Tuesday, December 6, 2011

Better 'Dow Dogs' Pay 4%

The Dogs of the Dow are running strong this year.

The decades-old strategy, which calls for buying the 10 highest-yielding shares among the 30 Dow Jones Industrial Average members at the end of each year, has returned 5.5% this year through Wednesday, versus a 0.4% decline for the broader Dow.

The dogs have had long periods of outperformance. From 1961 through 1998 they beat the Dow by 1.7 percentage points a year, according to a University of Kansas study. However, the same study found that, net of trading costs and taxes, there wasn't much point in using the dogs approach.

More recently, the dogs have lost their bite, lagging behind the Dow in 10 of the past 15 years.

Despite its shortcomings -- such as a tendency to produce poor diversification -- the strategy is based on an excellent idea: rules-based value investing. Today, a number of exchange-traded funds improve upon the dogs approach, seeking a performance edge with increased safety. There is reason to believe such funds will make solid core holdings in coming years.

Value stocks are those that look cheaper than others relative to some fundamental measure of worth, such as earnings, book value or dividend payments. A vast body of research suggests that value stocks outperform over long periods. Savita Subramanian, head of U.S. equity strategy for Bank of America Merrill Lynch, says valuation is the most important predictor of long-term returns -- as opposed to other factors, such as growth projections and Wall Street "buy" recommendations.

The problem: Cheap stocks are often ugly, too. Why else would the herd have left them cheap? For most investors, it isn't easy to scoop up unpopular shares, no matter what the long-term evidence says.

That is where rules come in. The dogs strategy takes investor bias out of the process, and it makes yearly portfolio rebalancing faster than an oil change.

But it also leaves investors highly dependant on just a handful of stocks, and it doesn't screen for financial strength. That is a liability in an era when even a Dow member can go bust, as General Motors (GM: 21.59, 0.31, 1.46%) did in 2009.

Like other untamed value approaches, the dogs strategy also can produce lopsided sector bets. In 2007, the portfolio included two banks, Citigroup (C: 29.83, 1.66, 5.89%) and J.P. Morgan Chase (JPM: 33.51, 1.18, 3.65%), plus two manufacturers that had grown heavily dependent on making loans, GM and General Electric (GE: 16.33, 0.24, 1.49%).

No wonder the 2008 and 2009 financial crisis was a lousy period for dogs' investors. It is less troubling that the dogs sharply underperformed during the late 1990s, which in hindsight looks like an aberrational stretch of bloated valuations during which a lot of prudent strategies fared poorly.

One way to adopt a better-behaved dogs strategy is through exchange-traded funds that run periodic screens for high dividend yields. They offer exposure to hundreds of stocks instead of just 10, while keeping expenses reasonable. And their current yields compare favorably with the 10-year Treasury yield of about 2%.

"The baby boomers will be retiring over the next two decades starting this year," says Jeremy Schwartz, director of research at Wisdom Tree, an investment firm. "They're going to want investment income, which means dividend-paying stocks will be in strong demand."

The Wisdom Tree Equity Income ETF is a dogs lookalike, but with more than 300 stocks. Health-care and consumer staples firms have the heaviest portfolio weightings, at 19% apiece. The fund has returned 2.2% from its June 2006 inception through the end of October, double the return of its benchmark, the Russell 1000. It costs $28 a year per $10,000 invested and yields 4.1%, based on trailing 12-month dividend payments.

Vanguard High Dividend Yield is a similar ETF but with more than 400 stocks and a lower yield, 3.1%. Consumer staples are 20% of the portfolio and industrial firms are 15%. And this dogs alternative keeps fees on a leash, at $18 a year per $10,000 invested.

Finally, the SPDR S&P International Dividend ETF offers overseas dogs exposure. Australia, the United Kingdom and Germany together make up just over one-third of the portfolio, and telecoms and utilities together have a 47% weighting. Recent declines in European stock markets have left the fund with a dividend yield of more than 7%. Expenses are $45 a year per $10,000 invested.

These funds won't beat their benchmarks every year, of course. But if the original dogs philosophy has merit, these new breeds might fetch more reliable results.

GM Is Worth a Test Drive

General Motors (NYSE:GM) — The world’s second-largest car maker went public again in 2010, 16 months after emerging from bankruptcy. But the stock took a nosedive following its public offering at $33 and fell to almost $19 in October.

Q3 earnings beat analysts’ forecasts and the stock rebounded. But guidance for the full year was adjusted lower, and the stock reacted by testing the October low. And estimates for 2012 have been lowered as well.

However, analysts are strong in their conviction of earnings of $3.55 in 2012 and $4.93 in 2013. And they look for a price target of $32 next year.

Technically, GM may have double-bottomed at around $20. If so, the fundamental analysts could be right and GM is a buy. If bought at current levels, a stop-loss should be placed on the stock at $19.

The Best Opportunities in a Half-Century

That's what veteran strategist Joe Rosenberg sees, and some of the best bargains, he says, are in the Dow Jones Industrials.

Joe Rosenberg is known for his candor, and for his understanding of all major asset classes. That comes from 50 years of experience on Wall Street, and his deep knowledge of markets and financial history. After beginning his career as an airline analyst at Bache in the 1960s, he was hired in 1973 by the late Larry Tisch at Loews, the New York conglomerate controlled by the Tisch family.

Rosenberg recalls that some people, including Barron's columnist Alan Abelson, told him that he might not last long at Loews because he and Tisch both were too strong-willed to get along well.

Yet, Rosenberg has been there ever since. He was chief investment officer until 1995, when he became chief investment strategist. He's also an advisor to Loews' current CEO, Jim Tisch, Larry's son. In addition, Rosenberg is a director of CNA Financial, the property-and-casualty insurer controlled by Loews.

Barron's has interviewed him on several occasions, most recently in February 2008. He then urged Microsoft (ticker: MSFT) to scrap its proposed merger with Yahoo! (YHOO) because he felt Microsoft was overpaying. Luckily for Microsoft, Yahoo! rejected the deal, which would have taken place at nearly double the Internet company's current share price.

Rosenberg doesn't always get things right. He was bullish on Fannie Mae and bank stocks prior to the financial crisis, during which financial stocks were crushed and Fannie Mae was taken over by the government.

Rosenberg spoke with Barron's last Monday at his New Jersey home. He's now bullish on U.S. blue-chips like Microsoft, Merck (MRK) and Johnson & Johnson (JNJ), saying investors have a historic opportunity now to buy them at attractive prices. He believes that Microsoft boss Steve Ballmer should act more like Sam Palmisano, the CEO of IBM (IBM). And he's bearish on U.S. government bonds—with yields near historic lows. Rosenberg emphasized that these are his own views, and not necessarily those of Loews (L).

Barron's: Europe has been a big overhang for the U.S. stock market. How bad is it?

Rosenberg: People are projecting a worst-case scenario about intertwined banking systems in Europe and the United States. That fear factor is what is impelling people to stay away from equities in the United States, and is precisely why equities here are so attractively priced. Now, I am not going to say all equities. There is a big disparity in valuations between the best companies in the world, large-cap companies—both growth and value—and small-cap stocks, which have done well over the past few years, and are not as attractively priced. The price/book ratio of the S&P 500 relative to the Russell 2000 is near a multidecade low (see graph).

In my 50 years on Wall Street, it is rare that I've been so attracted to some of the best and finest companies. I will name a few, but generally speaking, I feel like a kid in a candy store, because I don't know where to begin. There's Microsoft, Merck, Amgen [AMGN], Johnson & Johnson, Teva Pharmaceutical [TEVA], Staples [SPLS], Oracle [ORCL] and Cisco [CSCO]. The best companies in the world are now some of the cheapest stocks. (more)

100 Reasons to End The Fed

1. The Federal Reserve System constantly decreases the value of our dollar by printing money out of thin air. (inflation)

2. Graph: The value of a $1 Federal Reserve Note in 1913 dollars (the year the Fed was created).

3. The Fed even recognizes its inflationary activity. The Federal Reserve Bank of Boston says: “When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”

4. American economist Irving Fisher said: “Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.”

5. If you or I did what the Fed does when it prints money, we would be found guilty of counterfeiting and locked up for a very long time!

6. The reason you or I would be arrested for counterfeiting is it’s theft! Every bill you create in bad faith, which doesn’t actually represent the creation of real goods and services, real value that has improved life by directing resources to their most productive uses, is a lie and an appropriation of value from the rest of the world, which gives the counterfeiter goods and services in exchange for nothing, because he or she did not actually create anything of value in return.

7. This is true of what the Federal Reserve does: “Neither paper currency nor deposits have value as commodities, intrinsically, a ‘dollar’ bill is just a piece of paper. Deposits are merely book entries.” – Modern Money Mechanics Workbook, Federal Reserve Bank of Chicago, 1975 (more)

Jim Rogers to Faber: You're Wrong About China

Economist and editor of the Gloom, Boom & Doom Report Marc Faber shouldn't be so gloomy when it comes to the Chinese economy, says investor and noted Asian bull Jim Rogers.

There's no hard landing on the way for China as Faber claims, Rogers says.

"Marc still does not understand China. There are going to be several hard landings in the next few years, but China’s will be less hard overall than others such as Greece, U.S., et al," Rogers tells CNBC in an email.
Chinese authorities have taken steps to cool the economy's rapid growth and while pockets of the country will see somewhat abrupt slowdowns, the country as a whole will not, Rogers insists.
"Yes, there will be consolidations in the commodity bull market just as all markets have consolidations."

"In 1987, stocks declined 40-80 percent worldwide, but it was not the end of the secular bull market in stocks."

Faber, who accurately called the 1987 stock market crash as well as last the selloff last August, told CNBC recently that China's economy depends heavily on capital spending, which tends to be volatile and intensifies the intensity of slowdowns.

Rogers, who accurately called the commodities rally over the last few years, remains bullish on raw materials, and he's not alone.
Central Banks have been injecting liquidity into their economies to avoid crippling deflation and a return to recession, and that surge in money supply will weaken paper currencies and make commodities an attractive hedge, according to Renaissance Asset Managers, a unit of Moscow-based Renaissance Group.

"Money will continue to be plentiful and free, and that will continue to underwrite a commodity cycle," says Renaissance Chief Investment Officer Plamen Monovski, Bloomberg reports.

BNN: Top Picks

Paul Gardner, Partner & Portfolio Manager, Avenue Investment Management, shares his top picks.

click here for video

Stephen Leeb: Expect Gold Price to Double in Twelve Months

from King World News:

With gold and silver still consolidating, oil above $100 and stocks trying to hold on to recent gains, today King World News interviewed acclaimed money manager Stephen Leeb, Chairman & Chief Investment Officer of Leeb Capital Management. When asked about the action in gold, Leeb responded, “There are liquidity concerns right now. I think the world, and in particular Europe, really does have a liquidity problem. If Europe has a liquidity problem that obviously has the potential to affect everybody, especially the US. When you need liquidity gold is a natural source. It’s been a tremendous performer over the past decade.”

Stephen Leeb continues: Read More @ KingWorldNews.com

Target has issued a buy signal: TGT

Target Corp. (NYSE:TGT) — This retail giant, which operates about 1,500 general merchandise stores in the United States, is a victim of a slow economic recovery and its stock shows it. TGT hit a high over $60 in December 2010, but gapped lower and attempted to stabilize in January at its 200-day moving average.

However, same-store sales have shown significant improvement throughout 2011, and recent holiday numbers are strong. The stock has responded by forming a saucer bottom.

In October, its 50-day moving average crossed above the 200-day creating a “golden cross,” which is a very bullish development.

The stochastic issued a buy last week, so the stock will most likely find solid support at the 200-day moving average just over $50. TGT pays a dividend yield of 2.34%. The short-term technical trading target is $58.

TGT Chart
Click to Enlarge

The Bearish Signal Most Technicians Are Overlooking

Although the S&P 500 gained a whopping 7.4% for the week, Friday closed mixed. The lack of follow-through after the early gains provided more evidence that it is economic news from Europe and China that is moving the markets and not U.S. developments.

Friday started higher following a report that U.S. unemployment had fallen to 8.6% from 9% in October. But the report also showed that a record number of workers have dropped out of the work force and are not counted as part of the unemployed.

And later in the day gains were reversed upon reports that Republicans in Congress might try to impede the IMF from assisting with European bailouts.

The Dow Jones Industrial Average fell 0.01%, the S&P 500 was off 0.02%, and the Nasdaq gained 0.03%. Volume on the Big Board totaled 871 million shares and 423 million shares traded on the Nasdaq. Advancers exceeded decliners by about 1.5-to-1 on both exchanges.

SPX Triangle Chart
Click to EnlargeTrade of the Day Chart Key

Following four strong days for stocks, it is clear what technical barriers must be overcome in order for the bulls to keep the market in an upswing. There are three primary resistance points that must be overcome: First is the 200-day moving average and the bearish resistance line, which intersect at 1,265. Then the November high at 1,278, and finally, the October four-month high at 1,292. Initial support lies at the 1,220 line. Note that the stochastic is on a buy signal, but the chart action itself trumps the internal indicator and currently the advance may have stalled.

SPX Reversal Chart
Click to Enlarge

Note the small key-reversal day that has been overlooked by many technicians. A key-reversal day may appear to be a minor negative. But when it appears on multiple charts, it shouldn’t be ignored. It occurs when a stock or an index opens higher, then moves to a new high in a trend but closes lower. It is a sign of overall weakness and is usually followed by more selling.

UUP Chart
Click to Enlarge

As noted last week, the key to the success of the market’s rally is the U.S. dollar. On Friday, despite optimistic comments from Europe that the major powers have the ability to deal with their debt crisis, the PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) rose, moving away from its first support at the 50-day moving average at $21.91. The inverse relationship of the dollar to market moves tells us that it could be rough going this week for the euro and U.S. markets, and options may be your best bet for making money.

Conclusion: U.S. stocks moved higher last week on high expectations of a solid European plan that provides for both stability and growth. But the blast-off could be a fizzle.

Sarkozy of France and Merkel of Germany meet today, but they lack the authority and power to solve the problem since all 17 members, not just two, need to approve a detailed agreement. And French politicians from both the left and right were very vocal this weekend against cooperation with Germany.

Reports of a slowdown in China dropped the Shanghai Composite Index 1.1% on Friday. And The Wall Street Journal reports that “Vladimir Putin’s party appeared headed for a major setback in parliamentary elections Sunday.” This unexpected result would favor Russia’s Communist Party, and in Egypt Islamists have won a majority.

Stocks usually fall during periods of uncertainty, and so it is difficult to imagine that a major rally can be sustained under such chaotic international situations.

GOLDMAN: Here's The #1 Most Undervalued Housing Market In America

Earlier we mentioned how Goldman Sachs had constructed a new model to predict housing prices.

The model anticipates prices based on the following factors.

Long term factors

  • Income: A 1% increase in per capita income is associated with a 0.61% increase in home values.
  • User costs: Every 1% increase in user costs (taxes, maintenance, etc.) depresses values by 1.2%.
  • Construction costs: The higher they are, the more expensive they are.
  • Population: This matters, but only in areas where land supply is inelastic (like San Francisco or New York, as opposed to Dallas).

Short term factors

  • Momentum.
  • Mean reversion.
  • Excess supply.
  • Health of the mortgage market.

Anyway, the team -- lead by top economist Jan Hatzius -- published this chart to show which big metro areas are over and undervalued.

The cheapest? Vegas! Then Detroit. The hardest hit are now the best deals.

S&P warns eurozone of mass downgrade

Germany and the eurozone’s five other triple A members face having their top-notch ratings downgraded after Standard & Poor’s put 15 countries in the single currency bloc on negative creditwatch.

The US rating agency has warned that eurozone nations including Germany, France, Austria, Finland, the Netherlands and Luxembourg were under review – meaning they have a one in two chance of a downgrade within 90 days. However, S&P said it expected to conclude its review “as soon as possible” following this week’s summit of EU leaders on Friday.

It warned all of the six triple A rated governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts. Markets have been braced for a potential downgrade of France, but few expected Germany’s top rating to be called into question.

With regard to Germany, S&P said it was worried about “the potential impact ... of what we view as deepening political, financial and monetary problems with the European economic and monetary union.”

The agency is acting as eurozone governments make further progress towards a comprehensive deal to contain the region’s sovereign debate crisis ahead of a crucial EU summit on December 9. Berlin and Paris want the eurozone to sign up to tougher fiscal rules to calm investors’ worries.

S&P told governments: “It is our opinion that the lack of progress the European policymakers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”

S&P’s move at such a sensitive stage in negotiations is likely to spark further recriminations following ongoing political criticism about the behaviours of rating agencies during the crisis. They stand accused by many politicians of exacerbating the crisis and are facing stringent new regulation.

But the rating agencies are worried about who will pick up the bill for any eurozone solution with many plans likely to increase the strain on the triple A countries.

Governments are concerned that a downgrade will make it harder for the eurozone bail-out fund, the European Financial Stability Facility, to arrange financing in the markets for its rescue packages for Ireland, Portugal and Greece, as it is underpinned by guarantees from the six nations which are rated triple A. Those countries also fret that it could raise their own financing costs.

Any downgrading would further diminish the number of top-rated countries after S&P cut the US this summer, although it saw its borrowing costs fall on the move as investors remain desperate for highly-rated paper.