flow.” It would be hard to find a company more singularly focused on delivering dividends to shareholders. It has never missed a dividend payment since it began them in 1970. Given that it distributes monthly, this is little short of remarkable. It has raised its dividend twice already in 2009, and viewed quarterly, there have been 47 consecutive quarterly increases—almost 12 years. The company has announced no plans to pay dividends in stock shares rather than cash, which some troubled REITs have done.
Disclosure: Long O.

Complete Story »]]> O David Van Knapp What Kind of Market Rally Is This? http://seekingalpha.com/article/156451-what-kind-of-market-rally-is-this?source=feed 156451 In two previous articles, “This Rally Is Sustainable” (May 13, 2009) and “This Rally Is Sustainable: Halftime Report" (July 22, 2009), I took the position that the stock market rally made sense and could well continue. These articles were not meant to be forecasts or predictions, but simply to be arguments, based on facts and logic, that the rally might not come crashing down instantly, as so many were saying.
Now that we are more than five months into the rally, it seems like a good time to step back and see what we’ve got on our hands. I see five salient points:
  • A stock market rally in the face of a contracting economy—that is, during a recession—is not unusual. Eight of the last 9 recessions have had such rallies. One might say that this is a garden-variety late-recession rally. The investors driving the rally are reacting to the anticipation of the end of the recession, not to actual current growth in the economy. There is no broad current growth in the economy—we are still in recession. The catalyst for the rally was/is the anticipation that the recession will end within a matter of months.
  • That anticipation, in turn, has been supported by “green shoots”—that is, indications that the recession was ending. Green shoots do not have to indicate that the economy is expanding. Data that suggest that the economy is getting “less worse,” or declining at a slower rate, qualify. Obviously, for any economic contraction to end, it must first slow down its rate of contraction, reach a point of inflection, and then start actually expanding. So a data point that suggests the economic contraction is slowing, or is cause for optimism on some level, has “counted” as good news, at least until now.
  • Because the rally is in anticipation of the end of economic contraction, the market is basically sentiment-driven. Good news helps the rally along, while bad news slows it down or reverses it.
  • The fact that the rally is sentiment-driven is the answer to those who have been surprised and perplexed by its sustainability. Such investors and writers have insisted that the rally is not supported fundamentally, therefore it must fail. They are correct that it has not been supported fundamentally. But they have underestimated the power of “less bad” news, or signs of a slowing contraction, to create and sustain a rally. For example, about 75% of companies beat consensus earnings estimates in the second quarter. During the reporting period just ending now, the market advanced by about 14%. Clearly, it was the beating of the estimates that the market relied on to bid up the prices of stocks during this period. The facts that those estimates had been lowered significantly to low hurdles, and that most earnings were significantly reduced year-over-year, were not driving sentiment—beating the estimates drove sentiment.
  • Since the rally began on March 10, the net news flow has been, on average, pretty steady in indicating slowing contraction and a coming end to the recession. Therefore the rally has continued more or less steadily, with only an 8% pullback during June and July to interrupt its progress. The rally has expanded the value of the S&P 500 by more than 45% since it began in early March.
So what we have is a late-recession, sentiment-driven rally, where the predominant sentiment has been that the recession is ending and the economy will soon start to expand.

But we have reached a point that expectations are now built into the market of an actual end to the recession and an impending turnaround into an expanding economy. The market is not “priced for perfection.” Rather, it is priced for an end to the recession and the beginning of economic expansion. (It may or may not have gotten a little ahead of itself in anticipating an end to the recession and the beginning of economic expansion--which is to say, a correction may be in order.)
Over the next few weeks, the expectations placed on the news flow will become different: “Less bad” news will, at some point, no longer count as “good” news sufficient to support a continuation of the rally. Instead, the market will start to demand data that show:
  • The Conference Board’s Index of Leading Economic Indicators continues to rise each month without interruption.
  • Consumer confidence is rising.
  • Consumer spending is increasing. Look to the back-to-school season as an important indicator here. At more than two-thirds of economic activity, consumer spending is a necessary factor in an economic recovery.
  • Manufacturing is increasing, and manufacturing capacity is being utilized to a fuller degree. Inventory reductions are continuing.
  • Real estate sales are picking up. Better yet would be data that housing prices have stopped falling, but just an expansion in residential sales activity would probably be good enough for awhile.
  • Earnings are growing on a sequential basis, and closing the gap significantly on a year-over-year basis. Since the next reporting season is two months away, look for rising estimates, optimistic guidance, and the like. Everybody is aware that Q2’s earnings “successes” were built upon layoffs and cost reductions, not expanding business activity. Indeed, most companies reported drops in revenue in Q2. That won’t cut it for very much longer.
  • Stock valuations are not heading into the stratosphere. Note: Investors already seem to have signaled that they are willing to look past the S&P’s soaring trailing P/E ratio (the result of Q4 2008’s dismal negative earnings), and to consider projected P/Es, or P/Es calculated on operating earnings, in valuing stocks at the current time.
  • Layoffs are slowing significantly, jobs are being created, initial unemployment claims are falling, and the unemployment rate is falling.
There are those who say that good news of this kind is impossible, because both consumers and businesses are deleveraging and will not be expanding their activities any time soon. There is certainly logic behind their point, but I believe that nobody knows the future. After all, the market has surprised many for five months now, there is certainly a possibility that it might continue to do so for another month or two. My suggestion is to listen to the news flow, keep current with what’s actually happening in the market, and protect long positions with hedges or simple sell-stops.
]]> Mon, 17 Aug 2009 05:22:54 -0400 David Van Knapp David Van Knapp submits:
In two previous articles, “This Rally Is Sustainable” (May 13, 2009) and “This Rally Is Sustainable: Halftime Report" (July 22, 2009), I took the position that the stock market rally made sense and could well continue. These articles were not meant to be forecasts or predictions, but simply to be arguments, based on facts and logic, that the rally might not come crashing down instantly, as so many were saying.
Now that we are more than five months into the rally, it seems like a good time to step back and see what we’ve got on our hands. I see five salient points:
  • A stock market rally in the face of a contracting economy—that is, during a recession—is not unusual. Eight of the last 9 recessions have had such rallies. One might say that this is a garden-variety late-recession rally. The investors driving the rally are reacting to the anticipation of the end of the recession, not to actual current growth in the economy. There is no broad current growth in the economy—we are still in recession. The catalyst for the rally was/is the anticipation that the recession will end within a matter of months.
  • That anticipation, in turn, has been supported by “green shoots”—that is, indications that the recession was ending. Green shoots do not have to indicate that the economy is expanding. Data that suggest that the economy is getting “less worse,” or declining at a slower rate, qualify. Obviously, for any economic contraction to end, it must first slow down its rate of contraction, reach a point of inflection, and then start actually expanding. So a data point that suggests the economic contraction is slowing, or is cause for optimism on some level, has “counted” as good news, at least until now.
  • Because the rally is in anticipation of the end of economic contraction, the market is basically sentiment-driven. Good news helps the rally along, while bad news slows it down or reverses it.
  • The fact that the rally is sentiment-driven is the answer to those who have been surprised and perplexed by its sustainability. Such investors and writers have insisted that the rally is not supported fundamentally, therefore it must fail. They are correct that it has not been supported fundamentally. But they have underestimated the power of “less bad” news, or signs of a slowing contraction, to create and sustain a rally. For example, about 75% of companies beat consensus earnings estimates in the second quarter. During the reporting period just ending now, the market advanced by about 14%. Clearly, it was the beating of the estimates that the market relied on to bid up the prices of stocks during this period. The facts that those estimates had been lowered significantly to low hurdles, and that most earnings were significantly reduced year-over-year, were not driving sentiment—beating the estimates drove sentiment.
  • Since the rally began on March 10, the net news flow has been, on average, pretty steady in indicating slowing contraction and a coming end to the recession. Therefore the rally has continued more or less steadily, with only an 8% pullback during June and July to interrupt its progress. The rally has expanded the value of the S&P 500 by more than 45% since it began in early March.
So what we have is a late-recession, sentiment-driven rally, where the predominant sentiment has been that the recession is ending and the economy will soon start to expand.

But we have reached a point that expectations are now built into the market of an actual end to the recession and an impending turnaround into an expanding economy. The market is not “priced for perfection.” Rather, it is priced for an end to the recession and the beginning of economic expansion. (It may or may not have gotten a little ahead of itself in anticipating an end to the recession and the beginning of economic expansion--which is to say, a correction may be in order.)
Over the next few weeks, the expectations placed on the news flow will become different: “Less bad” news will, at some point, no longer count as “good” news sufficient to support a continuation of the rally. Instead, the market will start to demand data that show:
  • The Conference Board’s Index of Leading Economic Indicators continues to rise each month without interruption.
  • Consumer confidence is rising.
  • Consumer spending is increasing. Look to the back-to-school season as an important indicator here. At more than two-thirds of economic activity, consumer spending is a necessary factor in an economic recovery.
  • Manufacturing is increasing, and manufacturing capacity is being utilized to a fuller degree. Inventory reductions are continuing.
  • Real estate sales are picking up. Better yet would be data that housing prices have stopped falling, but just an expansion in residential sales activity would probably be good enough for awhile.
  • Earnings are growing on a sequential basis, and closing the gap significantly on a year-over-year basis. Since the next reporting season is two months away, look for rising estimates, optimistic guidance, and the like. Everybody is aware that Q2’s earnings “successes” were built upon layoffs and cost reductions, not expanding business activity. Indeed, most companies reported drops in revenue in Q2. That won’t cut it for very much longer.
  • Stock valuations are not heading into the stratosphere. Note: Investors already seem to have signaled that they are willing to look past the S&P’s soaring trailing P/E ratio (the result of Q4 2008’s dismal negative earnings), and to consider projected P/Es, or P/Es calculated on operating earnings, in valuing stocks at the current time.
  • Layoffs are slowing significantly, jobs are being created, initial unemployment claims are falling, and the unemployment rate is falling.
There are those who say that good news of this kind is impossible, because both consumers and businesses are deleveraging and will not be expanding their activities any time soon. There is certainly logic behind their point, but I believe that nobody knows the future. After all, the market has surprised many for five months now, there is certainly a possibility that it might continue to do so for another month or two. My suggestion is to listen to the news flow, keep current with what’s actually happening in the market, and protect long positions with hedges or simple sell-stops.

Complete Story »]]> DIA QQQQ SPY David Van Knapp Market Cycles: A Look at the Historical Evidence http://seekingalpha.com/article/154281-market-cycles-a-look-at-the-historical-evidence?source=feed 154281 There are frequent references on this site to bull markets, bear markets, sucker rallies, bear-market rallies, dead-cat bounces, and the like. For example, a couple of days ago, the following appeared in a comment: “…the heartbreaking high-P/E bull-market-that-wasn't of 2003-07.” That’s not the first time I’ve seen the 100%, 5-year market expansion of 2003-2007 dismissed as if it never happened.
I have invited such contributors to define “bull market” for me, but almost no one replies. Two replies that I did receive were very thoughtful:
  • thiazole said, “Bull market and bear market are just generic generalizations. Cyclical bull/bear market[s]…are based on economic cycles….Secular bull/bear market[s]…are also cyclical in nature and I believe they follow 17 year patterns as follows:
    1931-1948 Secular bear market
    1948-1965 Secular bull market
    1965-1982 Secular bear market
    1982-1999 Secular bull market
    1999-2016 Secular bear market
    You can have cyclical markets within secular markets of the opposite flavor. The early 90s saw a cyclical bear market inside a secular bull market and we are currently in a cyclical bull market inside a secular bear market. (Comment posted 7/31/2009; emphasis added.)
  • Robert A. Weigand said, “Technically, there is no widely-accepted way to measure the legitimacy of a bull market….I would propose that a bull market is legitimate when buy-and-hold investors earn real stock returns that exceed the real return on bonds. The Mar. 2009 low of approximately Dow 6,500 took us back to 1996 levels (nominally), indicating a tremendous loss of real wealth for equity investors. When investors are better off in bonds for more than a decade, I'd say that's a "faux" bull. (Comment posted 8/5/2009; emphasis added.)
So, that’s one response suggesting that the markets run in 17-year cycles, another requiring a “better-than-bonds” run of more than 10 years. You have probably, along with me, seen references to 16-year cycles, 18-year cycles, generational cycles, and others. What’s interesting is how tightly some people become attached to these theories, as if their concept is the right one. That’s how a 5-year market increase of 100% can be dismissed as if it didn’t happen, or be sarcastically called a “sucker’s rally,” as if everyone who “fell for it” got slaughtered in the end.
But with all the different cycle lengths, everyone can’t be right.
Or can they? Have you ever heard of Fourier analysis? In 1822, the French mathematician Joseph Fourier discovered that simple sine waves can be used as building blocks to construct , describe, and approximate any periodic waveform, even if it is highly irregular. That is, any complex wave pattern--such as a stock chart--is simply the sum of a large number of routine sine waves of varying frequency and magnitude.
The process of deconstructing a complex pattern into its sine-wave building blocks is called Fourier analysis. It is used all the time in physical and electronic analysis. Years ago, in another life, I used Fourier analysis to measure the impact of vibrations and violent shakes on rocket components when they are subject to the enormous forces of blast-off.
I don’t intend to get mathematical here (to be honest, I’ve forgotten the mathematics). But on a conceptual level, the simple concepts of Fourier analysis can be used to evaluate the various cycles that impact the stock market. Using this approach, everyone can be correct—there are a multitude of cycles at work. So:
  • Because we all know that the very long term direction of the market has been up (since, say, 1926), we can guess that there is a very long term cycle at work that tends to dominate the others over very long periods.
  • The graph supplied by thiazole above (see his post for a link) suggests that there is validity to the 17-year cycle. The cycle is quite apparent in his graph.
  • For the purposes of this discussion, let’s accept that there are 16-year, 18-year, and generational cycles at work too.
  • And, since there are week-to-week, hour-to-hour, and minute-to-minute volatilities in the market, it is easy to see that there are many cycles of those durations also at work. In the news recently, flash trading programs have apparently been taking advantage of cycles with durations measured in seconds or fractions of seconds.
How do all these cycles interact? Waves are additive. For example, if you and a friend both throw pebbles into a pond, they will each generate ripples. As those little waves cross each other, they add up. If two ripples happen both to be going up when they cross, the total ripple height will exceed the height of either single one—the effects of the two waves reinforce each other, causing the water to rise higher than it would from either pebble alone. Similarly, if the two ripples are in opposite directions as they cross (i.e., one is pushing up and the other is pulling down), their effects will tend to cancel each other out—the water will remain flat in that spot at that instant. And finally, if the two ripples are both pulling down as they cross each other, they will reinforce down, creating a trough in the water that is deeper than either ripple would have made by itself.
Exactly the same effects occur if you toss in a pebble and your friend drops in a boulder. The observable result, of course, is that the boulder’s ripples completely overwhelm those produced by the pebble. But if you could measure finely enough, you would find that the pebble’s ripples are still there and causing their own little effects, just as described above. You just don’t see them very easily.
Let’s apply these principles to the market. If we accept that a multitude of waves—of many different lengths and magnitudes—are interacting to create the chart of, say, SPY or the S&P 500, we can deduce a few things:
  • Even major cycles—say the 16-year cycle—can get drowned out by a larger cycle, or by the combined effects of other minor cycles that add up in the opposite direction. This helps explain the noise around the cycle itself.
  • It is not helpful to get anchored on a particular cycle. While you’re focusing on, say, a long secular bear cycle, you might miss tremendous investment opportunities of shorter duration. In fact it’s inevitable. That’s why 2003-2007 was a truly investable bull market, even if it was surrounded by the crashes of 2000-2002 and 2008-2009. The total time period from 2000-2008 might be a bear, but the part in the middle was a bull. After all, the market went up 100% in 5 years. Call it a “bear market rally” if you like, but don’t call it a “sucker’s rally.” Those who recognized it and had logical exit strategies did just fine. They were not suckers. If you only think in terms of 10+ years, don’t project your framework and strategies onto everyone else.
  • Primary trends and secondary trends become understandable. They are just different waves adding up to produce trends of an actionable magnitude and duration. What is “actionable,” of course, will depend on the individual investor’s risk profile, time commitment to the investing process, ability to process information, and other factors. One person’s investable trend will be something that escapes the attention or falls outside the investing principles of someone else.

This is why I cannot agree with the many posters on Seeking Alpha who are deriding the current rally, calling people investing in it “sheeple,” and predicting doom and destruction for participants. I am a participant, am profiting, and have logical exit strategies. Me and others like me will do just fine.

Disclosure: Long SPY, QQQQ, and IBM based on principles discussed here. Also long about 15 dividend stocks based on different strategies not discussed here.

]]> Thu, 06 Aug 2009 08:56:35 -0400 David Van Knapp David Van Knapp submits:
There are frequent references on this site to bull markets, bear markets, sucker rallies, bear-market rallies, dead-cat bounces, and the like. For example, a couple of days ago, the following appeared in a comment: “…the heartbreaking high-P/E bull-market-that-wasn't of 2003-07.” That’s not the first time I’ve seen the 100%, 5-year market expansion of 2003-2007 dismissed as if it never happened.
I have invited such contributors to define “bull market” for me, but almost no one replies. Two replies that I did receive were very thoughtful:
  • thiazole said, “Bull market and bear market are just generic generalizations. Cyclical bull/bear market[s]…are based on economic cycles….Secular bull/bear market[s]…are also cyclical in nature and I believe they follow 17 year patterns as follows:
    1931-1948 Secular bear market
    1948-1965 Secular bull market
    1965-1982 Secular bear market
    1982-1999 Secular bull market
    1999-2016 Secular bear market
    You can have cyclical markets within secular markets of the opposite flavor. The early 90s saw a cyclical bear market inside a secular bull market and we are currently in a cyclical bull market inside a secular bear market. (Comment posted 7/31/2009; emphasis added.)
  • Robert A. Weigand said, “Technically, there is no widely-accepted way to measure the legitimacy of a bull market….I would propose that a bull market is legitimate when buy-and-hold investors earn real stock returns that exceed the real return on bonds. The Mar. 2009 low of approximately Dow 6,500 took us back to 1996 levels (nominally), indicating a tremendous loss of real wealth for equity investors. When investors are better off in bonds for more than a decade, I'd say that's a "faux" bull. (Comment posted 8/5/2009; emphasis added.)
So, that’s one response suggesting that the markets run in 17-year cycles, another requiring a “better-than-bonds” run of more than 10 years. You have probably, along with me, seen references to 16-year cycles, 18-year cycles, generational cycles, and others. What’s interesting is how tightly some people become attached to these theories, as if their concept is the right one. That’s how a 5-year market increase of 100% can be dismissed as if it didn’t happen, or be sarcastically called a “sucker’s rally,” as if everyone who “fell for it” got slaughtered in the end.
But with all the different cycle lengths, everyone can’t be right.
Or can they? Have you ever heard of Fourier analysis? In 1822, the French mathematician Joseph Fourier discovered that simple sine waves can be used as building blocks to construct , describe, and approximate any periodic waveform, even if it is highly irregular. That is, any complex wave pattern--such as a stock chart--is simply the sum of a large number of routine sine waves of varying frequency and magnitude.
The process of deconstructing a complex pattern into its sine-wave building blocks is called Fourier analysis. It is used all the time in physical and electronic analysis. Years ago, in another life, I used Fourier analysis to measure the impact of vibrations and violent shakes on rocket components when they are subject to the enormous forces of blast-off.
I don’t intend to get mathematical here (to be honest, I’ve forgotten the mathematics). But on a conceptual level, the simple concepts of Fourier analysis can be used to evaluate the various cycles that impact the stock market. Using this approach, everyone can be correct—there are a multitude of cycles at work. So:
  • Because we all know that the very long term direction of the market has been up (since, say, 1926), we can guess that there is a very long term cycle at work that tends to dominate the others over very long periods.
  • The graph supplied by thiazole above (see his post for a link) suggests that there is validity to the 17-year cycle. The cycle is quite apparent in his graph.
  • For the purposes of this discussion, let’s accept that there are 16-year, 18-year, and generational cycles at work too.
  • And, since there are week-to-week, hour-to-hour, and minute-to-minute volatilities in the market, it is easy to see that there are many cycles of those durations also at work. In the news recently, flash trading programs have apparently been taking advantage of cycles with durations measured in seconds or fractions of seconds.
How do all these cycles interact? Waves are additive. For example, if you and a friend both throw pebbles into a pond, they will each generate ripples. As those little waves cross each other, they add up. If two ripples happen both to be going up when they cross, the total ripple height will exceed the height of either single one—the effects of the two waves reinforce each other, causing the water to rise higher than it would from either pebble alone. Similarly, if the two ripples are in opposite directions as they cross (i.e., one is pushing up and the other is pulling down), their effects will tend to cancel each other out—the water will remain flat in that spot at that instant. And finally, if the two ripples are both pulling down as they cross each other, they will reinforce down, creating a trough in the water that is deeper than either ripple would have made by itself.
Exactly the same effects occur if you toss in a pebble and your friend drops in a boulder. The observable result, of course, is that the boulder’s ripples completely overwhelm those produced by the pebble. But if you could measure finely enough, you would find that the pebble’s ripples are still there and causing their own little effects, just as described above. You just don’t see them very easily.
Let’s apply these principles to the market. If we accept that a multitude of waves—of many different lengths and magnitudes—are interacting to create the chart of, say, SPY or the S&P 500, we can deduce a few things:
  • Even major cycles—say the 16-year cycle—can get drowned out by a larger cycle, or by the combined effects of other minor cycles that add up in the opposite direction. This helps explain the noise around the cycle itself.
  • It is not helpful to get anchored on a particular cycle. While you’re focusing on, say, a long secular bear cycle, you might miss tremendous investment opportunities of shorter duration. In fact it’s inevitable. That’s why 2003-2007 was a truly investable bull market, even if it was surrounded by the crashes of 2000-2002 and 2008-2009. The total time period from 2000-2008 might be a bear, but the part in the middle was a bull. After all, the market went up 100% in 5 years. Call it a “bear market rally” if you like, but don’t call it a “sucker’s rally.” Those who recognized it and had logical exit strategies did just fine. They were not suckers. If you only think in terms of 10+ years, don’t project your framework and strategies onto everyone else.
  • Primary trends and secondary trends become understandable. They are just different waves adding up to produce trends of an actionable magnitude and duration. What is “actionable,” of course, will depend on the individual investor’s risk profile, time commitment to the investing process, ability to process information, and other factors. One person’s investable trend will be something that escapes the attention or falls outside the investing principles of someone else.

This is why I cannot agree with the many posters on Seeking Alpha who are deriding the current rally, calling people investing in it “sheeple,” and predicting doom and destruction for participants. I am a participant, am profiting, and have logical exit strategies. Me and others like me will do just fine.

Disclosure: Long SPY, QQQQ, and IBM based on principles discussed here. Also long about 15 dividend stocks based on different strategies not discussed here.


Complete Story »]]> DIA IVV IWV QQQQ SPY David Van Knapp This Rally Is Sustainable: Halftime Report, Part 2 http://seekingalpha.com/article/150472-this-rally-is-sustainable-halftime-report-part-2?source=feed 150472 << Part 1

Green Shoots

The term “green shoots” has become much reviled, but it is green shoots we look to for signs that the recession may be slowing or reversing. If bull markets start a few months before recessions end, the question becomes, are we nearing the end of the recession? As in May, there is evidence pointing in both directions. But almost everybody now accepts that the economy has pulled back from the precipice, and that there is some evidence that the economy may be heading towards growth again. If anything, those arguments have strengthened since May. Here is my updated list of “Top Twelve Green Shoots.”

]]> Wed, 22 Jul 2009 09:56:37 -0400 David Van Knapp David Van Knapp submits:

<< Part 1

Green Shoots

The term “green shoots” has become much reviled, but it is green shoots we look to for signs that the recession may be slowing or reversing. If bull markets start a few months before recessions end, the question becomes, are we nearing the end of the recession? As in May, there is evidence pointing in both directions. But almost everybody now accepts that the economy has pulled back from the precipice, and that there is some evidence that the economy may be heading towards growth again. If anything, those arguments have strengthened since May. Here is my updated list of “Top Twelve Green Shoots.”


Complete Story »]]> SPY David Van Knapp This Rally Is Sustainable: Halftime Report, Part 1 http://seekingalpha.com/article/150470-this-rally-is-sustainable-halftime-report-part-1?source=feed 150470 In early May, I wrote an article (“This Rally Is Sustainable,” available here) making an argument that the stock market rally might carry on for a while. I got soundly thrashed by commenters, with sentiment running heavily against the idea, although there were a few who bought it.

Now it is late July. We have reached the halfway point in the timeframe I defined for “sustainability.” So it is time for a halftime report.

]]> Wed, 22 Jul 2009 09:56:26 -0400 David Van Knapp David Van Knapp submits:

In early May, I wrote an article (“This Rally Is Sustainable,” available here) making an argument that the stock market rally might carry on for a while. I got soundly thrashed by commenters, with sentiment running heavily against the idea, although there were a few who bought it.

Now it is late July. We have reached the halfway point in the timeframe I defined for “sustainability.” So it is time for a halftime report.


Complete Story »]]> SPY David Van Knapp 22 Stocks on the Dividend Aristocrats List That May Spell Trouble http://seekingalpha.com/article/148049-22-stocks-on-the-dividend-aristocrats-list-that-may-spell-trouble?source=feed 148049 I have written several recent articles and comments on the potential for dividend investors to be misled by S&P’s general statistics and lists. One very popular S&P document that can be hazardous to your portfolio is the Dividend Aristocrats list.

S&P describes their Dividend Aristocrats thusly:

]]> Fri, 10 Jul 2009 07:27:13 -0400 David Van Knapp David Van Knapp submits:

I have written several recent articles and comments on the potential for dividend investors to be misled by S&P’s general statistics and lists. One very popular S&P document that can be hazardous to your portfolio is the Dividend Aristocrats list.

S&P describes their Dividend Aristocrats thusly:


Complete Story »]]> ADM AVY BBT BCR BDX CINF FDO GCI GE GWW JCI LEG LM LOW MTB PFE ROH SIAL STR STT USB WMT David Van Knapp Dividend Investors: Take S&P 500 Quarterly Reviews with a Grain of Salt http://seekingalpha.com/article/147811-dividend-investors-take-s-p-500-quarterly-reviews-with-a-grain-of-salt?source=feed 147811 It is that time of year again when S&P's broad statistics on the quarter just completed are released. Along with this information comes a spate of articles about how the S&P 500 did. This happens four times a year, every January, April, July, and October, right after the year’s fiscal quarters end. While the statistics are factual and the articles informative, they can often mislead. This is especially true for dividend investors.
First, let me make clear what I mean by “dividend investor.” It is someone whose objective is the collection of a rising stream of dividends, and who is working towards that objective by following a sound dividend strategy. Dividend investors may use their dividends for reinvestment and compounding, or just spend them as current income. The important point is that they have a significantly different objective from investing for capital appreciation. While dividend investors don’t enjoy seeing their capital stake decline, they are far less focused on that than on seeing their stream of dividends keep increasing. Dividend investing strategies take years to play out, and dividend investors become accustomed to and accept fluctuating values in their capital stake—so long as the dividends keep going up.
OK. Now it is easier to explain why the S&P statistics and the dividend articles can be misleading. It is because they can make it sound like all dividend investors are taking a bath, or even getting slaughtered, when in fact they are doing just fine.
In February, S&P issued a press release headlined, S&P 500 Dividends Projected to Decline 13.3% in 2009; Worst Annual Decline Since World War II. In April, USA Today ran this headline following the first quarter: S&P: Record number of firms cut dividend in Q1. Last week, this was the headline on S&P’s dividend press release for the second quarter: A Record Low 233 Companies Increase Dividend Payments in Q2. Over the next couple of weeks, you can expect to see articles in the financial and popular press with similar dire-sounding headlines. Most of them will be based on the most recent press release and broad S&P statistics, but few will include value-added research or reporting beneath the surface. The analysis will usually be superficial.
The facts will be right. For the first six months of 2009, 65 companies in the S&P 500 either cut or suspended their dividend payment, compared to 20 for the same period in 2008 and 4 in 2007. Dividend increases fell from 158 for the first six months last year to 86 this year. In the second quarter, S&P 500 dividends posted their biggest decline in more than 40 years, dropping by $14.3 billion from a year earlier, according to S&P. More broadly, a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P’s Dividend Record increased their dividend payment during the second quarter of 2009, compared to 455 last year.
Some articles will quote Howard Silverblatt, Senior Index Analyst at S&P, who said, “It’s not a good time for dividend investors. The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts. Until we see the economy better, …many companies will remain gun shy about parting with their cash.”
All of this is correct, as far as it goes. But the reason that these headlines, articles, sound bites, and statistics can be misleading is that a well-conceived dividend methodology filters out most stocks with “dividends in peril” before they cut their dividends, while at the same time it identifies stocks that are most likely to raise them. The indicia are there in the companies' business models and financial results for anyone who cares to examine them. Attentive dividend investors routinely perform stock-by-stock analysis. They may not trade often, but they usually manage to drop stocks that are likely to cut their dividends before it actually happens.
So the attentive dividend investor does not hold the stocks that create the headlines. Most well-constructed dividend portfolios will go on producing as before. Most of their stocks will not cut their dividends, they will increase them. To the owners of such portfolios, the S&P numbers, while factual and interesting, are little more than background noise.
In distinction to Mr. Silverblatt’s quote, there are many dividend-paying companies that have given their dividends healthy increases already this year. Examples would be Abbott Labs (ABT) 11%, Procter & Gamble (PG) 10%, Colgate-Palmolive (CL) 10%, Coca-Cola (KO) 8%, Johnson & Johnson (JNJ) 7%, Alliant Energy (LNT) 7%, Waste Management (WMI) 7%, Chubb (CB) 6%, and Pepsico (PEP) 6%. These are not obscure, hard-to-find companies. They are well-known, well-run, solid companies that have been increasing their dividends for many years. They all yield more than 3% right now to new buyers, and they are foundational holdings in many dividend investors’ portfolios. While not as sensational, might not a better headline be Dividend Stalwarts Continue to Increase Payouts Despite Tough Economic Times?
S&P's quarterly release of across-the-board dividend statistics is certainly interesting for broad trends, but no one following a dividend investment strategy should be investing across-the-board in the S&P 500’s dividend-paying stocks. Your portfolio should consist of stocks selected one at a time for the most important dividend characteristics: sufficient initial yield (say 3% or more); consistency and safety of the dividend; and rising dividends.
Disclosure: Long ABT, LNT, CB, PG, JNJ, PEP
]]> Thu, 09 Jul 2009 06:36:49 -0400 David Van Knapp David Van Knapp submits:
It is that time of year again when S&P's broad statistics on the quarter just completed are released. Along with this information comes a spate of articles about how the S&P 500 did. This happens four times a year, every January, April, July, and October, right after the year’s fiscal quarters end. While the statistics are factual and the articles informative, they can often mislead. This is especially true for dividend investors.
First, let me make clear what I mean by “dividend investor.” It is someone whose objective is the collection of a rising stream of dividends, and who is working towards that objective by following a sound dividend strategy. Dividend investors may use their dividends for reinvestment and compounding, or just spend them as current income. The important point is that they have a significantly different objective from investing for capital appreciation. While dividend investors don’t enjoy seeing their capital stake decline, they are far less focused on that than on seeing their stream of dividends keep increasing. Dividend investing strategies take years to play out, and dividend investors become accustomed to and accept fluctuating values in their capital stake—so long as the dividends keep going up.
OK. Now it is easier to explain why the S&P statistics and the dividend articles can be misleading. It is because they can make it sound like all dividend investors are taking a bath, or even getting slaughtered, when in fact they are doing just fine.
In February, S&P issued a press release headlined, S&P 500 Dividends Projected to Decline 13.3% in 2009; Worst Annual Decline Since World War II. In April, USA Today ran this headline following the first quarter: S&P: Record number of firms cut dividend in Q1. Last week, this was the headline on S&P’s dividend press release for the second quarter: A Record Low 233 Companies Increase Dividend Payments in Q2. Over the next couple of weeks, you can expect to see articles in the financial and popular press with similar dire-sounding headlines. Most of them will be based on the most recent press release and broad S&P statistics, but few will include value-added research or reporting beneath the surface. The analysis will usually be superficial.
The facts will be right. For the first six months of 2009, 65 companies in the S&P 500 either cut or suspended their dividend payment, compared to 20 for the same period in 2008 and 4 in 2007. Dividend increases fell from 158 for the first six months last year to 86 this year. In the second quarter, S&P 500 dividends posted their biggest decline in more than 40 years, dropping by $14.3 billion from a year earlier, according to S&P. More broadly, a record low 233 of the approximately 7,000 publicly owned companies that report dividend information to S&P’s Dividend Record increased their dividend payment during the second quarter of 2009, compared to 455 last year.
Some articles will quote Howard Silverblatt, Senior Index Analyst at S&P, who said, “It’s not a good time for dividend investors. The current trend to conserve cash and cut dividends has become defensive, with even relatively healthy companies choosing to reduce payouts. Until we see the economy better, …many companies will remain gun shy about parting with their cash.”
All of this is correct, as far as it goes. But the reason that these headlines, articles, sound bites, and statistics can be misleading is that a well-conceived dividend methodology filters out most stocks with “dividends in peril” before they cut their dividends, while at the same time it identifies stocks that are most likely to raise them. The indicia are there in the companies' business models and financial results for anyone who cares to examine them. Attentive dividend investors routinely perform stock-by-stock analysis. They may not trade often, but they usually manage to drop stocks that are likely to cut their dividends before it actually happens.
So the attentive dividend investor does not hold the stocks that create the headlines. Most well-constructed dividend portfolios will go on producing as before. Most of their stocks will not cut their dividends, they will increase them. To the owners of such portfolios, the S&P numbers, while factual and interesting, are little more than background noise.
In distinction to Mr. Silverblatt’s quote, there are many dividend-paying companies that have given their dividends healthy increases already this year. Examples would be Abbott Labs (ABT) 11%, Procter & Gamble (PG) 10%, Colgate-Palmolive (CL) 10%, Coca-Cola (KO) 8%, Johnson & Johnson (JNJ) 7%, Alliant Energy (LNT) 7%, Waste Management (WMI) 7%, Chubb (CB) 6%, and Pepsico (PEP) 6%. These are not obscure, hard-to-find companies. They are well-known, well-run, solid companies that have been increasing their dividends for many years. They all yield more than 3% right now to new buyers, and they are foundational holdings in many dividend investors’ portfolios. While not as sensational, might not a better headline be Dividend Stalwarts Continue to Increase Payouts Despite Tough Economic Times?
S&P's quarterly release of across-the-board dividend statistics is certainly interesting for broad trends, but no one following a dividend investment strategy should be investing across-the-board in the S&P 500’s dividend-paying stocks. Your portfolio should consist of stocks selected one at a time for the most important dividend characteristics: sufficient initial yield (say 3% or more); consistency and safety of the dividend; and rising dividends.
Disclosure: Long ABT, LNT, CB, PG, JNJ, PEP

Complete Story »]]> ABT CB CL IVV JNJ KO LNT PEP PG SPY WM David Van Knapp ETFs That Bet on Housing Values: Is This a Joke? http://seekingalpha.com/article/146961-etfs-that-bet-on-housing-values-is-this-a-joke?source=feed 146961 Is this what you get from the best and the brightest on Wall Street? On Tuesday, June 30, 2009, a day that should live in financial infamy, investment manager MacroMarkets launched two ETFs designed to track housing values. But they don't own any houses. And they're 3-times leveraged.

They are legalized gambling.

]]> Sun, 05 Jul 2009 05:41:59 -0400 David Van Knapp David Van Knapp submits:

Is this what you get from the best and the brightest on Wall Street? On Tuesday, June 30, 2009, a day that should live in financial infamy, investment manager MacroMarkets launched two ETFs designed to track housing values. But they don't own any houses. And they're 3-times leveraged.

They are legalized gambling.


Complete Story »]]> DMM UMM David Van Knapp Big Win for J&J with Elan Deal http://seekingalpha.com/article/146842-big-win-for-j-j-with-elan-deal?source=feed 146842 Johnson & Johnson (JNJ) has made a significant improvement to its business. Under a deal announced Thursday, J&J will take a major stake in biotech company Elan (ELN), thereby gaining access to Elan's Alzheimer's disease treatments, in particular leading drug bapineuzumab.

In the transaction, J&J will take a 50.1% ownership in Elan's Alzheimer's program, plus an 18.4% ownership in the remaining part of Elan. In return, Elan gets a $1 billion equity investment and a $500 million commitment to fund further development and marketing of promising Alzheimer's treatments. The major focus will be on further development of and launch activities for bapineuzumab, which is in Phase 3 clinical trials.

]]> Fri, 03 Jul 2009 05:43:58 -0400 David Van Knapp David Van Knapp submits:

Johnson & Johnson (JNJ) has made a significant improvement to its business. Under a deal announced Thursday, J&J will take a major stake in biotech company Elan (ELN), thereby gaining access to Elan's Alzheimer's disease treatments, in particular leading drug bapineuzumab.

In the transaction, J&J will take a 50.1% ownership in Elan's Alzheimer's program, plus an 18.4% ownership in the remaining part of Elan. In return, Elan gets a $1 billion equity investment and a $500 million commitment to fund further development and marketing of promising Alzheimer's treatments. The major focus will be on further development of and launch activities for bapineuzumab, which is in Phase 3 clinical trials.


Complete Story »]]> ELN JNJ David Van Knapp Realty Income: Excellent Dividend Growth REIT http://seekingalpha.com/article/145972-realty-income-excellent-dividend-growth-reit?source=feed 145972 Summary: Realty Income (O) is a superior company for a dividend strategy, whether the sub-strategy is current income or accumulating wealth through dividend growth. The company has paid monthly dividends without a miss since 1970, and it has raised dividends for 47 consecutive quarters--almost 12 years.

It would be hard to find a company more singularly focused on delivering dividends to shareholders. Calling itself “The Monthly Dividend Company®,” Realty Income describes its business as “…generat[ing] dependable monthly income by owning the freestanding properties of regional and national retail chains under long-term lease agreements.”
Type of Company and Stock: In Morningstar’s Style Box, Realty Income is classified as a mid-cap core company, meaning that the stock displays characteristics of both “growth” and “value” stocks. The company is a real estate investment trust (REIT), operating since 1969 and traded on the NYSE since 1994. Its specialty in the REIT world is the purchase and leaseback of commercial retail real estate. Its website is accessible here.
Company Story and Strategy: Realty Income follows an unwavering, well-developed strategy and executes it exceedingly well. Its playing field is the niche of freestanding, single-tenant properties throughout the country leased to leading regional and national retail chains under long-term net-lease agreements. Realty Income does not build or develop new retail facilities. Rather, it negotiates and executes sale-leaseback agreements, thus providing the retailers with immediate access to capital to fuel their own business growth. In essence, Realty Income allows the retailers to outsource the ownership of their real estate.
This real estate is managed by professionals dedicated to a conservative financial and real estate acquisition strategy. Care is built into every stage of Realty Income’s business model. In picking properties, it follows stringent guidelines, seeking proven profitable sites with more than enough ability to generate sufficient cash to cover the lease payments, called “rent coverage.” Realty Income looks for a margin of safety in rent coverage in the event the tenant’s business deteriorates. If over time a property fails to maintain adequate rent coverage, Realty Income will sell it. In constructing its portfolio of properties, Realty Income strives for geographic diversity, chain diversity, single-tenant properties, middle and upper market retailers of goods and services that consumers use every day, highly profitable locations, preservation of capital and income, and reliable cash flow. All of these practices contribute to the remarkably consistent results that the company has delivered over the years.
The safety-first approach is also reflected in the leases it negotiates. Realty Income signs long-term leases (15-20 years or more) with just one tenant, and that tenant is responsible for all of the taxes, maintenance, insurance, and most operating costs on the properties, hence the term "net-lease." Realty Income thereby minimizes its own expenses related to the properties it owns. As a result, the company has enjoyed average net operating income margins since 2003 of over 98% and negligible maintenance capital expenditures.
Growth comes from built-in rent escalators tied to inflation, plus acquisition of new properties that meet the stringent criteria. Realty Income currently has about $0.4 B at its disposal if attractive acquisitions become available, although it has no new properties under development and has acquired none so far in 2009.
Realty Income currently owns and manages more than 2,300 properties in 49 states, representing 117 retail chains in 30 retail industries (the two that provide the most revenue are restaurants and convenience stores). It has had tenant occupancy rates of 97%+ almost continuously since it began. The current occupancy rate is about 96%, reflecting the economic hardships facing its tenants during the recession. The weighted average remaining lease is about 12 years. Its properties are generally owned for cash and unencumbered by mortgage debt, so there are no mortgage payments to offset lease revenue. The company has no additional debt coming due until 2013.
Realty Income is superbly managed. CEO Tom Lewis was a finalist for Morningstar’s CEO of the Year in 2008. This is their own summary of their 2009 business plan:
  1. Pay 12 Monthly Dividends
  2. Raise the Dividend
  3. Maintain a Conservative Balance Sheet
  4. Maintain High Portfolio Occupancy Rates
  5. Acquire Additional Properties
  6. Tell More People About the Monthly Dividend Company
  7. Stay Conservative
Financials: As the company itself states, “Our mission of providing dependable monthly income for our shareholders requires that we maintain a conservative financial structure that supports responsible growth and generates a strong cash flow.” The thing that stands out about Realty Income’s financial performance is its consistency. It has a 3-year revenue growth rate of 20%, although that has slowed in the past year. The company has achieved average net operating income margins since 2003 of more than 98% with negligible maintenance capital expenditures. It has a conservative capital structure, with debt to total cap of 37%. ROE has been in the 9% to 10% range almost continually for the past 5 years. Analysts forecast growth of 5% annually over the next 3 to 5 years.
Dividends: Realty Income is well aware of its shareholders’ interest in (and need for) dividend income. In fact, the company considers its shareholders as “a market” that it serves, stating that it is “dedicated to providing shareholders with dependable monthly income.” It has not missed a dividend payment since it began making them in 1970. It pays dividends monthly and regularly increases them, often several times per year. Its current string of increases stands at 47 quarters (almost 12 years). It increased its dividend payout 5 times each year from 2004-2008, and it has made two increases so far in 2009. This chart shows Realty Income’s dividend record over the past ten years:
click to enlarge
Realty Income’s current yield is 7.4% (compared to the S&P 500’s 2.8%), and its trailing 3-year average dividend growth rate has been a little over 7%. If that rate of growth were to continue, the dividend return (on initial cost, from dividends alone) would double in about 10 years. Under the Ten-by-Ten approach to dividend investing, Realty Income can be expected to be returning 10 percent on initial cost in dividends alone about 4 years after purchase. That can be speeded up by reinvesting the dividends.
I do see two concerns. First, despite its diversification strategy, Realty Income’s top 10 tenants represent 45% of its revenue. Second, some of the company’s retail tenants currently face very challenging economic conditions. It is not hard to visualize that a few may default on their leases or ask to restructure them. Thus, I would expect to see Realty Income’s occupancy rate fall into the low 90%-range, and its growth rate to slow somewhat, over the next year or two.
That said, given the company’s strong dividend mission, culture, and history, I would not expect to see any dividend payments skipped, nor the payout cut, during these difficult times. At the time of the latest dividend announcement, CEO Lewis stated, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the July [2009] dividend we will have made 468 consecutive monthly dividend payments."
The company has announced no plans to pay dividends in stock shares rather than cash, which some troubled REITs have done.
Stock Performance and Valuation: Realty Income’s total performance has outpaced the market for the trailing 1-, 3-, 5-, and 10-year periods. It is up almost 3% so far in 2009, a little better than the S&P 500’s total return for the year.
The stock’s valuation ratios, when blended, suggest the stock is fairly valued at its current price of about $23. Representative indicators include a trailing P/E of 20, Forward P/E of 20, P/CF of 10, and P/B of 2.
Investment Thesis and Conclusion: While near-term growth prospects may not make this a good candidate for a capital-appreciation strategy, Realty Income’s wonderful record of dividend consistency and increases, solid business model, strong current assets, and explicit focus on the income needs of its shareholders make it an outstanding pick for investors following a dividend-investment strategy. For investors seeking diversification in their portfolios, Realty Income provides a liquid path to spread into real estate.
Disclosure: Long O.
]]> Mon, 29 Jun 2009 10:05:48 -0400 David Van Knapp David Van Knapp submits:

Summary: Realty Income (O) is a superior company for a dividend strategy, whether the sub-strategy is current income or accumulating wealth through dividend growth. The company has paid monthly dividends without a miss since 1970, and it has raised dividends for 47 consecutive quarters--almost 12 years.

It would be hard to find a company more singularly focused on delivering dividends to shareholders. Calling itself “The Monthly Dividend Company®,” Realty Income describes its business as “…generat[ing] dependable monthly income by owning the freestanding properties of regional and national retail chains under long-term lease agreements.”
Type of Company and Stock: In Morningstar’s Style Box, Realty Income is classified as a mid-cap core company, meaning that the stock displays characteristics of both “growth” and “value” stocks. The company is a real estate investment trust (REIT), operating since 1969 and traded on the NYSE since 1994. Its specialty in the REIT world is the purchase and leaseback of commercial retail real estate. Its website is accessible here.
Company Story and Strategy: Realty Income follows an unwavering, well-developed strategy and executes it exceedingly well. Its playing field is the niche of freestanding, single-tenant properties throughout the country leased to leading regional and national retail chains under long-term net-lease agreements. Realty Income does not build or develop new retail facilities. Rather, it negotiates and executes sale-leaseback agreements, thus providing the retailers with immediate access to capital to fuel their own business growth. In essence, Realty Income allows the retailers to outsource the ownership of their real estate.
This real estate is managed by professionals dedicated to a conservative financial and real estate acquisition strategy. Care is built into every stage of Realty Income’s business model. In picking properties, it follows stringent guidelines, seeking proven profitable sites with more than enough ability to generate sufficient cash to cover the lease payments, called “rent coverage.” Realty Income looks for a margin of safety in rent coverage in the event the tenant’s business deteriorates. If over time a property fails to maintain adequate rent coverage, Realty Income will sell it. In constructing its portfolio of properties, Realty Income strives for geographic diversity, chain diversity, single-tenant properties, middle and upper market retailers of goods and services that consumers use every day, highly profitable locations, preservation of capital and income, and reliable cash flow. All of these practices contribute to the remarkably consistent results that the company has delivered over the years.
The safety-first approach is also reflected in the leases it negotiates. Realty Income signs long-term leases (15-20 years or more) with just one tenant, and that tenant is responsible for all of the taxes, maintenance, insurance, and most operating costs on the properties, hence the term "net-lease." Realty Income thereby minimizes its own expenses related to the properties it owns. As a result, the company has enjoyed average net operating income margins since 2003 of over 98% and negligible maintenance capital expenditures.
Growth comes from built-in rent escalators tied to inflation, plus acquisition of new properties that meet the stringent criteria. Realty Income currently has about $0.4 B at its disposal if attractive acquisitions become available, although it has no new properties under development and has acquired none so far in 2009.
Realty Income currently owns and manages more than 2,300 properties in 49 states, representing 117 retail chains in 30 retail industries (the two that provide the most revenue are restaurants and convenience stores). It has had tenant occupancy rates of 97%+ almost continuously since it began. The current occupancy rate is about 96%, reflecting the economic hardships facing its tenants during the recession. The weighted average remaining lease is about 12 years. Its properties are generally owned for cash and unencumbered by mortgage debt, so there are no mortgage payments to offset lease revenue. The company has no additional debt coming due until 2013.
Realty Income is superbly managed. CEO Tom Lewis was a finalist for Morningstar’s CEO of the Year in 2008. This is their own summary of their 2009 business plan:
  1. Pay 12 Monthly Dividends
  2. Raise the Dividend
  3. Maintain a Conservative Balance Sheet
  4. Maintain High Portfolio Occupancy Rates
  5. Acquire Additional Properties
  6. Tell More People About the Monthly Dividend Company
  7. Stay Conservative
Financials: As the company itself states, “Our mission of providing dependable monthly income for our shareholders requires that we maintain a conservative financial structure that supports responsible growth and generates a strong cash flow.” The thing that stands out about Realty Income’s financial performance is its consistency. It has a 3-year revenue growth rate of 20%, although that has slowed in the past year. The company has achieved average net operating income margins since 2003 of more than 98% with negligible maintenance capital expenditures. It has a conservative capital structure, with debt to total cap of 37%. ROE has been in the 9% to 10% range almost continually for the past 5 years. Analysts forecast growth of 5% annually over the next 3 to 5 years.
Dividends: Realty Income is well aware of its shareholders’ interest in (and need for) dividend income. In fact, the company considers its shareholders as “a market” that it serves, stating that it is “dedicated to providing shareholders with dependable monthly income.” It has not missed a dividend payment since it began making them in 1970. It pays dividends monthly and regularly increases them, often several times per year. Its current string of increases stands at 47 quarters (almost 12 years). It increased its dividend payout 5 times each year from 2004-2008, and it has made two increases so far in 2009. This chart shows Realty Income’s dividend record over the past ten years:
click to enlarge
Realty Income’s current yield is 7.4% (compared to the S&P 500’s 2.8%), and its trailing 3-year average dividend growth rate has been a little over 7%. If that rate of growth were to continue, the dividend return (on initial cost, from dividends alone) would double in about 10 years. Under the Ten-by-Ten approach to dividend investing, Realty Income can be expected to be returning 10 percent on initial cost in dividends alone about 4 years after purchase. That can be speeded up by reinvesting the dividends.
I do see two concerns. First, despite its diversification strategy, Realty Income’s top 10 tenants represent 45% of its revenue. Second, some of the company’s retail tenants currently face very challenging economic conditions. It is not hard to visualize that a few may default on their leases or ask to restructure them. Thus, I would expect to see Realty Income’s occupancy rate fall into the low 90%-range, and its growth rate to slow somewhat, over the next year or two.
That said, given the company’s strong dividend mission, culture, and history, I would not expect to see any dividend payments skipped, nor the payout cut, during these difficult times. At the time of the latest dividend announcement, CEO Lewis stated, "We are pleased that, despite challenging economic conditions, our operations allow us to once again increase the amount of the dividend we pay to our shareholders. With the payment of the July [2009] dividend we will have made 468 consecutive monthly dividend payments."
The company has announced no plans to pay dividends in stock shares rather than cash, which some troubled REITs have done.
Stock Performance and Valuation: Realty Income’s total performance has outpaced the market for the trailing 1-, 3-, 5-, and 10-year periods. It is up almost 3% so far in 2009, a little better than the S&P 500’s total return for the year.
The stock’s valuation ratios, when blended, suggest the stock is fairly valued at its current price of about $23. Representative indicators include a trailing P/E of 20, Forward P/E of 20, P/CF of 10, and P/B of 2.
Investment Thesis and Conclusion: While near-term growth prospects may not make this a good candidate for a capital-appreciation strategy, Realty Income’s wonderful record of dividend consistency and increases, solid business model, strong current assets, and explicit focus on the income needs of its shareholders make it an outstanding pick for investors following a dividend-investment strategy. For investors seeking diversification in their portfolios, Realty Income provides a liquid path to spread into real estate.
Disclosure: Long O.

Complete Story »]]> O David Van Knapp Campbell Soup: For Dividend Investors, Better Choices Are Available http://seekingalpha.com/article/142876-campbell-soup-for-dividend-investors-better-choices-are-available?source=feed 142876 Summary: Campbell Soup (CPB) is rated here as a decent, but not outstanding, dividend growth company. It is worthwhile candidate to consider for investors who are pursuing a long-term dividend strategy, but there seem to be other, better choices available.

Type of Company and Stock: In Morningstar’s Style Box, Campbell is classified as a large value company. Its business is centered around soup, beverage, confectionery, and prepared food products sold both to consumers and the commercial food market. Its Web site may be accessed here.

]]> Fri, 12 Jun 2009 06:49:41 -0400 David Van Knapp David Van Knapp submits:

Summary: Campbell Soup (CPB) is rated here as a decent, but not outstanding, dividend growth company. It is worthwhile candidate to consider for investors who are pursuing a long-term dividend strategy, but there seem to be other, better choices available.

Type of Company and Stock: In Morningstar’s Style Box, Campbell is classified as a large value company. Its business is centered around soup, beverage, confectionery, and prepared food products sold both to consumers and the commercial food market. Its Web site may be accessed here.


Complete Story »]]> CPB David Van Knapp The S&P 500: Five Things You Probably Don't Know http://seekingalpha.com/article/139758-the-s-p-500-five-things-you-probably-don-t-know?source=feed 139758 The S&P 500 is widely regarded as the best single gauge of the U.S. equities market and as a decent proxy for the total market. But many investors rely on the S&P 500, its statistics, and its progeny—such as the Dividend Aristocrats list—without knowing how they work. This can lead to bad investment decisions.

Here are five things you probably don’t know about the S&P 500.

]]> Wed, 27 May 2009 07:44:22 -0400 David Van Knapp David Van Knapp submits:

The S&P 500 is widely regarded as the best single gauge of the U.S. equities market and as a decent proxy for the total market. But many investors rely on the S&P 500, its statistics, and its progeny—such as the Dividend Aristocrats list—without knowing how they work. This can lead to bad investment decisions.

Here are five things you probably don’t know about the S&P 500.


Complete Story »]]> GE SPY David Van Knapp Dividends: A Company's Leading Indicator http://seekingalpha.com/article/138136-dividends-a-company-s-leading-indicator?source=feed 138136 Traditional thinking about dividends is that low-paying stocks provide greater growth potential, because the company is fueling future growth by plowing more money back into the company. The so-called “sustainable growth model” (SGM) is based on this concept, holding that the maximum growth rate is achieved with zero dividends paid out. Stated another way, SGM purports to show that when a firm pays dividends, earnings growth lessens.

Does that academic formulation really play out in the real world? In the best Sensible Stock Investing tradition, let’s toss aside conventional wisdom for a moment, start with a blank sheet of paper, and think about this.

]]> Mon, 18 May 2009 06:26:13 -0400 David Van Knapp David Van Knapp submits:

Traditional thinking about dividends is that low-paying stocks provide greater growth potential, because the company is fueling future growth by plowing more money back into the company. The so-called “sustainable growth model” (SGM) is based on this concept, holding that the maximum growth rate is achieved with zero dividends paid out. Stated another way, SGM purports to show that when a firm pays dividends, earnings growth lessens.

Does that academic formulation really play out in the real world? In the best Sensible Stock Investing tradition, let’s toss aside conventional wisdom for a moment, start with a blank sheet of paper, and think about this.


Complete Story »]]> ABT APD CB CL DEO KO MMM PEP PG SHW SO T WM David Van Knapp This Rally Is Sustainable http://seekingalpha.com/article/137317-this-rally-is-sustainable?source=feed 137317 There have been many articles and posts in the past few weeks that emphatically make the case that the current rally is not sustainable. It’s a “sucker’s rally” they say, a secondary trend within a primary bear market. Opinions run hot. Conspiracy theories abound.

Somebody needs to make the case for the other side. Let’s say that you’ve been appointed to advocate for the other side. You have to make the case that this rally is sustainable, and that in fact the March 9 lows are the lowest lows we will see for a long time. What would your arguments be?

]]> Wed, 13 May 2009 05:22:05 -0400 David Van Knapp David Van Knapp submits:

There have been many articles and posts in the past few weeks that emphatically make the case that the current rally is not sustainable. It’s a “sucker’s rally” they say, a secondary trend within a primary bear market. Opinions run hot. Conspiracy theories abound.

Somebody needs to make the case for the other side. Let’s say that you’ve been appointed to advocate for the other side. You have to make the case that this rally is sustainable, and that in fact the March 9 lows are the lowest lows we will see for a long time. What would your arguments be?


Complete Story »]]> DIA SPY David Van Knapp Why Is Pepsico Buying Its Bottlers? http://seekingalpha.com/article/131886-why-is-pepsico-buying-its-bottlers?source=feed 131886 PepsiCo (PEP) announced over the weekend that it has offered about $6 billion to complete its stakes in its two largest bottlers, Pepsi Bottling Group (PBG), of which it already owns 33%, and PepsiAmericas (PAS), of which it already owns 43%. The offers, made up 50-50 of cash and stock, value both firms at a 17% premium to Friday's closing prices.

I am a long-term holder of Pepsico as a superlative dividend-growth stock. The company has paid dividends since 1952 and raised them for 36 years. One of the attractions for me has been that Pepsico does not own its bottlers. So I am curious about the decision to purchase the bottlers.

]]> Tue, 21 Apr 2009 04:22:13 -0400 David Van Knapp David Van Knapp submits:

PepsiCo (PEP) announced over the weekend that it has offered about $6 billion to complete its stakes in its two largest bottlers, Pepsi Bottling Group (PBG), of which it already owns 33%, and PepsiAmericas (PAS), of which it already owns 43%. The offers, made up 50-50 of cash and stock, value both firms at a 17% premium to Friday's closing prices.

I am a long-term holder of Pepsico as a superlative dividend-growth stock. The company has paid dividends since 1952 and raised them for 36 years. One of the attractions for me has been that Pepsico does not own its bottlers. So I am curious about the decision to purchase the bottlers.


Complete Story »]]> PAS PBG PEP David Van Knapp Bear Market Rally or the End of the Bear Market? http://seekingalpha.com/article/129793-bear-market-rally-or-the-end-of-the-bear-market?source=feed 129793 How Do You Tell the Difference Between a Bear-Market Rally and the End of the Bear Market?

The short answer is, you can’t, at least not while it’s happening.

]]> Tue, 07 Apr 2009 06:00:23 -0400 David Van Knapp David Van Knapp submits:

How Do You Tell the Difference Between a Bear-Market Rally and the End of the Bear Market?

The short answer is, you can’t, at least not while it’s happening.


Complete Story »]]> DIA QQQQ SPY David Van Knapp First Quarter Dividend Statistics - What to Make of Them? http://seekingalpha.com/article/129520-first-quarter-dividend-statistics-what-to-make-of-them?source=feed 129520 “March Caps Worst Quarter for Stock Dividends: S&P”

So reads the MarketWatch headline on a story that was widely distributed (I saw the story in several places). The story says:

]]> Sun, 05 Apr 2009 07:25:11 -0400 David Van Knapp David Van Knapp submits:

“March Caps Worst Quarter for Stock Dividends: S&P”

So reads the MarketWatch headline on a story that was widely distributed (I saw the story in several places). The story says:


Complete Story »]]> BAC CB CL GD KMB SPLS USB WFC WMT David Van Knapp