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Has the Dow Jones-UBS Commodity Index Reached the Low?
We’ve noticed an interesting pattern which may suggest that the Dow Jones-UBS Commodity Index is nearing the low. In the chart below, we show (at the red circles) the exact same percentage difference between the long-term technical support (red line) and the 2002 and 2013 low. That percentage difference, approximately 7% in both cases, is all that stands between the two low points and the support level. Our primary question is, will the most recent low sustain a double bottom as was the case in the 2001-2002 period?
Already we have indicated the extreme downside target for the commodity index at 79.32, based on the work of Edson Gould’s Speed Resistance Lines. However, if we are in a commodity bull market, as we’ve made reference to in our January 1, 2009 article titled (found here), then there is a good chance that a bounce at the long-term technical support line would mark the end of the cyclical bear move in commodities.
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Posted in Dow Jones-UBS, ExxonMobil, gold, gold bugs, Sysco, SYY, XOM
U.S. Dividend Watch List: October 25, 2013
Below are the 11 companies on our U.S. Dividend Watch List that are within 11% of their respective 52-week lows. 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 rigorous due diligence.
Canadian Dividend Watch List: October 23, 2013
This is a list of Canadian dividend stocks that currently, or in the past, had a history of consecutive dividend increases. For those wishing to find the most complete fundamental information on these companies, we recommend visiting one of Canada’s leading financial websites, the Financial Post (found here). However, Yahoo!Finance probably has the better long-term charts and historical dividend data.
U.S. Dividend Watch List: October 18, 2013
Below are the 14 companies on our U.S. Dividend Watch List that are within 11% of their respective 52-week lows. 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 rigorous due diligence.
U.S. Dividend Watch List: October 11, 2013
Below are the 18 companies on our U.S. Dividend Watch List that are within 11% of their respective 52-week lows. 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 rigorous due diligence.
Nasdaq 100 Watch List: October 11, 2013
Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows. 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 rigorous due diligence.
Dow Theory: Applied to Poultry Prices
On the Costco (COST) conference call dated October 9, 2013, executive vice-president and CFO Richard Galanti had the following to say about their rotisserie chickens:
“keep in mind the return – I used the example of the rotisserie chicken in the past. We get more positive press out there from keeping that incredible giant chicken at 4.99 and over the last year, year and a half, the underlying poultry price have skyrocketed so we've – the underlying price has skyrocketed such that there's very little margin on it right now although it looks like there is some relief in terms of where pricing is going over the next few months based on poultry future's cost. It doesn't mean we're raising price, it means that we'll at least make a little margin. (source: Seeking Alpha. Costco Wholesale’s Management Discusses F4Q 2013 Results-Earnings Transcript. October 9, 2013. internet link here)”
The reference to poultry prices caught our attention because, in an October 2012 discussion on EconTalk with Russell Roberts, economist Steve Hanke mentioned that chicken prices are a useful way to measure inflation rates in countries that have discontinued reporting their internal data. There is much more to the discussion with Roberts and Hanke and it is recommended that you get the full story at the following link (Hanke on Hyperinflation). Hanke says the following:
“…when you get the big plunges they've [Iran] experienced in September [2012] and October [2012], of course that leads to the implied inflation rate being very high. And then I can go back and just look at the press and the price of a key commodity--chicken. And it matches up almost perfectly with the calculations I'm making from going from the black market exchange rate to the implied inflation rate. And I've done this with a number of countries.”
We’re not ready to make the connection with the price of poultry and inflation rates. However, we’d like to see if Dow Theory has the capability to anticipate what the downside targets could be if the price were to decline in the next several months. To get us started, we need an overall view of how poultry prices have vacillated in the past. Below is a chart of poultry prices from September 1983 to September 2013 (source: www.indexmundi.com):
The black ascending lined is the mean of the overall trend while the upper and lower blue lines indicated the extremes of the overall trend. On the far right hand side of the chart, we have indicated the points A and B where we’ll be doing our Dow Theory analysis of the current trend in the chart below.
Based on the latest data available, it appears that poultry prices are topping out as indicated at point B. If this is the case, then Dow Theory suggests that the following are the downside targets from point A:
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98.38
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94.32
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90.26
Additionally, the parabolic nature of the above trend increase in poultry prices suggests that declining back to point A is not out of the question. We aren’t clear as to what might bring about such a dramatic decline however we want to observe whether any substantive inferences are gained from this general overview when applying Dow Theory. We’ll re-examine this topic in several months to see if these projections are meaningful in any way.
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Posted in inflation, poultry, Steve Hanke
Gold Stock Indicator: October 9, 2013
Although gold and gold stocks declined, the Gold Stock Indicator (GSI) increased above the level from yesterday. we’re currently sitting slightly above the “stage 4 buy” level which is based on the 2008 low.
Our use of the 2008 low as a reference point is based on Charles H. Dow’s assessment of the best time to consider an investment:
“The point of importance for those who deal in industrial stocks is whether the capitalization of the companies into which they propose to buy is moderate or excessive, when compared with the aggregate earnings of the various concerns forming the combination in a period of depression. It is probable that consolidated companies will be able to earn as much in the next period of low prices as the companies forming the combine were able to earn in the last one; hence the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowances for economies under consolidation. Where the earnings so shown would have provided dividends for industrials now active, the fact must be regarded as a very strong point in favor of those stocks.[1]”
The consideration of investments “in periods of depression,” “periods of low prices,” and “economies under consolidation” with the reference to 1893 and 1896 are all consistent with extremes in the investment cycle. This definitely is the case for gold and more especially gold stocks. Dow is telling us that investment considerations need to look back to the prior extreme lows for the best approximation for where investments will likely go to the downside in the current cycle and when those investments could be considered the best values. Naturally, in the next decline from a gold stock peak, we will need to use the 2013 low as the worst case scenario of downside risk.
The following are the dates and levels of gold and gold stocks (XAU) that were at or lower than the current level in the GSI.
| Date | Gold | XAU |
| 10/27/2008 | $730.50 | 65.72 |
| 6/24/2013 | $1,286.75 | 87.33 |
| 6/25/2013 | $1,279.00 | 87.22 |
| 6/26/2013 | $1,236.25 | 82.35 |
| 6/27/2013 | $1,232.75 | 84.35 |
| 7/8/2013 | $1,235.25 | 84.98 |
| 7/9/2013 | $1,255.50 | 85.99 |
| 7/10/2013 | $1,256.00 | 85.71 |
| 10/8/2013 | $1,329.50 | 88.94 |
| 10/9/2013 | $1,304.00 | 88.79 |
June 26, 2013 was the lowest point ever reached in the GSI since 1983. While we’re not there yet, we expect that gold and gold stocks should bring us to the former low with some margin for error on the downside.
Citation:
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Dow, Charles. H. Review and Outlook. Wall Street Journal. April 27, 1899.
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Posted in Charles Dow, Charles H. Dow, gold, gold bugs, Gold Stock Indicator
U.S. Dividend Watch List: October 4, 2013
Below are the 22 companies on our U.S. Dividend Watch List that are within 11% of their respective 52-week lows. 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 rigorous due diligence.
Charles H. Dow, Father of Value Investing
The concept of Dow Theory is widely associated with technical analysis. While there's no denying of such a view, investors shouldn't overlook the fact that Charles H. Dow emphasized the concept of value investing in much of his writings. In his Wall Street Journal editorial on February 25, 1902, Dow stated:
"The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Sether, Laura. Dow Theory Unplugged. 2009. page 81)."
This begs a follow-up question of what is considered of value? In the previous quote, Dow didn't speak of price-to-earnings ratio (P/E) or price-to-book value (P/B). However, one measure of values that Dow mentions often in his writing is dividends. In the book Charles H. Dow and the Dow Theory, by George W. Bishop, Jr., it is noted that Dow makes many references to dividends and its impact on values, as indicated below:
"Determine the stock or stocks to trade in. They should be railroad stocks, dividend payers, not too low, nor too high, fairly active, and for the bull side below their value; for the bear side above their value. Values are determined roughly by earnings available for dividends."
It becomes clear that the oldest tool we can and should use in our investment playbook is based on the actual dividend. Furthermore, not only should a stock provide income in the form of dividend but have a large enough margin of safety to withstand market cycles in case earnings start to decline.
Warren Buffett said the most important concept he learn from Benjamin Graham was a margin of safety. This concept, margin of safety, was made popular in the book The Intelligent Investor which was published in 1949. However, Dow spoke of such concept in a specific manner in many of his editorials. Specifically, his writings indicated that the greatest margin of safety can be had in what we know as the dividend payout ratio. It is one of the aspects our team highlights in our dividend watch list. The quote below is from the Wall Street Journal editorial on January 28, 1902 and might be one of the best examples on the concept:
Nothing strengthens a stock more than margin of safety in dividend earnings, and nothing weakens a stock more than doubt in regard to the stability of dividends. It is unquestionably better for a stock that a company should pay 5% and earn 10% than to pay 9% and earn 10%, because, in the latter case, the small margin of safety must be a great element of weakness in the price (Sether, Laura. Dow Theory Unplugged. 2009. page 352).
All of the examples above provide some of the highlights of Dow's writing. While holding the perception of Dow Theory as a "system" for reading charts, many fail to recognize the inherent discussion of values and fundamentals in the work of Charles H. Dow.
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Posted in Dow's Value Theory