prudentinvestor's Comments

5%+ Dividend Yields in the S&P 500

Sun, 22 Nov 2009 08:41:34 -0500

Fully agree that the best investments are those with stable, growing dividends. I still own stocks purchased several decades ago that have paid a stream of dividends whose total has greatly exceeded their initial purchase price, not to mention that their value has appreciated as well.

However, many of the names listed above have unsustainable dividend payout ratios, and the last thing any investor needs is to buy a stock because of its high dividend, only to find that dividend decimated, followed shortly thereafter by the stock price tanking. As one example, the list includes AEP, which used to pay over $2.5 in annual dividends and trade for $40 many years ago, and now it pays $1.64 and trades for $30. Another example is Goodyear Tire (GT), which many years ago paid a handsome dividend and traded in the 30's, now it pays no dividend and trades in the teens, and the list of such situations is long and ugly.

The trick is guessing which of the issues listed in the table will lead to similar dead-ends, so buyer beware, and remember that the market is discounting these issues for a reason.

Is the Market Reversal Already Happening?

Sun, 22 Nov 2009 08:23:43 -0500

You are quite right. However, regarding the statement "..I find it hard to fathom that the average investor would accept risk without reward...", I think it is worth noting that the average investor in US equities is at the mercy of the mutual fund industry that invests his 401K on his behalf, whilst paying itself handsomely out of his savings.

The inevitable long-term outcome of the bursting of the two-decade-long stock market bubble will be the shrinkage of the mutual fund and financial services industries, as savers discover the disservice which these oversized industries have done them.

I hope our authorities recognize, sooner rather than later, that a return to fundamentals, free of asset bubbles, and without a megasized and subsidized financial services industry sucking the air out of the real economy, will be the first step to a resumption of stable growth and prosperity.

On Nov 22 06:33 AM User 410955 wrote:

> With all the recent predictions by some leading economist regarding
> the "new normal" of 4% return on equities in the future, will the
> average investor want to remain in equities? If the average return
> of 10% during the past several decades was an anomaly due to the
> U.S. having been in a sweet spot of prosperity sans global competition,
> this means that risk will not be rewarded given what portends for
> our economy due to all this debt and job loss.
> I find it hard to fathom that the average investor would accept risk
> without reward. Why invest in equities when conservative fixed income
> vehicles will provide equal or near-equal returns?
> The incredible market rally of late makes no sense to me given the
> lack of fundamentals, but the market is always driven by emotion
> and those that can manipulate a good spin to the general public.
> I would not be surprised if investors start to realize that they
> have only recouped half of their losses despite this rally of epic
> proportion and might decide to take those gains and revisit their
> strategy, especially all us boomers who cannot take another hit due
> to our timeline.
> If the spread between equities and fixed income investing will be
> as predicted going forward (no spread), who would want to have a
> downside risk of 50% or greater versus maybe a 5% - 15% ? If this
> school of thought prevails, a massive exodus of equity investors
> will occur regardless of stock P/E's or any other measure of value
> regarding equities.

The Twenty Year Stock Bubble Is Still Inflated

Fri, 20 Nov 2009 09:21:04 -0500

John, I fully agree with your article, and since I am much older than mid-40's, I've been saying (and am still convinced) that 750 +/- is the appropriate fair valuation when you discount the bubbles era.

Market Cap/GDP is a simple, yet meaningful metric. Some argue that because interest rates are artificially low, we can justify a market cap that is artificially high. True while it lasts, but artificially manipulated valuations are inconsistent with a free market, so, eventually we either stay with a free market and artificial valuations collapse, or we become a centrally-planned economy like the former Soviet Union.

For now, current policy is to maintain the stock market above its intrinsic value for a prolonged period, based on low interest rates and unbounded liquidity. Although I believe this sort of manipulation is unsound and will end badly, it is a fact of life for now, and this argues for tip-toeing out of the party, locking in some gains, but not jumping off completely and missing further upside, artificial or not.

7 Dividend Stocks to Prove Buy-and-Hold Isn't Dead

Fri, 13 Nov 2009 08:06:30 -0500

After decades of "Buy and Hold" of high quality, dividend-paying stocks, the past decade has taught me to "Buy, Hold, Sell (high), and Buy again", and this has worked much better.

9 Dividend Stocks Sending More Cash to Shareholders

Fri, 13 Nov 2009 07:50:51 -0500

Interesting to see a company which has a dividend yield of 0.37% described as a "Dividend Stock" !

Memo to Senator Dodd: Financial Reform Need Not Be Complicated

Fri, 13 Nov 2009 07:45:46 -0500

Perhaps it will prevent the crash of 2012!

On Nov 11 03:25 PM woollyB wrote:

> Glass-Steagall was passed in 1932-33 (actually 2 acts) to prevent
> the market crash of 1929, and it was repealed in 1999, just in time
> for the next big turn down. If we reinstate it in 2010 to prevent
> the crash of 2008, we'll end up repealing it again once we get into
> a long enough uptrend for everyone to believe that the Act is inhibiting
> growth and profits.
>
> P.S. to MyrEnforker, when was banking ever for the public good? Not
> in any banking history I've ever read.

Memo to Senator Dodd: Financial Reform Need Not Be Complicated

Fri, 13 Nov 2009 07:41:08 -0500

The only "regulations" we need are:

(1) Public should not bail out any failed private enterprise. If its failure threatens our security, it should be nationalised with its shareholders losing out and its bondholders taking a haircut. This is what gov't did with GM & Chrysler, and this is what should have been done with any bank, no matter how large. No amount of regulation will work as long as the upside goes private and the downside goes public.

(2) Stop manipulating interest rates and let markets set them based on equilibrium between willing lenders and borrowers.

(3) Institute an "Alternative Maximum Tax" that ensures creative entrepreneurs, the true engine of our economy, don't choose "early retirement" and "spend more time with family" ......, when they really mean "I've earned enough money, and the incremental after-tax income is not worth the extra effort" !

Capitalism and free markets have brought us prosperity, and the only "regulations" we need are to stop distorting them.

Equities Update: Energy, Financials Derail Dow's Run

Fri, 13 Nov 2009 07:26:03 -0500

Not yet.

On Nov 12 08:55 PM LaChic wrote:

> well, we had the job report and to some this was great news, and
> the market went down, which brings me to my question? is this is
> it?

Are Stocks Making a Major Top?

Fri, 13 Nov 2009 07:16:10 -0500

Archman,

You are absolutely right.

Markets detached from fundamentals in the mid-90's due to excessive liquidity from Fed. As time went by, investors lost sight of basics like dividend yields which have to be high enough above risk-free yields by a premium. Shills started justifying overvaluations by using "Earnings Yield", ignoring the fact that earnings are based on creative accounting (such as not deducting cost of executive options, etc...). The notion took hold that you can buy any stock at any absurd price and just hold it for a while, and a nice guy will then pay you more for it. This is not investing, but a Ponzi scheme, and many who bought into it have started to see the consequences

Over the next decade, market participants will slowly re-learn old fashioned investing fundamentals, and yes, they imply an S&P in the vicinity of 750 about now, or its inflation-adjusted equivalent in a couple of years.

On Nov 13 06:45 AM Archman Investor wrote:

> Absolutely.
> The market is nothing more than a FED liquidity driven market.
S&P
> 500 should be at 750 or so which would be at its 25 year continuation
> trend line. I have no idea when it gets there, but knowing that it
> should be there, is what counts. Average Americans have no clue about
> anything, that is why they continue to lose in the markets over long
> periods of time. Just ask the average American who's portfolio is
> at 1999 levels when it should be at 2009 levels.
>
> www.compdivplan.com

Stocks Soar, Unemployment Rises, Dollar Slumps

Mon, 09 Nov 2009 08:23:35 -0500

Unfaire, Very good observation, yes simplistic, but realistic too!

The true disaster with the USD is not its inevitable depreciation against the Yuan or the Reais, which can be viewed as a natural appreciation of the latter, rather than a decline in the USD. It is the continued erosion of USD against other developed economy currencies, such Euro or others. It was not that long ago (twelve years?) that the USD bought 1.2 Euros, so it is now approaching a drop of 50%. I remember in the mid-1980's, one USD bought you 2.1-2.3 SFr, now it is 1.

Appreciation of undervalued currencies of growing economies like China, Brazil, India, etc, is natural, but dollar collapse against the currencies of other developed countries is a sign of deep trouble.

On Nov 09 07:15 AM unfaire wrote:

> Ricard, yes, your are right.
> Just look at what happened to Japan. I remember a time when it was
> 360 Japanese Yen to 1 US dollar. It is somewhere around 100 or less
> to 1 now. In the meantime, we 300 million or so of use raised the
> standard of living of 100 million or so of Japanese.
> In other words, the US dollars develued to 1/3 relative to Japanese
> yen with a population ratio of 3/1.
> Now, the Chinese population is about 1.3 billion or about 4 times
> ours. A simple math would tell us the US dollars would have to devalue
> 1/12 againist the Chinese RMB to reach some kind of balance. That
> would be about 0.6 RMB to a US dollar in the next decades or so.
>
> I know things are not this simple. But, this is the direction where
> the US dollars are going.

Stocks Soar, Unemployment Rises, Dollar Slumps

Mon, 09 Nov 2009 08:09:58 -0500

Tom, Yes, 9.5% annual increase in productivity, but how is it defined. Correct me if I am wrong, but I believe it is GDP per hour worked, and GDP includes government spending.

So, when you drive past a "stimulus" road construction site at night, and see a dozen parked state police cruisers with their blue lights on permanent flash, and the officers sitting inside listening to music @ $100/hr overtime, this counts towards GDP growth. Extrapolate this to the majority of our stimulus spending, and you get 9.5% growth in "productivity". But is it real ?

On Nov 09 05:14 AM Tom Armistead wrote:

> Where are you getting your productivity figures? I went to the BLS
> and the most recent quarterly figure is 9.5%.

Tuesday Outlook: Commodities, Global Markets

Tue, 03 Nov 2009 08:06:40 -0500

I must confess to being jealous of these courageous folks who fly as seen in the video. Ditto for the duantless who buy at today's levels!

IMHO, what we have begun is a multi-year return to fundamentals, in which investors will slowly relearn that the value of equities is really based on dividends, and the liklihood of their increase with time, not "accounting earnings" and their liklihood of increase; and not on the presumption of a greater fool down the line paying more for a stock that pays no dividend. As this realisation becomes mainstream, it may result in averages close to current levels ten years from now.

Hold the champagne before celebrating China's economy, says the American Enterprise Institute's Michael Auslin - there's an asset bubble and resource-allocation problems on the underside that make the country look a lot like '80s Japan.

Sat, 24 Oct 2009 09:40:07 -0400

China looks more like 1960's Japan than 1980's Japan; and barring socio-political collapse, still has two decades of strong growth before it stalls.

We know about the laws of supply and demand, but what if economics violates the laws of physics? Some academics are arguing that a model for consistent economic growth ignores diminishing energy supplies. As one professor puts it: "Neoclassical economics is inconsistent with the laws of thermodynamics."

Sat, 24 Oct 2009 09:35:59 -0400

Whilst I lack formal credentials in economics, I have been a successful investor for several decades, obtaining returns much better than market averages over time. My background is in physical sciences, especially thermodynamics.

The paradigm of indefinite and exponential growth of consumption is physically impossible, and none who comprehend the exponential function would dispute this obvious reality. The question is when, not if, this paradigm breaks down. Neoclassical economics presumes that "when" is far enough into the future, that we need not worry about it now. My own opinion, for what its worth, is that the limit to this paradigm is impending, within the lifetimes of many of our younger people, if not due to energy supply limits, then due to environmental degradation effects.

John Meriwether Is Back - Risk Must Be Too

Fri, 23 Oct 2009 18:37:51 -0400

So why should'nt investors pour billions into a fund run by a known failure? After all, shareholders keep re-electing directors and CEO's who nearly bankrupted their companies; politicians keep re-appointing treasury secretaries and fed chairmen who created financial calamities; and the public keep re-electing politicians who passed laws that had disastrous consequences.

We have sadly reached a point where failure is routinely rewarded, and productivity and prudence routinely penalised.

Real Cause of This Financial Crisis? Global Hunger for Savings Instruments

Thu, 22 Oct 2009 08:13:07 -0400

Your opening sentence is great, ".. Every sort of idiotic expanation is offered by academic economists for the financial crisis ...", but I would also extend it to the vast majority of MSM commentators.

It is obvious to anyone with any intelligence that artificially low interest rates promote bubbles and mis-allocate capital and resources, and this is indeed the single root cause of this crisis. Every other explanation has this simple, obvious fact as its underlying root.

It is unbelieveable that "educated" policymakers and professors should be oblivious of such a basic fact, so perhaps they are aware of it, but choose to pretend otherwise since the politicians, the vocal elements of the MSM, and the underproducing but overconsuming sections of the populace all loves bubbles.

Walgreen's Rewards Shareholders with $2 Billion Repurchase Program

Sun, 18 Oct 2009 21:25:06 -0400

Elementary math shows that buybacks reward executives who hold options to a far greater extent than they reward shareholders. A 3% increase in share price can double or triple the value of an option, but only gives a shareholder a 3% gain.

If the company wants to reward shareholders, they would increase the dividend. An increase in dividend would be of equal benefit to both shareholders and executives (who also own shares).

It is astonishing that very few investors seem to be aware of the basic fact that buybacks are just a way for executives and crony boards to reward themselves disproportionately to the paltry benefit received by the real owners, aka the shareholders.

Harley Davidson Executives, Investors Wear Generational Blinders

Sat, 17 Oct 2009 10:05:25 -0400

Fully agree with your logic, and have now gratefully exited from the remainder of my HOG position for a tidy profit. May wade into it again, if and when reality returns to the equities market.

U.S. Economy: Partying Like It's Still 2005 and How to Turn Things Around

Mon, 12 Oct 2009 22:39:44 -0400

"... We are not going back to normal, although it is likely we will see some form of Statistical Recovery ..."

Which "normal" are you talking about ? It is all a matter of your age and perspective. Those under 30 years old probably think the bubble years 1995-2008 were normal. Those who have keen observation and who are over 50 probably see them as an astonishing aberration, unlikely to be reincarnated no matter how hard the alchemists try.

U.S. Economy: Partying Like It's Still 2005 and How to Turn Things Around

Mon, 12 Oct 2009 22:28:31 -0400

".... But that will mean some painful choices. It is not a matter of pain or no pain, it is just deciding when and how bad it will be. The longer we wait, the worse the consequences....."

It is also a matter of how our rulers decide to apportion the pain amongst us. So far, it seems that savers, producers, and entrepreneurs have been selected as the sacrificial elements, whereas asset speculators and financial manipulators have been selected as those most worthy of being protected and having their profits secured and guaranteed. This apalling direction of current policies is the real disaster for our long-term prospects.

The Dogma of Low Interest Rates Is Wrong

Wed, 07 Oct 2009 20:17:33 -0400

You make an excellent point. It has been understood, by a few, for centuries that bubbles mis-direct human resources and lead to an inverse "division of labor", where people apply their talents to sectors that provide artificial rewards, which free markets would not allow, thereby failing to apply their talents to the most productive uses.

Adam Anderson, an officer of the South Sea Company, is reported to have written in the aftermath of the South Sea bubble:

" It is hoped that the year 1720 ' .... may serve for a perpetual memento to the legislators and ministers of our own nation, never to leave it to the power of any, hereafter, to hoodwink mankind into so shameful and baneful an imposition on the credulity of the people, thereby diverted from their lawful industry' .."

By "lawful industry", I believe he meant applying their talents in the most productive way as judged by a free market economy, rather than the most profitable way set by a manipulated economy.

On Oct 07 11:04 AM a fat panda wrote:

> "I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable."
>
> Harry, The problem with low interest rates is more than just the
> carry trade. It lowers the cost of risk, and encourages people who
> have no business owning a business to go into business. If you look
> at the house flippers, as an extreme example, they surely stimulated
> the economy, but did so by pushing demand forward and pulling resources
> away from productive uses. That is to say, that it creates a "real"
> economy that isn't real.
>
> The cost of this is much more than the loss in the house. The cost
> is going to be terrible once you factor in the retraining costs to
> get these 'business people' back in the workforce. People who left
> real jobs to become house flippers now have stale resumes. They are
> going to have to re-invent themselves. This can be a trival cost
> in some industries, but for people who work in say the IT world a
> year off is a killer.

Saudi Arabia emphatically denies reports Gulf Arab states are in secret talks to replace the U.S. dollar in oil trading. Britain's Independent quoted unidentified sources as saying Gulf Arab states were in secret talks with Russia, China, Japan and France to turf the dollar.

Tue, 06 Oct 2009 08:12:38 -0400

An inevitable response, sooner or later, to Greenspan/Bernanke's irresponsible policies. It should have hapened sooner, at Greenspan's first ZIRP in 2003, but these folks could not see the righting on the wall. Had they began moving in this direction back then, they would have saved themselves a lot of losses, and also saved us from the recent housing/equity bubble, and everyone would have been better off today.

Simon Johnson's question for the NY Fed: If Goldman Sachs (GS) is now a bank holding company, how come it's still acting like a private-equity fund?

Sun, 04 Oct 2009 14:36:59 -0400

Because GS is so special, it is above the rules. After all, its alumni and cohorts make the rules, so they can decide to whom they apply and who is exempt.

In 2009, roughly 47% of households (71M) will not owe any federal income tax - up from an earlier estimate of 38%.

Sun, 04 Oct 2009 14:31:55 -0400

Looks like we are on track to become more socialist than Europe.

Friday Roundup: Reality Bites Bulls

Sat, 03 Oct 2009 17:20:57 -0400

The market surged under Clinton because of the dot.com bubble, not because of higher taxes! The dot.com bubble was the first wave in the mess we now have, thanks to Greenspan's ultra easy money.

The market fell under Reagan because Volcker held rates high to stamp out inflation, encourage savings, and thus set the stage for a long period of prosperity.

Economies have high inertia, and long response times. Regan's and Volcker's actions caused long-term prosperity, long after they were gone, and Clinton's and Greenspan's actions caused an immediate feel-good bubble that undermined basic fundamentals, and we are seeing its aftermath now.

On Oct 03 10:36 AM jerrydd wrote:

>
> While it may have been a bull market in technical terms, until 93
> it was way overrun by inflation as has it been since 2001 which in
> real terms, what stuff costs, has been over 100% in the 7 yrs of
> Bush. The only real bull that increased real wealth was 93-2000 when
> Clinton ruled. We even balanced the budget then which is what curbed
> real inflation and increased real wealth.
>
> The Fortune 400 lost 30% of it's wealth with lower taxes by 4%. Which
> is better, slightly more taxes and a good economy or a bad economy
> and slightly lower taxes?

"They're treating taxpayers as if they're infants. Human infants in the early months of their life figure out that if you throw a blanket over something, it doesn't really disappear," cash flow analyst Janet Tavakoli tells Max Kaiser (video, 10 min.). "Our meltdown risk today is greater than it was in 2007." (via)

Sat, 03 Oct 2009 17:11:23 -0400

This lady makes sense. It is quite amazing that there has been no investigation into what appears to have been rampant and massive fraud in originating and securitizing all sorts of loans into false and misleading securities.

Confidence cannot return if the system is uninterested in enforcing its own laws regarding securities fraud, and neither taxpayers nor entrepreneurs, nor investors are infants as the lady correctly stated.

No Chance of a 'V' Recovery

Fri, 02 Oct 2009 08:48:05 -0400

"...what we must hope for is a possible continuous building of fundamentals.."

But the fundamental fundamentals are devastated by the policies of bank bailouts, debt monetization, mortgage modifications, handouts to go shopping or buy houses or cars, bigger govt, higher taxes, etc.... , all at the expense of the dwindling productive elements of society. So how exactly are we going to build sound fundamentals?

For the Fed's Credibility, It's Time for a Fire Drill

Sat, 26 Sep 2009 08:04:22 -0400

Fed policy is to have "independent: board members keep talking about how they will raise rates quicker than anyone expects whenever they sense recovery/inflation have arrived. Reality, however is that they plan is to keep rates @ ZIRP for many years, but hope that this sort of "tough talk" may convince the world not to dump dollars or scare the carry trade folks.

I am afraid te world has already reached its own conclusions, and that the carry trade types may not be that gullible. The fact that China is buying Treasuries only in return for the Fed buying from them at par their devalued Fanny/Freddy bonds suggests that Treasuries are already selling at a discount, implying interest rates paid to China are already much higher than nominal coupons.

Housing Slumps Pressure Trading

Sat, 26 Sep 2009 07:43:37 -0400

"... The housing market has come a long way as inventories were down 11.0% to 3.6 million and supply declined to 8.5 months from 9.3 months..."

I assume these are the official numbers, excluding massive shadow inventory held off-market by the banks, or the pent-up need to sell held temporarily off-market by those who wish to sell but awaiting the promised recovery.

Preview from Europe: Another Day of Defiant Resilience

Fri, 28 Aug 2009 08:39:14 -0400

Great summary as usual.

".... One gets the feeling that if equities don’t weaken in September as most would seem to expect, there could be a mad scramble to cover shorts in the final quarter, driving equities to levels that would have seemed inconceivable earlier this year...."

At this point, I view economic fundamentals as negative and the only way to reverse the trend is to create an illusion by driving the markets up. I therefore fully agree with your statement, and expect TPTB to drive equities up in September and October, because many are then expecting "the correction" and will be short, and this will be an opportunity to punish the shorts and liquidate them.

If, like me, you are taking profits, do so slowly and make sure you profit from the engineered rally coming this fall. Eventually, fundamentals do catch up, but the correction will not occur on a widely expected schedule.