Richard Shaw's Instablog Richard is the managing principal of QVM Group LLC, a fee-based investment advisor based in Connecticut, with clients across the country. QVM also operates the site www.StopAlerts.com and the site www.RationalRisk.com. QVM manages portfolios uniquely designed for each client on a flat fee basis through the client’s own accounts at Schwab; and provides investment coaching to "do-it-yourself" investors on an hourly fee basis. The investment approach is based on value, asset allocation, expense control, risk management, customizing portfolios to each client's specific circumstances, and regular communication about strategy and absolute and benchmark performance. StopAlerts (which also publishes at Seeking Alpha under the user name StopAlerts) is a subscription service that tracks stock, ETF and mutual fund prices versus subscriber selected trailing percentage and/or fixed price criteria on an end-of-day basis, and that sends email alerts to subscribers when trigger prices are reached (the site offers a 30-day free trial). RationalRisk publishes a monthly subscription letter about a rules-based selection of high quality dividend stocks (the site provides a sample letter). Richard's extensive experience includes serving as a Board Director of Phoenix Investment Counsel, a U.S. pension and mutual funds manager, now Virtus Investment Partners (New York Stock Exchange: VRTS http://www.virtus.com); as Managing Director of Phoenix American Investment in London; and as a Board Director Aberdeen Asset Management PLC in Aberdeen Scotland (London Stock Exchange: ADN http://www.aberdeen-asset.com). He has been a Trustee of a $500 million pension fund, and was a charter investor and member of the Board of Directors of several internet companies, including Lending Tree (NASDAQ: TREE http://www.lendingtree.com) prior to its IPO. He is a 1970 graduate of Dartmouth College. QVM Group LLC is a Registered Investment Advisor. Visit the QVM Group website. (http://www.qvmgroup.com). Follow him on Twitter: @QVMinvest Richard Shaw http://seekingalpha.com/author/richard-shaw/instablog S&P 500 Price Target From Head & Shoulders http://seekingalpha.com/instablog/377194-richard-shaw/80013-s-p-500-price-target-from-head-shoulders?source=feed 80013 Head and Shoulders patterns are popular indicators of a trend reversal for both tops and bottoms. We may have one now suggesting high 800's as an S&P 500 price target. The folks over at StockCharts.com report that a Head and Shoulders may be upon us. Let's look at that logic a bit.

The interpretation of Head and Shoulders patterns includes a very general price projection method, which measures the distance from the Neckline to the Head, and then projects a further price move in the opposite direction of the Head from the Neckline. As with any projection method, whether chart-based or fundamental, it is only approximate, doesn't always work out, and should be taken in consideration of other indicators and factors for confirmation.

Let's look at a possible Head and Shoulders that may have recently completed, and also compare it to the reverse Head and Shoulders that occurred around the March 2009 low.

In this image of the S&P 500 index (proxies SPY, IVV and VFINX), we see a Shoulder at "A", a Head at "C", a Neckline defined by "B-D", and an Shoulder at "E".

The distance from that Neckline to the the tip of the Head was about 280 points long (the red vertical). Projecting from the Neckline at about 946 in the opposite direction of the Head (the green vertical), suggested a price target of about 1226. The high in April was 1220 --- pretty close.

In the immediate past, there may be a Shoulder at "F", a Head at "H", a Neckline at "G-I", and a Shoulder at "J".

The distance from the Neckline to the tip of the Head is about 172 points. Projecting 172 points in the opposite direction from the Neckline, we arrive at a plausible price target of 876.

Given that, what confirmation can we derive from other independent indicators?

Price probability cones, based on 21-day (1 month) and 63-day (3 months) historical volatility (standard deviation) projected forward 63 days, using 90% probability says that 876 is roughly within the 90% probably price range -- not that 876 is 90% probable, but that a price lower than roughly 860 to 870 is only 5% probable [5% probable above the cones, 90% within the cones, and 5% below the cones]. You can see those cones projected to September 30, on the right side of the price chart above.

Clearly, the last couple of months have been in a downward direction, so assuming continuation of that direction for a while is more reasonable, we think, than assuming an upward direction -- but, of course, we could be wrong.

The next chart (a box chart that is time independent and only plots new boxes when the average daily price range is exceeded), shows the general area of 1050-1040 as a repetitive support price in the past. Now that the support level is clearly breached, it may be logical to assume an "air pocket" with a further drop of 10% or so, which would tend to put the price of the index in the range of about 920.

Standard and Poor's projects trailing "as reported" earnings through September 2010 to be $65.83. An average kind of multiple on that would be around 15 or 16 (broadly 975 to 1050 as a target). A price target of about 876 would imply (assuming the S&P earnings estimate is reasonable) a P/E multiple of about 13+. That does not seem so unreasonable to us in what we see as a very weak and fragile (or at least highly uncertain) global economy. In any event, it is not a terribly unreasonable multiple in these times.

Some would argue that with such low interest rates, multiples should be high (reminiscent of the old Fed model of expected P/E equal to the inverse of the 10-year Treasury rate). That idea may have held water in prior periods, but these days such low rates and their continuing decline is not a positive sign, but rather a sign of worry about trouble ahead. In our view, P/E multiples should be depressed when trouble is expected.

For these and other reasons, we are on watch for a possible S&P 500 index level of about 900 -- down about 10% from here.

The opposite may happen, and we will change our view and behavior accordingly when and if that happens, but for now, we think the handwriting on the wall is for more down than up, and for a possible target of around 900.

We certainly hope we are wrong, because we'd like to be back in the game, and not sitting on so much cash. We'll just have to wait and see.

Holdings Disclosure: As of July 4, 2010, we do not own any securities mentioned in this article in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 4, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of July 4, 2010, we do not own any securities mentioned in this article in any managed accounts.]]> Sun, 04 Jul 2010 22:07:26 -0400 Head and Shoulders patterns are popular indicators of a trend reversal for both tops and bottoms. We may have one now suggesting high 800's as an S&P 500 price target. The folks over at StockCharts.com report that a Head and Shoulders may be upon us. Let's look at that logic a bit.

The interpretation of Head and Shoulders patterns includes a very general price projection method, which measures the distance from the Neckline to the Head, and then projects a further price move in the opposite direction of the Head from the Neckline. As with any projection method, whether chart-based or fundamental, it is only approximate, doesn't always work out, and should be taken in consideration of other indicators and factors for confirmation.

Let's look at a possible Head and Shoulders that may have recently completed, and also compare it to the reverse Head and Shoulders that occurred around the March 2009 low.

In this image of the S&P 500 index (proxies SPY, IVV and VFINX), we see a Shoulder at "A", a Head at "C", a Neckline defined by "B-D", and an Shoulder at "E".

The distance from that Neckline to the the tip of the Head was about 280 points long (the red vertical). Projecting from the Neckline at about 946 in the opposite direction of the Head (the green vertical), suggested a price target of about 1226. The high in April was 1220 --- pretty close.

In the immediate past, there may be a Shoulder at "F", a Head at "H", a Neckline at "G-I", and a Shoulder at "J".

The distance from the Neckline to the tip of the Head is about 172 points. Projecting 172 points in the opposite direction from the Neckline, we arrive at a plausible price target of 876.

Given that, what confirmation can we derive from other independent indicators?

Price probability cones, based on 21-day (1 month) and 63-day (3 months) historical volatility (standard deviation) projected forward 63 days, using 90% probability says that 876 is roughly within the 90% probably price range -- not that 876 is 90% probable, but that a price lower than roughly 860 to 870 is only 5% probable [5% probable above the cones, 90% within the cones, and 5% below the cones]. You can see those cones projected to September 30, on the right side of the price chart above.

Clearly, the last couple of months have been in a downward direction, so assuming continuation of that direction for a while is more reasonable, we think, than assuming an upward direction -- but, of course, we could be wrong.

The next chart (a box chart that is time independent and only plots new boxes when the average daily price range is exceeded), shows the general area of 1050-1040 as a repetitive support price in the past. Now that the support level is clearly breached, it may be logical to assume an "air pocket" with a further drop of 10% or so, which would tend to put the price of the index in the range of about 920.

Standard and Poor's projects trailing "as reported" earnings through September 2010 to be $65.83. An average kind of multiple on that would be around 15 or 16 (broadly 975 to 1050 as a target). A price target of about 876 would imply (assuming the S&P earnings estimate is reasonable) a P/E multiple of about 13+. That does not seem so unreasonable to us in what we see as a very weak and fragile (or at least highly uncertain) global economy. In any event, it is not a terribly unreasonable multiple in these times.

Some would argue that with such low interest rates, multiples should be high (reminiscent of the old Fed model of expected P/E equal to the inverse of the 10-year Treasury rate). That idea may have held water in prior periods, but these days such low rates and their continuing decline is not a positive sign, but rather a sign of worry about trouble ahead. In our view, P/E multiples should be depressed when trouble is expected.

For these and other reasons, we are on watch for a possible S&P 500 index level of about 900 -- down about 10% from here.

The opposite may happen, and we will change our view and behavior accordingly when and if that happens, but for now, we think the handwriting on the wall is for more down than up, and for a possible target of around 900.

We certainly hope we are wrong, because we'd like to be back in the game, and not sitting on so much cash. We'll just have to wait and see.

Holdings Disclosure: As of July 4, 2010, we do not own any securities mentioned in this article in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of July 4, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of July 4, 2010, we do not own any securities mentioned in this article in any managed accounts.]]> Vanguard 10-Yr Treasury Yield Forecast http://seekingalpha.com/instablog/377194-richard-shaw/77051-vanguard-10-yr-treasury-yield-forecast?source=feed 77051 June 16, 2010

According to Vanguard projections (made 3/29/10 for, AAII Journal, June 2010, page 7) 10-yr Treasury rates are implied by the current yield curve to be 4.4%, 5.2% and 5.6% by 1 year, 3 years and 5 years into the future. The current rate (June 15) is 3.32%.

They don't do a great job of explaining just how they got to those projections, but given their huge bond asset base, we think they should be presumed to be well qualified to make the projections.

They certainly cover themselves well with a disclaimer. Basically, they say you've to make some projection, but the future often unfolds differently. Therefore, broad diversification among bonds is more likely to be satisfactory over time than a narrow focus, which can seem right now, but turn out quite wrong later. --- So their article and this discussion is probably better than doing nothing all, but, as with any forecast, shouldn't be taken as ultimate truth.

For perspective, they report that historical rates were 4.9% since, 1800, 4.7% since 1900, 7.3% since 1970, and 4.6% since 2000.

The price implication for 10-year Treasury rates, by our calculation, is for price declines of 9.6%, 16.5% and 19.9% by years 1, 3 and 5.

That calculation is based on multiplying the duration for the current 10-year Treasury (which is 8.67 years) by the percentage yield change (1.1 * 8.67, 1.9 * 8.67, and 2.3 * 8.67).

Considering the interest that will be received over the holding period (without reinvestment), the net of price change and interest proceeds would be implied to be losses of 6.3%, 6.6% and 3.4% over 1, 3 and 5 years.

Those expected interest rate changes are large versus short term history, as the 1-year chart shows..

However, this 10-year chart of the rates for the 10-year Treasury, shows Vanguard's projections to be very much in the range of rates that we experienced in the period from 2000-2007 (except for a dip below during the last major bottom in 2002-2003).

This 50-year view of rates for the 10-year Treasury, shows plenty of room for rate increases well beyond Vanguard's projections in times inflationary, stress as we had in the early 1980's.

Related ETF products: IEF and TLH.

Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of June 16, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.]]> Wed, 16 Jun 2010 17:58:37 -0400 June 16, 2010

According to Vanguard projections (made 3/29/10 for, AAII Journal, June 2010, page 7) 10-yr Treasury rates are implied by the current yield curve to be 4.4%, 5.2% and 5.6% by 1 year, 3 years and 5 years into the future. The current rate (June 15) is 3.32%.

They don't do a great job of explaining just how they got to those projections, but given their huge bond asset base, we think they should be presumed to be well qualified to make the projections.

They certainly cover themselves well with a disclaimer. Basically, they say you've to make some projection, but the future often unfolds differently. Therefore, broad diversification among bonds is more likely to be satisfactory over time than a narrow focus, which can seem right now, but turn out quite wrong later. --- So their article and this discussion is probably better than doing nothing all, but, as with any forecast, shouldn't be taken as ultimate truth.

For perspective, they report that historical rates were 4.9% since, 1800, 4.7% since 1900, 7.3% since 1970, and 4.6% since 2000.

The price implication for 10-year Treasury rates, by our calculation, is for price declines of 9.6%, 16.5% and 19.9% by years 1, 3 and 5.

That calculation is based on multiplying the duration for the current 10-year Treasury (which is 8.67 years) by the percentage yield change (1.1 * 8.67, 1.9 * 8.67, and 2.3 * 8.67).

Considering the interest that will be received over the holding period (without reinvestment), the net of price change and interest proceeds would be implied to be losses of 6.3%, 6.6% and 3.4% over 1, 3 and 5 years.

Those expected interest rate changes are large versus short term history, as the 1-year chart shows..

However, this 10-year chart of the rates for the 10-year Treasury, shows Vanguard's projections to be very much in the range of rates that we experienced in the period from 2000-2007 (except for a dip below during the last major bottom in 2002-2003).

This 50-year view of rates for the 10-year Treasury, shows plenty of room for rate increases well beyond Vanguard's projections in times inflationary, stress as we had in the early 1980's.

Related ETF products: IEF and TLH.

Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of June 16, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of June 16, 2010, we do not own any securities mentioned in this article in any managed accounts.]]> ief tlh Worst May in 70 Years .... BUT http://seekingalpha.com/instablog/377194-richard-shaw/73822-worst-may-in-70-years-but?source=feed 73822 May 27, 2010

Bloomberg reported today (May 27) that this has been the worst US stock market in the 70 years since 1940. That's pretty bad, BUT there are some individual stocks and some ETFs with strongly positive price performance.

We filtered four lists (S&P 500, S&P 400, S&P 600 and ETFs) to find those securities that show these five price conditions using daily closing prices:

  • positive slope of the 1-year best fit linear regression trend line
  • 6-month average greater than 12-month average
  • 3-month average greater than 6-month average
  • 1-month average greater than 3-month average
  • price greater than 1-month average.

That makes for a solidly positive trend.

Here is how many past that test:

  • S&P 500: 53
  • S&P 400: 38
  • S&P 600: 45
  • ETFs: 36

That is too many to put into lists for this article. A single Excel file containing the name and symbol of those securities in a separate tab for each list is available for download.

(Download File)

Holdings Disclosure: As of May 27, 2010, we may or may not have holdings in some of the securities in those lists in some managed accounts. Nothing about the list of securities is in any way a recommendation to buy or hold those securities. The list is simply identification of those securities with a strong up trend pattern, as defined by the filter criteria disclosed above.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of May 27, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of May 27, 2010, we may or may not have holdings in some of the securities in those lists in some managed accounts. Nothing about the list of securities is in any way a recommendation to buy or hold those securities. The list is simply identification of those securities with a strong up trend pattern, as defined by the filter criteria disclosed above.]]> Fri, 28 May 2010 20:57:22 -0400 May 27, 2010

Bloomberg reported today (May 27) that this has been the worst US stock market in the 70 years since 1940. That's pretty bad, BUT there are some individual stocks and some ETFs with strongly positive price performance.

We filtered four lists (S&P 500, S&P 400, S&P 600 and ETFs) to find those securities that show these five price conditions using daily closing prices:

  • positive slope of the 1-year best fit linear regression trend line
  • 6-month average greater than 12-month average
  • 3-month average greater than 6-month average
  • 1-month average greater than 3-month average
  • price greater than 1-month average.

That makes for a solidly positive trend.

Here is how many past that test:

  • S&P 500: 53
  • S&P 400: 38
  • S&P 600: 45
  • ETFs: 36

That is too many to put into lists for this article. A single Excel file containing the name and symbol of those securities in a separate tab for each list is available for download.

(Download File)

Holdings Disclosure: As of May 27, 2010, we may or may not have holdings in some of the securities in those lists in some managed accounts. Nothing about the list of securities is in any way a recommendation to buy or hold those securities. The list is simply identification of those securities with a strong up trend pattern, as defined by the filter criteria disclosed above.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of May 27, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: Holdings Disclosure: As of May 27, 2010, we may or may not have holdings in some of the securities in those lists in some managed accounts. Nothing about the list of securities is in any way a recommendation to buy or hold those securities. The list is simply identification of those securities with a strong up trend pattern, as defined by the filter criteria disclosed above.]]> Conservative Equity Income Filter - 2 http://seekingalpha.com/instablog/377194-richard-shaw/73008-conservative-equity-income-filter-2?source=feed 73008 May 24, 2010

Anytime is a good time to build a shopping list of stocks you'd like to buy someday -- if the time and price is right. Even though we are in a downward market period now, it's still a good time to build or refresh that list.

Yesterday, we published a list of potentially interesting equity income stocks. That list had a relative price performance aspect. The list today does not consider relative price performance, just yield and internal fundamental considerations which are different than those in yesterday's filter..

After selecting for minimum price, market-cap and Dollar trading volume for liquidity, this filter looks for consistently positive "as reported" earnings. We don't look at "operating earnings" in this filter because it ignores write-offs and other "non-recurring" expenses, because many companies have an endless stream of different "non-recurring items each year -- we don't want those in this filter.

In addition to positive and growing earnings, the filter requires a history of sales growth. Earning growth can only continue so far and for so long if sales do not grow too.

With equity income as the goal, the filter requires a minimum 2% yield, and a history of dividend growth.

To see the dividend as reasonably well protected, the filter requires a history of free cash flow, limited payout ratios, a current ratio of 1 or better, and earnings coverage of interest costs at a three or higher multiple.

From a stock database of 8,883 stocks, using data as of the close of business last Friday (May 21, 2010), eighteen stocks passed the filter criteria presented in the lower half of the table image.

Keep in mind that qualitative filtering can result in significantly different lists with sometimes minor changes in filter criteria.

Stocks named in the table image and charts are: AZN, BF.B, CHL, CL, FLO, GD, GSK, HAS, HRL, SJM, JNJ, KMB, LMT, PEP, SYT, SYY, UGI and GWW.

We are predominantly out of equities at this time in the portfolios we manage, but find some of these stocks interesting for future consideration. This list is the beginning, not the end of research. Look at each stock carefully before deciding that it may be a good choice. Simple quantitative filtering doesn't catch all that reading SEC filings and consideration of macroeconomic issues and competition will reveal.

Holdings Disclosure: As of May 24, 2010, we have some exposure to PEP mentioned in this article in some, but not all, managed accounts. We do not have current positions at this time in any other securities discussed in this document in any managed account.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of May 24, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: AZN, BF.B, CHL, CL, FLO, GD, GSK, HAS, HRL, SJM, JNJ, KMB, LMT, PEP, SYT, SYY, UGI and GWW]]> Mon, 24 May 2010 22:33:52 -0400 May 24, 2010

Anytime is a good time to build a shopping list of stocks you'd like to buy someday -- if the time and price is right. Even though we are in a downward market period now, it's still a good time to build or refresh that list.

Yesterday, we published a list of potentially interesting equity income stocks. That list had a relative price performance aspect. The list today does not consider relative price performance, just yield and internal fundamental considerations which are different than those in yesterday's filter..

After selecting for minimum price, market-cap and Dollar trading volume for liquidity, this filter looks for consistently positive "as reported" earnings. We don't look at "operating earnings" in this filter because it ignores write-offs and other "non-recurring" expenses, because many companies have an endless stream of different "non-recurring items each year -- we don't want those in this filter.

In addition to positive and growing earnings, the filter requires a history of sales growth. Earning growth can only continue so far and for so long if sales do not grow too.

With equity income as the goal, the filter requires a minimum 2% yield, and a history of dividend growth.

To see the dividend as reasonably well protected, the filter requires a history of free cash flow, limited payout ratios, a current ratio of 1 or better, and earnings coverage of interest costs at a three or higher multiple.

From a stock database of 8,883 stocks, using data as of the close of business last Friday (May 21, 2010), eighteen stocks passed the filter criteria presented in the lower half of the table image.

Keep in mind that qualitative filtering can result in significantly different lists with sometimes minor changes in filter criteria.

Stocks named in the table image and charts are: AZN, BF.B, CHL, CL, FLO, GD, GSK, HAS, HRL, SJM, JNJ, KMB, LMT, PEP, SYT, SYY, UGI and GWW.

We are predominantly out of equities at this time in the portfolios we manage, but find some of these stocks interesting for future consideration. This list is the beginning, not the end of research. Look at each stock carefully before deciding that it may be a good choice. Simple quantitative filtering doesn't catch all that reading SEC filings and consideration of macroeconomic issues and competition will reveal.

Holdings Disclosure: As of May 24, 2010, we have some exposure to PEP mentioned in this article in some, but not all, managed accounts. We do not have current positions at this time in any other securities discussed in this document in any managed account.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of May 24, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.



Disclosure: AZN, BF.B, CHL, CL, FLO, GD, GSK, HAS, HRL, SJM, JNJ, KMB, LMT, PEP, SYT, SYY, UGI and GWW]]> azn bf.b chl cl flo gd gsk has hrl sjm jnj kmb lmt pep syt syy ugi gww New Investment Income Taxes and Investor Behavior http://seekingalpha.com/instablog/377194-richard-shaw/59766-new-investment-income-taxes-and-investor-behavior?source=feed 59766
It would seem to us that such an across the board tax on the upper income population that probably accounts for the bulk of non-institutional income in regular taxable accounts would suggest some kind of downshift in stock prices to be logically appropriate.  Investment income is worth less in 2012 than it is today.

That is in addition to substantial increases in other income tax rates at the federal, state and city levels.

Dividend income is particularly hard hit, because it will be taxed at much higher rates in 2011 before the 3.8% additional Medicare tax.

There are still the IRA, 401-k and other assets, but the withdrawals from those will be taxed at the higher rate too.

Of course, if there is no place to invest that is free of this new tax, the only alternative to less wealth may be to spend a bit more and save a bit less.  That might have a somewhat countervailing effect on stock prices, for a short while.  Total spending won't change either way, it's just who spends your money and for what.

We believe that private expenditures would result in higher productivity and growth, and therefore stock prices over time than will result from government expenditures, because of a more profit and growth oriented capital allocation in the private sector.

Given the recent steep rise in stock prices, it is hard to believe that this particular tax is baked-in.  It may be, but we doubt it.

This and other additional taxes on investments (such as the much higher rates on dividends in 2011) will cause shifts in behavior. 

For example, the top marginal tax rate on qualified dividends in the US in 2010 is 15%.  In 2011, the top marginal rate is expected to be 39.6%.  In 2012, combining the new Medicare tax in investment income, the top marginal rate on qualified dividends will be 43.4%.  Clearly, nearly three times the tax rate on dividends must come into consideration by investors when making choices.

As we all know from experience, medicare and related entitlement program specific taxes don't go down, but they do go up. That means in subsequent years, the tax on dividends will likely exceed 43.4%.

While we do not have the ability to quantify those shifts, we are comfortable with the direction of those shifts for investors in the aggregate.  Among others, we expect these shifts may take place, each of which would tend to reduce taxes paid:

1.  Spending will gain versus savings
2.  Capital gains orientation will gain versus dividend income orientation
3.  "Buy and Hold" will gain versus more active approaches
4.   Because of greater "Buy and Hold" emphasis, broadly diversified funds may gain over less diversified individual stock holdings
5.  Low turnover funds will gain versus high turnover funds
6.  Index funds will gain over active management funds
7   Depreciation or depletion sheltered investments may gain over those without that shelter.

We don't know the magnitude of the shifts (they could be minor or major), but rational behavior is likely to push investments in those directions. 

None of this is to suggest that investors will collapse into a giant passive investment pool.  Investors will still seek best performers.  They will still exit under-performing securities. However, in the aggregate, and perhaps only on the margin, the new tax factors will push in the direction of tax minimization, causing aggregate shifts in investor behavior and money flows, thereby shifting relative values and performance of various assets.


Disclosure: No securities named in this post.

Disclaimer:
Opinions expressed in this material and our disclosed positions are as of March 21, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC

 



]]> Mon, 22 Mar 2010 01:54:30 -0400
It would seem to us that such an across the board tax on the upper income population that probably accounts for the bulk of non-institutional income in regular taxable accounts would suggest some kind of downshift in stock prices to be logically appropriate.  Investment income is worth less in 2012 than it is today.

That is in addition to substantial increases in other income tax rates at the federal, state and city levels.

Dividend income is particularly hard hit, because it will be taxed at much higher rates in 2011 before the 3.8% additional Medicare tax.

There are still the IRA, 401-k and other assets, but the withdrawals from those will be taxed at the higher rate too.

Of course, if there is no place to invest that is free of this new tax, the only alternative to less wealth may be to spend a bit more and save a bit less.  That might have a somewhat countervailing effect on stock prices, for a short while.  Total spending won't change either way, it's just who spends your money and for what.

We believe that private expenditures would result in higher productivity and growth, and therefore stock prices over time than will result from government expenditures, because of a more profit and growth oriented capital allocation in the private sector.

Given the recent steep rise in stock prices, it is hard to believe that this particular tax is baked-in.  It may be, but we doubt it.

This and other additional taxes on investments (such as the much higher rates on dividends in 2011) will cause shifts in behavior. 

For example, the top marginal tax rate on qualified dividends in the US in 2010 is 15%.  In 2011, the top marginal rate is expected to be 39.6%.  In 2012, combining the new Medicare tax in investment income, the top marginal rate on qualified dividends will be 43.4%.  Clearly, nearly three times the tax rate on dividends must come into consideration by investors when making choices.

As we all know from experience, medicare and related entitlement program specific taxes don't go down, but they do go up. That means in subsequent years, the tax on dividends will likely exceed 43.4%.

While we do not have the ability to quantify those shifts, we are comfortable with the direction of those shifts for investors in the aggregate.  Among others, we expect these shifts may take place, each of which would tend to reduce taxes paid:

1.  Spending will gain versus savings
2.  Capital gains orientation will gain versus dividend income orientation
3.  "Buy and Hold" will gain versus more active approaches
4.   Because of greater "Buy and Hold" emphasis, broadly diversified funds may gain over less diversified individual stock holdings
5.  Low turnover funds will gain versus high turnover funds
6.  Index funds will gain over active management funds
7   Depreciation or depletion sheltered investments may gain over those without that shelter.

We don't know the magnitude of the shifts (they could be minor or major), but rational behavior is likely to push investments in those directions. 

None of this is to suggest that investors will collapse into a giant passive investment pool.  Investors will still seek best performers.  They will still exit under-performing securities. However, in the aggregate, and perhaps only on the margin, the new tax factors will push in the direction of tax minimization, causing aggregate shifts in investor behavior and money flows, thereby shifting relative values and performance of various assets.


Disclosure: No securities named in this post.

Disclaimer:
Opinions expressed in this material and our disclosed positions are as of March 21, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC

 



]]> Quick Chart Trip Around the World http://seekingalpha.com/instablog/377194-richard-shaw/45680-quick-chart-trip-around-the-world?source=feed 45680 These index charts cover nearly all markets, except the frontier markets, Canada, Australia, Singapore, and Hong Kong, except to the extent that they are included in the World index. The emerging markets index is one day behind the other indexes.

World

world1

United States

us

Europe

europe

Japan

japan

Emerging

emerging

Compliance Disclosure:
Opinions expressed in this material and our disclosed positions are as of January 26, 2010.  Our opinions and positions may change as subsequent conditions vary.  We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too.  Investment involves risks of loss of capital.   Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC



Disclosure: Compliance Disclosure: Opinions expressed in this material and our disclosed positions are as of January 26, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.]]> Tue, 26 Jan 2010 19:16:48 -0500 These index charts cover nearly all markets, except the frontier markets, Canada, Australia, Singapore, and Hong Kong, except to the extent that they are included in the World index. The emerging markets index is one day behind the other indexes.

World

world1

United States

us

Europe

europe

Japan

japan

Emerging

emerging

Compliance Disclosure:
Opinions expressed in this material and our disclosed positions are as of January 26, 2010.  Our opinions and positions may change as subsequent conditions vary.  We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too.  Investment involves risks of loss of capital.   Consider seeking professional advice before implementing your portfolio ideas.

Richard Shaw
QVM Group LLC



Disclosure: Compliance Disclosure: Opinions expressed in this material and our disclosed positions are as of January 26, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.]]>