Our last recommendation, which was to go long Procter & Gamble (PG) on August 30, has outperformed the S&P 500 by almost 4% over the past month. Today we’re going to review another “high-quality” stock that has not fared so well over the same time horizon: Wal-Mart (WMT), which underperformed the market by about 10% in September 2009.

August 2009 has been a good media month for Proctor & Gamble (PG). Morningstar declared the stock was undervalued, Barron’s included PG on a list of “12 Quality Stocks Ready to Rally,” and last week Dividends Value and iStockAnalyst recommended PG based on the company’s record of increasing dividends for 55 straight years.

The simple answer to their question is that equities tanked because this is what they do from time to time. The behavior of equities isn’t what changes — what changes is our willingness to believe that our portfolios can be devastated by a “super bear” market tsunami from time to time.

I recently teamed up with Steven Sapra from Analytic Investors and Larry Gorman from Cal Poly San Luis Obispo on a research paper that investigates the relation between stock market volatility, alpha and the information ratio. We find that measures of market volatility provide forecasts of when alpha-capture opportunities in U.S. equity markets improve or worsen. This article will present an executive summary of our findings; readers interested in the technical details can download the complete paper from SSRN.

As we all know, there are many problems facing the economy and financial markets right now. One of the longest-lived and most pernicious problems is one of the least discussed — or even recognized. For example, this problem is responsible for many Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control (and California is on the brink of bankruptcy). This problem fueled the market’s overvaluation in the 1990s, culminating in the infamous tech bubble. It lent a significant tailwind to the crazy lending standards and housing bubble that propped up the bull-market-that-wasn’t from 2003-2007, and the problem is still with us today, preventing us from clearly evaluating conditions in the economy and financial markets — particularly how we arrived at our current state of affairs.

David Fessler wrote a compelling recommendation in favor of Jacobs Engineering (JEC) on June 26, summarizing the many compelling macroeconomic themes that favor this stock right now:

Everyone generally agrees that the US and global equity markets have heroically priced in a remarkably optimistic scenario since the March stock market lows. An intelligent consensus appears to be emerging that government stimulus programs deserve some credit for this, as financial markets and the US economy are showing some signs of stabilization. John Hermann and Ron Insana had a spirited debate on this topic on CNBC on June 15. Hermann’s more optimistic, forecasting a slow but stable recovery as the stimulus programs help the global economy build momentum through 2011. Insana’s a bit more pessimistic, but does a fine job of thwarting Trish Regan’s “concerns” about government intervention while emphatically stressing that the Fed’s massive monetary stimulus efforts, both traditional and untraditional, must remain in place. You can watch the interview here:

by Rob Weigand

[First, a brief disclaimer. Nothing in this article implies that Bill Ackman of Pershing Square Capital should be compared to former V.P. Dick Cheney, beyond strictly pointing out that they are both currently using more or less the same strategy to justify their recent behaviors -- a strategy that's so embedded in the Judeo-Christian and Western Scientific traditions that it's often overlooked for being too obvious. The strategy is known as a "claim to virtue," a concept elaborated on in the writings of the renowned psychiatrist Robert Jay Lifton. However, if you perceive that this article represents a personal attack on either Ackman or Cheney, or aspires to make some sort of political statement, you're projecting. I assure you, no such intentions exist. But I believe that anyone who is motivated to figure out how the world works -- something that applies to all investors -- the following perspectives will be interesting.]

The 2008-09 bear market has created some apparent dividend plays in certain industries, big pharma among them. Widows and orphans, tax-free endowments and pension funds should naturally be interested in these opportunities. We took a look at 4 compelling dividend yields and analyzed which stock was best in class in terms of financial stability and the ability to maintain the high dividend payout throughout the downturn and over the long run (10 years or longer). The analysis below suggests that at Friday’s closing price of $32.38, Astrazeneca’s (AZN) dividend is best in class and the one most worth chasing. Note that this forecast focuses only on sustainable dividend yields, and does not include a prediction regarding future price appreciation.

The credit crisis and dire position of banks remain the major roadblocks to recovery of the U.S. economy. Although the recession and credit crunch began in late 2007, thus far the injections of TARP capital have done little to stabilize the ongoing deterioration among larger banks. Many now blame former Treasury Secretary Hank Paulson for not laying out explicit guidelines regarding the purpose of the TARP funds, although his successor, Timothy Geithner, has been equally ineffective. Banks had other ideas of what to do with the capital, which in most cases has been hoarded to shore up their balance sheets and ward off insolvency.

It appears that the U.S. Congress is set to pass a $850 billion dollar spending package designed to provide fiscal stimulus for the U.S. economy. It is a mix of spending increases, transfers and tax cuts purportedly designed to pump up aggregate demand. Both tax cuts and spending increases create budget deficits, and therefore the government must increase borrowing to finance its operations. Add in the interest charges and this legislation easily surpasses a trillion dollars in total cost.

I’m thinking of a stock that’s beaten the S&P 500 by over 300% in the last 6 years and by 70% in the past 6 months (see charts below) . . .

The phrase “off balance sheet” will be permanently removed from the global vocabulary.

Motivated by Cassandra Does Tokyo’s eloquently-written post about the pundits prematurely anticipating economic and financial conditions returning to “normal” (because normal may not mean anything any more), and Paul Krugman’s recent comments at the National Press Corps Luncheon about ZIRP in Japan vs. the U.S, I decided to share a little experiment I’ve been keeping track of for about 5 years now. This is a picture that’s truly worth the proverbial 10,000 words: I overlayed the compound returns to the Nikkei 225 and S&P 500, beginning 4 years before each market’s bubble top, and continuing for the next 8 years. I believe the graph speaks for itself:

There’s been a lot of cyber ink and hot air devoted to the question of whether or not the U.S. Government should get involved in General Motors’ (GM) difficulties. Here’s my two cents on the issue: Don’t bail out GM with loans – you’ll never see a nickel of that money again. Instead, the government should execute a hostile takeover of the whole company, hire one or more private equity firms to turn the company around, and bank a profit when GM’s stock can be sold to the public again in a few years.

These are some of the most frequently-asked questions I have heard in the various speaking engagements and media interviews I’ve participated in over the past several months.