Today, I want to explain the reasons for taking a long position on The Western Union Company (WU) as part of the Rock Solid Yield Portfolio. But first, let me first explain a little about the Rock Solid Yield Portfolio (RSY). RSY was built using Sabrient Systems' quantitative analysis to generate higher returns than the market (alpha), with overweighting on such factors as balance sheets, dividend yields, fundamentals, and earnings quality. Basically, picking high dividend payers with strong value attributes.

The last post, with a long recommendation of Armour Residential REIT (ARR), included the positions currently in the RSY portfolio as an online broker might display with cash balances and option positions. Unfortunately, ARR has dropped around 5% since the buy recommendation, which was partially explained by its public offering of 65,000,000 shares of common stock. All things being equal, this would have been a non-event. While there are

My latest post stated that "Warner Chilcott Is A Buy For Dividend Lovers" as part of a value dividend portfolio affectionately called Rock Solid Yields (RSY). In addition to recommending a buy on WCRX, the article discussed that not all dividends are equal and that the classification of a dividend is important for considering the dividend yield as an ongoing commitment by management. While any dividend is great for investors getting returns on their assets, only regular declared dividends associated with a time-period can be counted on with a reasonable expectation like yearly, quarterly, or monthly. Some of the other classifications for dividends are special, extra or the dreaded liquidation as that spells the end of dividends and most likely all revenue generating assets of the company.

Other than the link to the RSY blog at Sabrient Systems as part of the disclosures, I did

Just like most financial data concerning stocks, dividend yield can be interpreted differently and has no one answer for what is the precise amount. Let us start off with the definition of dividend yield from Investopedia.

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Read more: Investopedia

The price per share is relatively straight-forward but even what is a dividend is not necessarily well defined. Take for example, Warner Chilcott Public Limited Company (WCRX) that paid a dividend of $4.00 for an ex-dividend date of August 29, 2012. Using the above calculations that would make the dividend yield at over 33% assuming a price of $12. But that would be wrong for dividend investors

Although the initial market reaction to the ISM reports was muted, both the manufacturing and non-manufacturing reports from the Institute for Supply Management showed considerable strength. The headline indexes both exceeded the consensus numbers and even the high range of the consensus ranges. The PMI made the most dramatic move by increasing 1.9, jumping the 50% mark at a 51.5%, which was 1.8% over the consensus and 0.9% over the high range of the consensus range. The NMI also increased an acceptable 1.4 to 55.1% after an increase of 1.1% last month. This made this month the 33rd consecutive month the index was above the 50% mark, indicating continued growth.

Even with this broadly positive news, there were a few points of concern. With the manufacturing sectors, sub-indexes broadly increased, including employment up by 3.1 to 54.7%, the only ongoing concern is input prices. The price index jumped 4 points

To the same degree that the ISM's PMI index (manufacturing) disappointed the markets, the NMI index (non-manufacturing) was positive news for the markets. The PMI continued its contraction for the third consecutive month with an additional drop of 0.2 to 49.6% which was on the low end of the narrow consensus range of 49.5-50.5% provided by Econoday. On the other hand, the NMI showed considerable strength with an expanding growth rate of 1.1 to 53.7% for the 32nd consecutive month of growth. According to Econoday, the NMI exceeded the consensus by 0.7 and above the consensus range of 51.5- 53.5%.

The broad strength in the non-manufacturing report was represented by increases in employment of 4.5 to 53.8%, reversing last month's contraction, back log of orders of 6 to 50.5%, new export orders of 1 to 52%, imports of 5 to just shy of 50

The ISM reports showed mixed signals this time as the PMI (manufacturing) missed the consensus mark by 0.3 at 49.8% and the NMI (non-manufacturing) beat the consensus by 0.6 at 52.6%. Although muted as usual, the Dow's initial reactions were in the same direction as the whether it met or missed expectations. Both indexes were inside the consensus range provided by Econoday (Mfg and Non-Mfg).

The manufacturing subindexes showed positive signs in production up 0.3 to 51.3%, new orders up 0.2 but stayed below 50 at 48%, and prices up 2.5 to a more acceptable 39.5%. Prices down might be good overall but sustained price level drops can signify the dreaded deflation. The biggest negative in the manufacturing report was the drop in employment of 4.6 to 52%. It maintained above 50 but the trend clearly is downward from 57.3% in April 2012 and if it continues

The most recent ISM manufacturing report has left much to be pessimistic about, not that the markets or the media seemed to notice.

First, the headline PMI dropped below 50 (marginally to 49.7) with a drop of 3.8, indicating contraction in the manufacturing sector for the first time since July 2009. It also missed the consensus by 2.3 and outside the consensus range from Econoday.

Second, new orders dropped a surprising -12.3% to end also up in negative territory at 47.8%.

Third, exports also dropped into negative territory by 6% to 47.5%. This is troubling as it was one possible avenue for increased aggregate demand, although it was expected because of the weakness in China and the financial crisis in Europe.

Fourthly, the most important indicators showed weakness in production, down 4.6% to 51%; employment, down slightly to 56.6%; inventories, down 2 to 44%; and a backlog of orders, down

In one of my recent articles based on the ISM reports it used lagged linear regressions to derive at a group of stocks that should perform well in a variety of markets and especially well under rising ISM indexes (picking stocks based on the ISM Manufacturing Index with lagged indicators). This time I want to get back to exploring inflation based regressions in choosing stocks similar to the article using the PPI Index. Results from prior regressions on sector returns versus inflation indicators showed that the headline PPI had the highest degree of correlation.

But those regressions did not consider inflation expectations but just recorded levels of inflation backward looking. The University of Michigan Inflation Expectation (MICH) is one such index that takes a survey of consumers based on 1 year forward inflation expectations. Below is a graph of the MICH and CPI headline numbers and

In the last post (9 Stocks That Should Perform Well When The ISM Index Rises) about the ISM reports for May, I included the results from regressing stock returns in the S&P 1500 versus the ISM manufacturing report headline index (PMI), with 5 additional factors being 5 lags. This post will present some of the findings based on the non-manufacturing ISM report.

Since the Institute for Supply Management has only recently presented the composite index (NMI) since 2008, it limits the ability to back-test over the desired 10 year duration. The underlying indexes have been supplied since around mid-1997, so a composite index is possible to derive from the data, as the ISM states.

The new Non-Manufacturing Index, NMI, consists of:
Business Activity 25%
New Orders 25%
Employment 25%
Supplier Deliveries 25%

I ran two regressions from mid-2000 to May 2012 using the four

Overall, the ISM reports brought in good news, although not great, with the market's reactions being overshadowed by the poor jobs report of last week. Even though Tuesday was a light calendar day, the non-manufacturing sector's good news only translated into a slight improvement in market sentiment. More specifically, the good news was that the new orders index of both reports rose 2 points or nearly 2 points to 55.5 and 60.1 for non-manufacturing and manufacturing, respectively. Also, pricing pressures have continued to subside, as discussed below.

The headlines indexes were fair to middling, even with the strong headwinds of the Euro crisis and questions about China's continuing growth. Manufacturing PMI, at 53.5, was below the market consensus of 54, but at the top-end of the consensus range of 51.0-54.5 by Econoday. The non-manufacturing index was above the consensus of 53.5 by Econoday and MarketWatch, with

The experts got the general directions of the ISM reports correct this last month. While there is no break-out to indicate increased overall strength of the economy or the return to the dreaded double-dips, both reports showed consistent growth, which should translate into economic growth of over 3.5% in GDP annually according to Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. The economists surveyed, predicted that the ISM manufacturing index would increase to around 53 to 53.5 and was in the consensus range by Econoday of 51.9-54.2% at the actual of 53.4%. On the non-manufacturing headline index, economists had stated the index would decline slightly to 57-56.8 from 57.3% and it declined to 56 but maintained within the consensus range by Econoday of 55.7-58%.

Respondents to the surveys were basically very upbeat about business conditions with two reservations. A respondent from Heath Care & Social Services

My last post presented 22 Stocks That Perform Well When The ISM Index Goes Up along with some analysis of the ISM reports published in March. The picks were based on the manufacturing index along with 5 of the subindexes (employment, new export orders, new orders, and price).

The following list of stocks are based on the most recent ISM report on the non-manufacturing sectors of the economy and the same subindexes. Since the composite/headline index was only added in early 2008, the subindexes were useful in allowing a backtest since early 2000.

As expected, the stock picks this time should overlap with the last report, as both the non-manufacturing and especially the manufacturing indexes are highly correlated with the overall growth of the economy. Even the backtested annualized returns were the same, and above the S&P 1500, flat-weighted. At this time, it might also be interesting to see

Fair to Middling for Manufacturing, Good News for the Services Sectors
Manufacturing missed the consensus range of 54%-55.5% by over 1.5% to 52.4% and well below the consensus point of 54.6%. Economists had predicted a rise in the index of 0.5 but got slack results in all the sub-indexes with new orders down 2.7, production down 0.4, employment down 1.1, supplier deliveries down 4.6, and inventories at break even. But according to Econoday, "... February's rates are respectable and not that much different than January." The most dramatic increase in the sub-indexes was prices with a rise of 6% to 61.5%. So the only good news was the exports index up 4.5 to 59.5%.

Non-Manufacturing ISM Report showed greater strength with the headline index rising 0.5% to 57.3% which was well above the consensus of 56 and on the high side of the consensus range of 54.5%-58%.

The recent release of the PPI index and core PPI has sparked some interest in how it is related to stock market returns. Calafia Beach Pundit thinks that the PPI inflation of 3.5% points to higher yields ahead.

From my regression research, the PPI index has the highest correlation with stock market returns by sector versus the CPI indexes of core and headline. Results for back-testing over the last 10 years also resulted in greater returns for the PPI over the CPI although core CPI does better than the headline CPI. But for the PPI versus core PPI, the results for the core PPI are very weak and much lower than the S&P 1500 flat weighted. Even when adding core to the headline, PPI results in lower returns than just PPI.

The above regression analysis was in regards to sectors and stocks that performed well when the index was

The recent jobs reports was such good news for the economy and the markets that it overshadowed the good news contained in the ISM reports. My latest article on the ISM reports was lukewarm at best, but this month has more silver linings. The biggest upside surprises occurred in the non-manufacturing index where the headline index jumped up 3.8 to 56.8% beating the consensus of 53.3-53.5% and the consensus range of 52-54%. This was even after revisions in December upward of 0.4%. The manufacturing headline also bumped up one percent to 54.1% but after a revision down last month of 0.8%. Econoday succinctly stated a summary of the market reactions to the report.

The manufacturing sector is a bulwark of the economy and, despite troubles in Europe and slowing in Asia, continues to expand, underscored by a faster rate of expansion for new export orders which rose 2

We have discussed the Institute for Supply Management (ISM) reports and explored the relationships between the reports and the general health of the economy over the last two years. After first exploring the December reports, this post will explore a new area of research along with some stock suggestions related with the ISM research.

Good but is that Good Enough?

Both headline indexes increased month over month for December reports although non-manufacturing did not make up the ground it lost in November. The non-manufacturing increased 0.6–52.6% in December from a loss of 0.9% in November. The manufacturing index continued its rise of 1.2%–53.9% in December after the gain of 1.9% which was on the high side of the consensus range of 52.5–54% with a consensus point of 53.2%. The non-manufacturing index was below the consensus of 53.4% but within the consensus range of 52–57.5%.

Although the economy is still apprehensive

While the newest ISM reports did not indicate the start of a double-dip recession, both reports were weaker than expected. The Manufacturing ISM Report announced a drop of 0.8 to 50.8% which was below the consensus estimates of 52 and a range of 50.9 to 53% (Econoday Report: ISM Mfg Index). The Non-Manufacturing ISM Report announced an insignificant drop of .1 to 52.9% so that it fell into the consensus range of 52.2 to 54% but was below the consensus point 53.5% that signified that economists were expecting the index to raise 0.6% (Econoday Report: ISM Non-Mfg Index).

Even though the recent reports have shown continued weak and anemic economic growth, there was some surprise in the underlying indexes that could indicate positive news going forward. It was expected that the price pressures would continue to subside, indicated by the number of commodities up

The Reports on Business by the Institute of Supply Management (ISM) showed overall positive news even with a marginally lower headline NMI for non-manufacturing by 0.3 to 53%. Both headline numbers came above consensus of 50.5 & 50.6 with an actual number of 51.6% for manufacturing, and consensus of 52.7 & 52.9 with actual number of 53% for non-manufacturing. Both were within the consensus ranges provided from Econoday with a range of 49 to 52% for manufacturing and 51.3 to 54.2% for non-manufacturing.

Comparing the U.S. manufacturing index to World-Wide Factory Activity indexes shows that the U.S. was among the minority that experienced growing expansion of the manufacturing index. Over two-thirds of the sample countries experienced a drop in the month-over-month index. The positive news of the U.S. manufacturing increasing the index by 1% even inspired economist Dan Greenhaus of BTIG LLC

While the markets had bigger worries than the little ISM reports, both headline numbers of the reports were above consensus expectations. The PMI for manufacturing was three tenths lower than last month's number at 50.6%, but well above the consensus of 48.5, which was expecting a drop of almost 2 1/2 points. The NMI for non-manufacturing was nicely up 0.6 to 53.3% while the consensus was expecting a drop of 1.7 to 51%. Both were neatly in the consensus range provided by Econoday with the PMI range of 47 to 51.9% and the NMI range of 49.7 to 56.6%. Looking at the ranges of the consensus, the NMI range as usual is broader. This may reflect that the economists find it harder predicting the non-manufacturing sectors. I do question the one or more economists that thought the NMI would jump nearly 4 points last month.

This last week has seen wild swings in the markets and certainly the ISM reports did not help the mood of pessimism. Starting Monday, the markets got a significant jump up of almost 140 points on the DJIA, but the mood changed as soon as the July 2011 Manufacturing ISM Report (PMI) was released at 10am. Although Wednesday was up slightly for the day, the July 2011 Non-Manufacturing ISM (NMI) also reversed the up direction at 10am.

The markets were reacting to the headline numbers as both were below the consensus marks of 54.3% versus the actual of 50.9% for PMI and 53% versus 52.7% for NMI. The market also reacted more dramatically on the PMI, presumably because it also missed the consensus range of 52 to 55.4%, as reported by Econoday.

Before the two reports came out, leading economics bloggers became gloomy on the economic outlook