Monthly Archives: August 2011

Considering the Crisis at Bank of America

Posted on August 25, 2011 by | Leave a comment
As a former NLO dividend watch list stock, Bank of America (BAC) has fallen on hard times that in many respects were predestined.  In a posting titled “Financial Panic Chronicles” dated May 9, 2009, we pointed out the similarities of the October 1929 forced merger between Austria’s number two bank BodenKreditAnstalt with number one ranked CreditAnastalt and the forced mergers between Bank of America/Merrill Lynch, Wells Fargo/Wachovia, and J.P. Morgan/Bear Stearns in 2008.
Our point of making the comparison between distinctly different institutions in different eras was to show what the hazards might be when an ailing bank isn’t allowed to fail.  It was only two years after the merger of BodenKreditAnstalt with CreditAnstalt that the remaining “super bank”, CreditAnstalt, collapsed which resulted in the worldwide banking crisis. 
The failure of CreditAnstalt in 1931 did not arrive without a fight. F.M. Rothschild committed enormous amounts of money from 1930 to 1931 in an effort to use his name and financial largess to sway public opinion of the health of CreditAnstalt, not unlike Warren Buffett’s most recent “investment” in Bank of America.  As noted in our previous article:

“London banks, the Bank of England, Germany's Reichsbank, Bank for International Settlement and the Bank of Austria all threw money at CreditAnstalt starting in May of 1930 in a failed attempt to shore up the problem.”

 The current travails of Bank of America (BAC) and Citigroup (C) may prove too enormous for market forces to bear.  Talk of possible capital raises and divesting individual units through bankruptcy speak largely of the dire risk to the banking system the zombie banks pose.  Bank of America, in particular, through “too big to fail” policies has become THE bank of America.
We wouldn’t be surprised if Bank of America, or another of the current top ten banks in the U.S., in an effort to stave off certain failure, will be partially or fully nationalized as CreditAnstalt before its collapse.  However, such actions will only demonstrate for the investing public that band-aids should not be used to deal with hemorrhages.
Because we rely heavily upon the markets to tell us what the investing public believes will come next, we are presenting the Dow Theory downside targets for Bank of America.
According to Dow’s Theory, the following are the long-term downside targets for Bank of America (BAC):
  • $18.59
  • $13.44 (1/3)
  • $10.865 (fair value)
  • $8.29 (2/3)
  • $3.14 (3/3)
Already, BAC has managed to decline below the 2/3 resistance level of $8.29 per share.  This typically indicates that Bank of America stock will go to $3.14 (3/3 resistance level).  In four prior peak-to-trough periods since 1982, Bank of America has managed to fall close to, or below, the previous low three times as demonstrated in our September 15, 2008 Dow Theory analysis of the stock.
Because we don’t want to assume that the Bank of America will automatically go to the prior low of $3.14, we have provided short-term Dow Theory targets for BAC.
Dow Theory on the $8.29 to $3.14 price levels ($1.73):
  • $8.29
  • $6.65
  • $5.72
  • $4.83
  • $3.14
 
These targets are in hopes that the stock does not actually go below $3.14. Already, Bank of America has fallen below the $6.65 level leaving only $5.72 and $4.83 as possible support levels before the bank reaches $3.14.
If the voting machine known as the stock market continues on its current downward trajectory, any decline of BAC below $3.14 would require nationalization in the “best” case scenario.  The worst case scenario might reveal that safety nets like FDIC insurance are the root cause of how our financial system got to where we are today.  In the words of Citigroup (formerly National City) when FDIC was first proposed:

"The element of character in the choice of bank is eliminated, and the competitive appeal is shifted to other and lower standards, such as liberality in making loans. The natural result is that the standards of management are lowered, bankers may take greater risks for the sake of larger profits and the economic loss which accompanies bad bank management increases."
Grant, James. Mr. Market Miscalculates. Axios Press. 2008. page 202.

Our focus on the merger of BodenKreditAnstalt and CreditAnstalt in 1929 and the subsequent failure in 1931 that led to a worldwide banking crisis should give good reason for all individuals to be concerned.  The safety nets that were created as an outgrowth of failure of the banking system are not prepared to handle what may come if the perception grows that Bank of America needs to be nationalized.

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Posted in 1929, Bank of America, Bodenkreditanstalt, Citigroup, CreditAnstalt, National City Bank

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Dow Theory: Values and Price

Posted on August 25, 2011 by | Leave a comment
On Friday June 24, 2011, we published an article regarding the topic of Dow’s Theory of value and price regarding Dish Networks (DISH).  At the time, we suggested that a recent recommendation to buy DISH by a widely read Dow Theorist was not in keeping with Charles H. Dow’s theory on value based investing.  At the time of the recommendation, DISH was trading at $28.39 and within 6.65% of the 52-week high of $30.28 set on May 31, 2011.
Our June 24th article referenced the following critical concept of Dow’s regarding values:

 

“The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.
"In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market."
Source: Hamilton, William Peter. Stock Market Barometer. Page 38.

 

In our conclusion about Dish Networks (DISH) not being priced at the most optimum level for purchase, we said the following:

 

“The lack of attention paid to the price as it relates to values, in the case of the recommendation of DISH, may cost an investor a decline of 30% before a material gain is achieved unless the company is bought by a larger institution.”
 At the time of the June 24, 2011 recommendation by the Dow Theory Forecasts (DTF), Dish Networks (DISH) was expected to gain at least 30% in the following 12-months.  The stock was able to achieve a sizable 12.75% gain in the very first month.  However, as we fast forward to the most recent price of Dish Networks (DISH), we see that DISH has fallen as low  $21.37 or 24.73% in a two-month period following the recommendation by the widely read (DTF) newsletter.
  
Obviously, the situation with Dish Networks (DISH) has not been resolved since the recommendation by DTF was specific about the increase in the stock price should take place over the next 12 months.  However, the most important point that should be considered when attempting to buy a stock is whether the price is reflective of values. Buying any stock at or near a new 52-week high is definitely not based on values.
Those who bought DISH between June 24th and July 22nd using the recommendation of DTF would be justified in being disappointed with the performance of the stock thus far.  Applying Dow Theory to individual stocks that are primarily on our Dividend Watch List should result in more optimal investments returns rather than haphazard speculation. 
If you are considering any stocks that are on our most recent Dividend Watch List, we’ll be more that glad to profile a brief Dow Theory analysis upon request.
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In the News: August 21, 2011

Posted on August 21, 2011 by | Comments Off on In the News: August 21, 2011

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NLO Dividend Watch List: August 19, 2011

Posted on August 19, 2011 by | Leave a comment
The market continued to lose its footing.  The S&P 500 closed down almost 5% for the week while the Dow slipped below 10,900. The Dow Theory Bear Market stands at the end of the week with no sign of alleviating.  As a result of weakness in the market, there are many opportunities to be had if and when the market turn.  Our list exploded to include more than 100 companies.  This after we've incorporated more filters to make sure that only quality names appear on the list.  We've chosen to display only the companies that are within 5% of the low this week.  If you'd like to see the full list, please consider donating to the New Low Observer.

August 19, 2011 Watch List

Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
BOH Bank of Hawaii Corp. 37.44 -3.41% 11.11 3.37 1.80 4.81% 53%
LNC Lincoln National Corp. 19.46 -3.28% 5.67 3.43 0.20 1.03% 6%
SEIC SEI Investments Company  15.71 -2.06% 12.88 1.22 0.24 1.53% 20%
STT State Street Corp. 31.91 -1.75% 10.10 3.16 0.72 2.26% 23%
BBT BB&T Corp. 19.27 -1.73% 14.27 1.35 0.64 3.32% 47%
AFL AFLAC Inc. 34.61 -1.23% 9.11 3.80 1.20 3.47% 32%
NTRS Northern Trust Corp.  34.78 -0.91% 13.80 2.52 1.12 3.22% 44%
WFSL Washington Federal, Inc.  13.85 -0.86% 16.10 0.86 0.24 1.73% 28%
MDP Meredith Corp. 23.63 -0.59% 8.50 2.78 1.02 4.32% 37%
EV Eaton Vance Corp. 21.16 -0.47% 13.74 1.54 0.72 3.40% 47%
SYY Sysco Corp. 27 -0.44% 13.78 1.96 1.04 3.85% 53%
HHS Harte-Hanks, Inc. 7.37 -0.27% 10.10 0.73 0.32 4.34% 44%
FII Federated Investors Inc 16.39 -0.18% 10.18 1.61 0.96 5.86% 60%
DNB Dun & Bradstreet Corp. 62.32 -0.08% 12.12 5.14 1.44 2.31% 28%
MMM 3M Co 76.87 -0.17% 13.05 5.89 2.20 2.86% 37%
BRC Brady Corp. 24.94 0.24% 13.13 1.90 0.72 2.89% 38%
USB U.S. BanCorp. 20.56 0.59% 9.98 2.06 0.50 2.43% 24%
AVY Avery Dennison Corp. 26.05 0.77% 9.37 2.78 1.00 3.84% 36%
MUR Murphy Oil Corporation 48.69 0.83% 9.88 4.93 1.10 2.26% 22%
ANAT American National Insurance 72.5 0.95% 12.00 6.04 3.08 4.25% 51%
SON Sonoco Products Co. 28.04 1.23% 14.09 1.99 1.16 4.14% 58%
AVP Avon Products, Inc. 20.53 1.38% 12.01 1.71 0.92 4.48% 54%
WEYS Weyco Group, Inc.  22.02 1.43% 18.20 1.21 0.64 2.91% 53%
GS Goldman Sachs Group, Inc.   111.76 1.56% 10.96 10.20 1.40 1.25% 14%
ECL Ecolab, Inc. 44.53 1.64% 20.06 2.22 0.70 1.57% 32%
NC NACCO Industries Inc. 69.16 1.71% 4.33 15.99 2.13 3.08% 13%
BMS Bemis Co Inc 28.6 1.92% 14.23 2.01 0.96 3.36% 48%
TRV The Travelers Companies, Inc. 49.46 2.06% 9.35 5.29 1.64 3.32% 31%
FFIC Flushing Financial Corp.  10.73 2.09% 8.19 1.31 0.52 4.85% 40%
BMI Badger Meter, Inc. 32.03 18.20 1.76 0.64 2.00% 36%
CHRW C.H. Robinson Worldwide 63.67 2.20% 25.47 2.50 1.16 1.82% 46%
BRK-A Berkshire Hathaway Inc. 102591 2.32% 13.76 7457.95 N/A N/A N/A
HIG Hartford Financial Services  17.72 2.43% 5.08 3.49 0.40 2.26% 11%
SYK Stryker Corp. 43.8 2.48% 13.86 3.16 0.72 1.64% 23%
EOG EOG Resources, Inc. 87.57 2.52% 55.08 1.59 0.64 0.73% 40%
ITW Illinois Tool Works, Inc. 41.36 2.55% 10.91 3.79 1.44 3.48% 38%
EMR Emerson Electric Co. 42.46 2.63% 13.10 3.24 1.38 3.25% 43%
EXPD Expeditors International 40.33 2.86% 23.05 1.75 0.50 1.24% 29%
PNR Pentair, Inc. 30.26 2.89% 13.82 2.19 0.80 2.64% 37%
TMP Tompkins Financial Corp. 37 2.98% 11.75 3.15 1.44 3.89% 46%
SJW SJW Corp. 21.52 3.02% 16.18 1.33 0.69 3.21% 52%
MATW Matthews International Corp.  30.05 3.23% 12.37 2.43 0.32 1.06% 13%
PEP PepsiCo Inc. 62.07 3.28% 15.79 3.93 2.06 3.32% 52%
APD Air Products & Chemicals 75.24 3.34% 14.01 5.37 2.32 3.08% 43%
WFC Wells Fargo & Co. 23.36 3.45% 9.05 2.58 0.48 2.05% 19%
LLTC Linear Technology Corp.  26.31 3.54% 10.52 2.50 0.96 3.65% 38%
GD General Dynamics Corp. 57.47 3.62% 8.20 7.01 1.88 3.27% 27%
MDT Medtronic, Inc. 31.29 3.68% 10.94 2.86 0.97 3.10% 34%
TFX Teleflex InCorp.orated 49.87 4.07% 9.39 5.31 1.36 2.73% 26%
UTX United Technologies Corp. 67.45 4.46% 13.07 5.16 1.92 2.85% 37%
LLY Eli Lilly & Co. 35.01 4.63% 8.24 4.25 1.96 5.60% 46%
AOS AO Smith Corp. 34.43 4.86% 10.28 3.35 0.64 1.86% 19%

52 companies

Watch List Summary

Much of the weakness in the market can be attribute to the banking sector.  Thus it's no surprise that Bank of Hawaii (BOH) top our list.  Our long time readers may remember our buy and sell recommendation of BOH back in 2009.  The stock appears to have come full circle.  Back in January of 2009, 6 months before the Dow Theory buy signal in July, we advised our readers to research BOH when it was trading at $37.76 with 4.8% yield.  The 10-year note was trading at 2.34% which mean BOH offered a 2.46% premium over the treasury.  While BOH hasn't raised their dividend, they also haven't cut it.  At the same time, earnings have risen from $3 to $3.37 which bring down the payout ratio.  Acquiring this stock today would give you a 2.74% premium over the 10-year note.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks in our database from August 20, 2010 (not published) and have checked their performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2010 Price 2011 Price % change
SVU SUPERVALU Inc. 10.08 6.8 -32.54%
HRB H&R Block, Inc. 13.47 13.26 -1.56%
BBT BB&T Corp. 23.11 19.27 -16.62%
MDT Medtronic, Inc. 34.77 31.29 -10.01%
WFC Wells Fargo & Co. 24.60 23.36 -5.04%



Average -13.15%





DJI Dow Jones Industrial 10,213.62 10,817.65 5.91%
SPX S&P 500 1,071.69 1,123.53 4.84

Last year's performance was far below the market  Even the "best" performer (H&R Block) lagged the market by a wide margin.  The biggest hit to the list was the collapse of Supervalu (SVU).  SVU's failure to pass on costs was a major factor in their profit decline.  Although holding on to these names for one year yielded a negative return, each name offered at least 10% profit within seven months of purchase.

Disclaimer:

On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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Dow Theory: Bear Market Remains as INDPRO Surges

Posted on August 17, 2011 by | Leave a comment
On Tuesday August 16th, it was reported that the current unadjusted Industrial Production Index (INDPRO) rose to 94.1525 for the month of July from the June level of 93.3075 which exceeded the March 2011 unadjusted high of 93.0943 (adj. 93.0770).  We'll have to watch closely in the coming months to determine if the INDPRO tops out with the July or August figures.
In our recent Dow Theory analysis of August 2, 2011, we indicated that we'd be surprised at an INDPRO figure that was above the March 2011 level.  As new information has come in (i.e. government revisions of the data) it appears that we have to allow for some time to pass before the stats are "finalized." We'll definitely provide updates as the revised data presents solid indications on the direction of the economy or confirmation of Dow Theory.
So far, the market still retains the Dow Theory bear market indication.  Additionally, there continues to be resistance, on the part of the Dow Jones Industrial Average, to convincingly close above the  first bear market rally target of 11,416.80.  We don't believe that it is advisable to take on new positions unless they are considered speculative in nature, which means that you're willing to accept all losses.
With a new cyclical bull market initiated when the Dow Jones Industrial Average and Dow Jones Transportation Average go above their respective highs for 2011, the missed opportunity for investment gains on new purchases between now and then are worthwhile.  When the next bull market indication is provided, our Dividend and Nasdaq 100 watch lists will point you to ideal investment candidates at reasonable values.  
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2 Years of Profitable Dow Theory Analysis

Posted on August 15, 2011 by | 1 comment
Below are the articles that take you from the beginning of a cyclical bull market indication starting on July 24, 2009 to a bear market indication on August 2, 2011.  Although it is possible to have a change from the current bear market indication to a bull market indication at a moments notice, we're willing to submit that an uninterrrupted bull market indication in a two year period within a secular bear market has yielded the intended results.  In some instances, these articles can be found on Seeking Alpha.com (found here) with added commentary from those who had questions about the concepts or ideas on the topic of Dow Theory.

 

Date Article Title Topic
8/2/2011 Dow Theory: August 2, 2011 A new bear market begins, bull market ends
6/30/2011 Waiting for Confirmation Bull market confirmation, next target Apr & May high
6/24/2011 Dow Theory: Price and Values Values, price, seeking fair profits
6/13/2011 Russell: Wrong about the Industrial Production Index Industrial Production: 1929 and today
5/4/2011 Price Decline equals Dividends Canceled Values, dividends, fair profit
4/6/2011 Richard Russell's Miscue Russell says 2007-2009 was not bear market
4/6/2011 Dow Theory: Cyclical Bull Market Confirmed cyclical bull market confirmation
2/14/2011 Dow Theory: Continuation of Bull Market Confirmed cyclical bull market confirmation
11/8/2010 Dow Theory Q&A Primary trends, confirmations, S&P in Dow Theory
11/7/2010 A Lesson In Dow Theory When to buy, sell, and wait for confirmation
11/4/2010 Dow Theory: Continuation of Bull Market Confirmed cyclical bull market confirmation
9/25/2010 Seeking Ten Percent Seeking pair profits
9/8/2010 Dow Theory: The Formation of a Line Lines
8/5/2010 Dow Theory, Stock Markets and Economic Forecasting Economic forecasting, stock markets
6/30/2010 Dow Theory Bear market non-confirmation
5/13/2010 Dow Theory Secondary reactions
4/13/2010 Dow Theory Q&A When to sell; asset allocation
4/11/2010 Dow Theory cyclical bull market confirmation
3/23/2010 Dow Theory cyclical bull market confirmation
2/23/2010 Dow Theory Q&A Manipulation; Averages discount everything
2/22/2010 Dow Theory 50% principle
1/24/2010 Dow Theory Downside targets
1/19/2010 Dow Theory on Fair Value Values and Price
1/10/2010 Dow Theory confirmation; line; 50% principle
9/24/2009 Dow Theory retest recent lows; going higher
9/2/2009 Dow Theory Double tops and Double bottoms
8/25/2009 Dow Theory Russell changes from bear to bull
8/24/2009 Dow Theory possible non-confirmation
7/24/2009 Dow Theory a new bull market begins, bear market ends
We hope you have profited from our analysis and  enjoyed our contributions to the topic of Dow Theory.
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In the News: August 14, 2011

Posted on August 14, 2011 by | Comments Off on In the News: August 14, 2011
Betting on Bank of America Over Apple at Yahoo!Finance
Time to Bet on Bank of America at Barron’s
Why Contrarians Shouldn't Consider Bank of America at Investor’s Business Daily
Bank of America's back-door TARP at Fortune
Can Washington handle 'too big to fail'? at Money
The Flash Crash: Effects on S&P 500 Index versus non-Index stocks (PDF) at NYU.edu
Order Imbalances and Stock Price Movement on October 19 and 20, 1987 (PDF) at Wharton.edu
The Long-term Returns on the Original S&P 500 Firms (PDF) at Wharton.edu
Is Apple's Market Value Too Big for Comfort? at Barron’s
Cisco's Bids at Barron’s
Transatlantic Enters Talks With Berkshire on $3.25 Billion Takeover Offer at Bloomberg
Former Nasdaq Managing Director Johnson Sentenced to 3 1/2 Years in Prison at Bloomberg
Who started the S&P downgrade rumor? at Yahoo!Finance
CoolChip cools server farms with tiny flying saucers at Yahoo!Finance
Is Insurance Boring? at Forbes
Three Beaten-Down Banks Poised To Drop Even Lower at Forbes
How Tom Selleck predicted the future of tech at Fortune
D.A. disagrees with Steve Jobs about who's a journalist at Fortune
Shaw Wu: Apple could double or triple its market shares at Fortune
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Nasdaq 100 Watch List: August 12, 2011

Posted on August 12, 2011 by | Leave a comment
Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows and ranked by highest dividend yield. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and thorough due diligence.
Symbol Name Trade P/E EPS Yield P/B % from Low
INFY Infosys Limited 53.78 19.77 2.72 1.60% 4.97 2.56%
ATVI Activision Blizzard, Inc 10.71 19.76 0.54 1.50% 1.16 2.98%
LIFE Life Technologies 38.42 19.77 1.94 0 1.53 3.36%
NIHD NII Holdings, Inc. 36.9 14.99 2.46 0 1.66 4.44%
AMGN Amgen Inc. 50 10.4 4.81 2.30% 1.79 4.91%
FLIR FLIR Systems, Inc. 23.66 18.05 1.31 1.00% 2.31 6.29%
ADBE Adobe Systems 24.1 12.91 1.87 0 2.2 6.31%
PCAR PACCAR Inc. 36.84 18.7 1.97 2.00% 2.27 6.84%
WCRX Warner Chilcott plc 17.25 36.7 0.47 0 159.35 7.41%
MSFT Microsoft Corporation 25.1 9.33 2.69 2.50% 3.7 7.63%
QGEN Qiagen N.V. 15.12 27.49 0.55 0 1.33 8.08%
LLTC Linear Technology 27.47 10.99 2.5 3.50% 12.58 8.11%
PAYX Paychex, Inc. 26.66 18.77 1.42 4.70% 6.41 8.11%
AKAM Akamai Technologies 22.55 22.48 1 0 1.86 8.94%
MU Micron Technology, Inc. 6.18 9.78 0.63 0 0.75 9.38%
ADSK Autodesk, Inc. 29.18 28.3 1.03 0 3.79 9.58%
CHRW C.H. Robinson Worldwide 68.4 27.36 2.5 1.80% 8.49 9.79%
ESRX Express Scripts, Inc. 46.69 19.13 2.44 0 12.43 9.86%

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the top five stocks on our list from August 15, 2010 and have checked their performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2010 2011 % change 11/9/2010 approx. annualized gain
GRMN Garmin Ltd. 27.05 31.32 15.79% 10.94% 37.68%
PAYX Paychex, Inc. 24.97 26.66 6.77% 11.21% 38.61%
MXIM Maxim Int. 16.75 22.65 35.22% 35.28% 121.50%
KLAC KLA-Tencor 29.10 35.93 23.47% 28.59% 98.45%
INTC Intel Corp. 19.15 20.65 7.83% 10.50% 36.14%
Average 17.82% 19.31% 66.48%
^NDX Nasdaq 100 1818.80 2182.05 19.97% 19.69% 67.79%
The top 5 companies on our list last year underperformed the Nasdaq 100 by a narrow margin.  However, in the chart above, you'll notice that all 5 stocks achieved 10% gains within 3 months (our ideal target for selling) of the August 15th posting,  If all the stocks were bought after the posting and sold on November 9, 2010, as noted above, the gains would have approximated nearly 66% annualized returns.  We cannot emphasis enough the value of selling stocks if a 10% gain is accomplished within a year while inside of a tax-deferred account.  As you can see, the year end results vastly differ from the gains that could have been made.

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The General Nature of Bear Market Declines According to Charles H. Dow

Posted on August 10, 2011 by | Comments Off on The General Nature of Bear Market Declines According to Charles H. Dow
"The stock market seldom has uninterrupted advances or declines. Its gains and its losses are the net outcome of an irregular movement. Even in a bear market, days of advance are very frequent.
"This is because there are always strong people long of stocks and hopeful enough to be willing to add something to their lines. It is because the seller of short stocks must become a buyer, while the holder of long stocks is not necessarily a seller. It is because whenever stocks become oversold, and there is difficulty in borrowing, somebody endeavors to start covering in order to make a turn out of frightened shorts. These, and other causes, combine to make more rallies in a bear market than there are relapses in a bull market, even where the total movement is about the same.
"Furthermore there is always a feeling on the part of traders when the market has gone one way for several days in succession, that it ought to turn, and stocks are bought in anticipation of recovery. The buyers are sometimes numerous enough, and powerful enough, to make by their own purchases the rally which they anticipate."
Quick Summary
  • Declines are seldom uninterrupted
  • Short sellers must eventually buy, investors that are long the market can remain inactive
  • There are more rallies in a bear market than there are secondary reaction in a bull market even when the total movement is the same
  • Buyers produce self-fulfilling rebounds in the market
Dow, Charles H. Wall Street Journal. October, 9, 1901
Sether, Laura. Dow Theory Unplugged. W&A Publishing. 2009. page 339.
Bishop, George W. Charles H. Dow and the Dow Theory. Appleton-Century-Crofts. 1960. page 167.

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Bear Market Rally Targets

Posted on August 9, 2011 by | 3 comments
Now that a bottom has been established, within the context of a bear market, we can calculate the bear market rally targets according to Dow Theory.  The upside targets are:
  • 11,527.87
  • 11.767.18
  • 12,073.49
  • 12,724.41
  • 12,807.51
A new bull market would be considered when the Dow Industrials and Dow Transports jointly exceed the prior highs set in May 2011, respectively.
 
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A Review of Projection Strategies

Posted on August 8, 2011 by | Leave a comment
There are two articles that we published in 2010 on Seeking Alpha (also found on our site) that explore different methodologies but come to the same conclusion.  The first article is titled "Three Upside Scenarios for the Dow Industrials."  In that article, we covered the timing aspect of the Dow Industrials reaching the old high of 14,164 using price projection lines.The second article on Seeking Alpha is titled "A Market Cycle Worth Observing" which covers the 4-4 1/2 year market cycle.  Although the first article incorrectly anticipates the Dow Industrials going back to the old high of 2007, in both cases they arrive at a market top occurring between the months of January and June of 2011. 
If we look at the Dow Industrials in the chart above, we can see that May 3, 2011 was the actual top.  Coincidentally, the May 3, 2011 top was 93 days from our January 31, 2011 estimate and 91 days from the Dow Theory bear market indication on August 2, 2011. The two different approaches to analyzing the market may prove useful for market projections going forward.

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In the News: August 7, 2011

Posted on August 7, 2011 by | 2 comments
'DowTheory' Confirms Sell Signal at WSJ
Buy this market at MarketWatch
Transatlantic Holdings (TRH) gets lowball offer from Buffett
 It was announced on Sunday August 7, 2011 that Warren Buffett has put up a bid for Transatlantic Holdings (TRH).  The all cash offer is coming in at $52, a premium of nearly 15% above the closing price of Friday August 5, 2011.  In a market that appear on the brink of collapse, the all cash offer from Berkshire Hathaway appears to be tantalizing.  However, we know for a fact that Buffett is making a lowball offer.
According to Yahoo!Finance, Transatlantic Holdings has a book value of $67.  According to Valueline Investment Survey, TRH has a book value of $66 and is expected to have a book value of $70 in 2012.
This is among the many stocks that we’ve tracked and then Buffett has subsequently made an offer for.  In fact, only two days after our investment recommendation of Wesco Financial, Buffett made an offer to buy the company out. In our August 29, 2010 Dividend Watch List, we said the following:
“Our Investment Observation of Wesco Financial (WSC) on August 24, 2010 was quickly verified as being undervalued by Warren Buffett's offer to buy the remaining portion that he didn't already own on Thursday August 26th. We were able to provide a new Investment Observation of Transatlantic Holdings (TRH). With Transatlantic Holdings selling below book value, median price-to-earnings and dividend increases every year since going public, we believe TRH is a great alternative to Wesco Financial.”
After we made the switch from Wesco to Transatlantic Holdings (TRH), we later sold Transatlantic Holdings within two days of the 52-week high.  Subsequent to our sell recommendation of Transatlantic Holdings the stock declined from $53.52 to $44.  On our June 12, 2011 Dividend Watch List we reiterated Transatlantic Holdings as a stock that should be considered.  Three suitors later, we’re getting the lowball offer from Buffett.  We’re hopeful that the Davis Advisors and other large shareholders fight this offer.
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NLO Dividend Watch List: August 6, 2011

Posted on August 6, 2011 by | Leave a comment
Quick Take: U.S. rating downgrade
Late Friday evening, Standard & Poor's downgraded the debt of the U.S. from AAA to AA+.  The full implications of such action are yet to be known.  However, we believe that there are some interesting points to be made.  A lower debt rating will require the U.S. government to increase the yield offered on new issuance's. A more competitive yield might draw money out of the stock market and into fixed income securities. As rates rise, utilities and real estate investment trusts (REITs) might come under extreme pressure as the markets try to weight the benefit of holding assets that offer no guarantee and relatively less competitive yields.
Also, it has not gone unnoticed by us that the U.S. first got tagged with the AAA rating in 1941 and had held that rating through a completed interest rate cycle.  It seems almost ironic that the AAA rating ascribed to the U.S. when interest rates were at their lowest would be taken away at the same level 70 years later.  We also note that rating agencies tend to show up late to the party.  The chart below tells us that it only gets interesting from here.
  
NLO Dividend Watch List
At the end of the week, our list contained over 120 companies. We had to pare down the number of companies on the list so we decided to post only those stocks trading within 5% of the 52-week low.
symbol name price p/e earnings yield p/b % from low
GBCI Glacier Bancorp, Inc. 12.41 21.66 0.59 3.9 1.05 0.08%
SYBT S.Y. Bancorp, Inc. 21.47 12.41 1.71 3 1.72 0.28%
BOH Bank of Hawaii 43.04 12.77 3.37 4 2.03 0.49%
O Realty Income 30.01 28.5 1.04 5 2.21 0.81%
SFNC Simmons First National 23.47 11.29 2.15 3 1.03 0.95%
FNFG First Niagara Financial 11.06 16.58 0.76 5 0.79 1.10%
CHFC Chemical Financial 18.05 13.52 1.34 4.2 0.88 1.12%
MLM Martin Marietta 67.63 36.76 2.24 2 2.16 1.17%
SUSQ Susquehanna Bancshares 6.8 39.53 0.17 1 0.45 1.19%
CFR Cullen/Frost Bankers 51.28 14.53 3.5 3.4 1.46 1.24%
PRK Park National 60 13.52 4.51 5.8 1.42 1.52%
TCB TCF Financial 11.83 13.77 0.99 1.5 1.07 1.55%
SON Sonoco Products 29.9 15.03 2.04 3.5 1.91 1.63%
CMA Comerica 29.13 14.98 1.68 1.2 0.88 1.75%
IBKC IBERIABANK 49.18 28.84 1.84 2.3 1 1.80%
ALL Allstate 26.29 25.06 2.45 3 0.72 1.94%
EMR Emerson Electric 45.39 13.99 3.11 2.5 3.15 1.95%
BRK-A Berkshire Hathaway 107k 16.3 6.6k - 1.1 1.98%
MCY Mercury General 36.54 13.43 2.72 6.2 1.11 2.07%
MDP Meredith 26.56 9.56 2.85 3.4 1.58 2.08%
NTRS Northern Trust 41.3 16.39 2.71 2.4 1.41 2.13%
FII Federated Investors 19.53 12.14 1.67 4.3 3.75 2.20%
GS Goldman Sachs 125.18 12.28 9.13 1 0.94 2.31%
HGIC Harleysville 29.5 10.56 2.79 4.7 1.03 2.36%
SEIC SEI Investments 17.76 14.56 1.22 1.2 3.11 2.36%
AFL AFLAC 41.72 10.97 4.44 2.7 1.65 2.38%
PG Procter & Gamble 60.59 15.97 3.8 3.3 2.53 2.40%
BKH Black Hills 28.8 17.61 1.64 4.8 1 2.42%
LEG Leggett & Platt 19.3 16.31 1.16 4.6 1.88 2.50%
CINF Cincinnati Financial 25.97 14.36 2.27 5.8 0.84 2.53%
WMT Wal-Mart Stores 50.85 11.11 4.58 2.7 2.68 2.54%
AVY Avery Dennison 29.12 10.47 2.88 3.2 1.72 2.57%
UBSI United Bankshares, Inc. 22.66 13.73 1.66 4.8 1.24 2.58%
ANAT American Nat'l Insurance 76.02 12.85 5.91 4.1 0.55 2.59%
WEYS Weyco Group, Inc. 22.83 19.85 1.15 2.5 1.48 2.61%
NWN Northwest Natural Gas 42.8 16.31 2.62 3.7 1.58 2.64%
AVP Avon Products 23.21 13.56 1.62 3.3 4.87 2.72%
TDS TDS 25.47 19.59 1.3 1.6 0.7 2.83%
RBCAA Republic Bancorp 17.29 3.95 4.36 2.9 0.83 2.86%
CYN City National 48.58 16.09 3.02 1.5 1.27 2.95%
BXS BancorpSouth 11.92 25.36 0.16 0.3 0.83 3.03%
LLTC Linear Technology 27.08 10.83 2.36 3.1 12.52 3.08%
MRK Merck & Company 31.71 59.94 0.53 4.2 1.79 3.12%
EV Eaton Vance 23.29 15.12 1.54 2.5 5.71 3.14%
TRH Transatlantic Holdings 45.24 17.2 3.06 1.7 0.69 3.17%
TEG Integrys Energy Group 47.58 12.67 3.75 5.2 1.23 3.19%
NUE Nucor 34.95 23.6 0.82 3.6 1.48 3.22%
SCG SCANA Corp 37.32 12.56 2.97 4.7 1.24 3.38%
VLY Valley National Bancorp 12.15 14.45 0.77 5 1.6 3.47%
VNO Vornado Realty Trust 80.78 18.75 4.31 2.8 2.61 3.48%
ADM Archer-Daniels-Midland 28.64 9.15 3.25 2.1 0.97 3.58%
FCBC First Community Banc 12.04 9.48 1.25 2.7 0.76 3.70%
ECL Ecolab Inc. 47.78 21.51 2.23 1.4 4.77 3.71%
UVV Universal 36.33 6.7 5.42 5.1 0.84 3.74%
VAL Valspar 30.17 13.94 2.16 2.1 1.82 3.78%
BMI Badger Meter 35.27 20.04 1.76 1.5 3.01 3.80%
GCI Gannett Co. 10.8 5.07 2.13 2.3 1.19 3.85%
LOW Lowe's 20.15 14.18 1.42 2.4 1.53 4.13%
PEP Pepsico 64.67 16.45 3.74 3.1 4.17 4.22%
SJW SJW 22.86 17.2 1.28 2.8 1.67 4.48%
MUR Murphy Oil 55.2 11.64 4.74 1.6 1.29 4.55%
FFIN First Financial 30.44 14.79 1.99 2.8 2 4.85%
KMB Kimberly-Clark 64.07 15.12 4.4 4.1 4.22 4.93%
Top 5 Performance review
In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from August 6, 2010 and have check their performance one year later. The top five companies on that list can be seen in the table below.
Symbol Company 2010 2011 % change
PBI Pitney Bowes Inc   20.71 20.02 -3.33%
WST West Pharmaceutical Services 35.26 41.91 18.86%
PAYX Paychex, Inc.  25.56 27.09 5.99%
HGIC Harleysville Group 30.9 29.5 -4.53%
CWT California Water Service Group 17.49 18.09 3.43%
Average 4.08%
^DJI Dow Industrials 10653.56 11444.61 7.43%
^GSPC S&P 500 1121.64 1199.39 6.93%
The top 5 companies on our list last year underperformed the major indexes by a wide margin.  However, in the chart below, you'll notice that all 5 stocks achieved 10% gains (our ideal target for selling) within 4 months of the August 6th posting; such a gain approximates nearly 30% annualized returns.  We cannot emphasis enough the value of selling these stocks if a 10% gain is accomplished within a year while inside of a tax-deferred account.  As you can see, the year end results vastly differ from the gains that could have been made.
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Dow Theory: Q&A

Posted on August 3, 2011 by | 2 comments
A reader has asked, “if the bear market is confirmed, do you see a possible longer term test of the lows from ’08 [2009]?”
This question is predicated on the fact that the Dow Jones Industrial Average confirms the March low as the Transports plumbed both the June and March lows. Dow Theory relies heavily on confirmations of the two key indexes and without such there is no theory.
In addition, we’ve included Robert Rhea’s use of the Industrial Production Index as an indicator to watch for. If the Industrial Production Index exceeds the prior high while the Dow Industrials fail to decline below the March low then we’ll be in a no-man’s land, which would require that the Dow Industrials and Transports exceed the May high to get a change from the current bearish condition.
From a Dow Theory perspective, the downside target relies heavily on the concept of the 50% principle. Although mistakenly attributed to E. George Schaefer by Richard Russell, the 50% principle is derived from Charles H. Dow’s “great law of action and reaction.” Dow describes the “law” in the following manner:
“The market is always responsive to the great law of action and reaction. The longer the swing one way the longer it will be the other. One of the best general rules in speculation is the theory that reaction in an advance or a decline will be at least one-half of the primary movement [50% principle].
“The fact that the law is working through short ranges and long ones at the same time makes it impossible to tell with certainty what any particular swing may do; but for practical purposes, it is not infrequently wise to believe that when a stock has risen 10 points, and as a result of one or two short swings [double tops] does not go above the high point, but rather recedes from it, that it will gradually work off 4 or 5 points.[1]”
In another excerpt from Dow’s work, on the topic of the 50% principle, Dow says:
“It often happens that the secondary movement in a market amounts to 3/8 to ½ of the primary movement.[2]”
Again, Dow emphasis the concept of the 50% principle:
“Whoever will study our averages, as given in the Journal for years past, will see how uniformly periods of advance have been followed by periods of decline, amounting in a large proportion of cases to from one-third to one-half of the rise. [3]”
Finally, George Bishop, one of the greatest authors on the topic of Charles H. Dow, concludes:
“The law of action and reaction applies to both the general market and to individual stocks. This law states that the reaction to an advance or decline will approximate half the original movement.[4]”
As far as we know, the concept of applying what is commonly known as fibonacci numbers to indexes and individual stock prices was never published before Dow’s time and yet Dow is often quoted offering up such indications in the Wall Street Journal. So pervasively is the “law of action and reaction” applied to stocks that free online stock charting software allows an investor to automatically indicate the fibonacci numbers with little reference to Dow’s use of such parameters for declines or increases from a primary trend.
Based on the chart above, the 50% principle, or law of action and reaction, indicates that the next downside target at 38% is 10,417 and at 50% is 9,679. We first must reach these downside targets in order to then project the next stage of the decline.
While we believe that a fibonacci 5th wave is possible, meaning that the index could fall below the prior low of March 2009, we have seen that this type of action can be deceptive and costly to those who gamble big in the belief that the low of the 5th wave will be substantially lower than 6440. We covered this topic in an October 16, 2009 article titled “Stock Market Projections”:
“The second type of market low is based on the premise that the Dow fulfills the Wave principle and falls below the upward trending line (red) to the old support level 8100 and then 6440. A true Wave move down to the old low would bring the market below 6440. However, the last time this was fulfilled, in the period from 1970 to 1974, the market only fell 8.5% below the previous low of 631.16 on the Dow Industrials in 1970. Additionally, the Industrials ran up from 631.16 in 1970 to 1051.70 in 1973, an increase of 118% of the previous peak. As more time passes I expect the index to fall to 5474 if we do manage to complete a Wave formation on the downside.”
The prior piece suggests that anything is possible between the point where we are and the point we expect to be going towards. Our personal investing experience as demonstrated by our claim of 40% gains (going long only) from January 2008 to August 2008 and closing out 2008 with +14% gains suggests that getting out of the market entirely is not exactly the solution to a bear market signal. Charles Dow has commented on this matter:
"Even in a bear market, this method of trading will usually be found safe, although the profits taken should be less because of the liability of weak spots breaking out and checking the general rise.[5]"
Finally, we do need to emphasis that our analysis of the market is subject to change as conditions change. After the very first Dow Theory bull market indication in July of 2009, we have had to continually update the status of the indexes based on all significant and indications. Since that time, we’ve issued more than ten confirmations that the trend was bullish.
Likewise, we will have to revisit our August 2nd call with relevant updates that support or change our view. For now, the market bias is definitely bearish and would require both the Dow Industrials and Dow Transports to exceed the previous May 2011 highs to change our current view.
Citations:
[1] Dow, Charles H. Wall Street Journal. October 19, 1900.
[1] Bishop, George. Charles H. Dow and the Dow Theory. Appleton-Century-Crofts. New York. 1960. page 119.

[1] Sether, Laura. Dow Theory Unplugged. W&A Publishing. 2009. page 112.
[2] Dow, Charles H. Wall Street Journal. January 22, 1901.
[2] Bishop, George. Charles H. Dow and the Dow Theory. Appleton-Century-Crofts. New York. 1960. page 120.
[2] Sether, Laura. Dow Theory Unplugged. W&A Publishing. 2009. page 117.
[3] Dow, Charles H. Wall Street Journal. January 30, 1901
[3] Bishop, George. Charles H. Dow and the Dow Theory. Appleton-Century-Crofts. New York. 1960. page 120.
[3] Sether, Laura. Dow Theory Unplugged. W&A Publishing. 2009. page 199.
[4] Bishop, George. Charles H. Dow and the Dow Theory. Appleton-Century-Crofts. New York. 1960. page 231.
[5] Schultz, Harry D. A Treasury of Wall Street Wisdom. Investors' Press. (New Jersey, 1966). p. 12. Additional commentary here.

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Dow Theory: August 2, 2011

Posted on August 2, 2011 by | 3 comments
In a first since the bear market bottom of March 9, 2009 and the bull market indication that initiated the New Low Observer on July 24, 2009, the Dow Jones Industrial Average and the Dow Jones Transportation Average has signaled the beginning of a bear market.

 

The last confirmation of the bull market that we received was on April 6, 2011. At that time we suggested that the market, as a leading indicator for the economy would continue to rise for “…at least for the next month and a half….” As far as the market is concerned, the top came in early May.

 

Almost as a total shock to some, the announcement of the extension of the debt ceiling didn't help the market in the least. In fact, one could have applied the adage “buy the rumor (of a deal), and sell the news.”

 

Today, the Dow indexes continued to slump and ended the day down more than 2%. While we would look for a breach of the June 2011 low to be a key indicator of the bearish trend, we’re primarily focused on the March 2011 low to be the most revealing level. The charts below graphically make clear what may become the trend for the market over the next several months.

 

Starting back in May 2011, both indices had risen to the high then retraced (secondary reaction) in June before heading higher. The Transports took off and broke above the May high hitting 5,618 (point A1). The Industrial, however, failed to confirm by going to a new high and reached only 12,724 (point A2). This first non-confirmation was a definite sign of bearishness, although it did not signal a bear market had begun.

 

As our April 6, 2011 Dow Theory article indicated, “What we see from the Transports on the way up we may also see on the way down.” Today was no exception to that idea. The Transports didn’t bother falling to the prior secondary reaction levels set in June, instead it plummeted past the March 2011 low. Both the Industrials and the Transports closed the day lower than such key support as noted in point B. The Industrials closed slightly below at 11,866 (point B1) while the Transports tumbled to 4,942 (point B2).

 

What is most worrisome now is that the Transports have taken out both the June low and the March low of 4,950 as seen on the chart at point C2. The Industrial index may appear to have quite a distance to go, but our calculations reveal that it would take only 2.1% decline for the index to confirm the Transports (point C1) action. Confirmation of the March lows by the Dow Industrials would be a devastating signal for the stock market and economy going forward.

 

The characteristics of the market in the last several months is not unlike what was experienced back in November 2007 when Richard Russell wrote and excellent article on the bearish Dow Theory implications for Barron's (article here). The similarities between now and 2007 don’t end there. The charts of the Industrial Production Index (INDPRO) show a pattern of trying to achieve new highs in 2007 and the present but then failing.

 

The connection between the Industrial Production Index and Dow Theory is well established as put forth by the Dow Theorist Robert Rhea. Our last article (found here ) on the Industrial Production Index made clear the importance of considering the movements of this indicator.

We’d be jumping to conclusions if we went so far as to conclude that the July Industrial Production Index numbers would not exceed the March 2011 high of 93.0943. However, we would be surprised if the INDPRO, despite already being so close to the high, manages to go above the numbers that were set in June and March 2011.

The caveat to our analysis on the Dow Industrials and Dow Transports is the possibility that the Industrials actually don’t go below the low set in March 2011 (considered a divergence or non-confirmation of the trend). If the Dow Industrials do not confirm the same lows as the Transports then we’d essentially be in a Dow Theory no-man’s land. Under such conditions, the bias should be towards being bearish but on a wait and see basis.

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