Dow Theory's 112 Year Record

The following information is the return that would have been received if an investor bought and sold stocks based on the buy and sell signals of Dow's Theory. This information is based strictly on buy signals and does not account for the compounding of dividends, buying earlier and selling earlier than the actual signal. Touc.

Original Fund $100	Date	Industrial Average Price	% Gain	Proceeds
Invested	July 12, 1897	44.61
sold	December 16, 1899	63.84	43.1	$143.10
Funds reinvested	October 20, 1900	59.44
Stocks sold	June 1, 1903	59.59	0.3	$143.53
Funds reinvested	July 12, 1904	51.37
Stocks sold	April 26, 1906	92.44	80.0	$258.35
Funds reinvested	April 24, 1908	70.01
Stocks sold	May 3, 1910	84.72	21.0	$312.60
Funds reinvested	October 10, 1910	81.91
Stocks sold	January 14, 1913	84.96	3.7	$324.17
Funds reinvested	April 9, 1915	65.02
Stocks sold	August 28, 1917	86.12	32.5	$429.53
Funds reinvested	May 13, 1918	82.16
Stocks sold	February 3, 1920	99.96	21.7	$522.74
Funds reinvested	February 6, 1922	83.70
Stocks sold	June 20, 1923	90.81	8.5	$567.17
Funds reinvested	December 7, 1923	93.80
Stocks sold	October 23, 1929	305.85	226.1	$1,849.54
Funds reinvested	May 24, 1933	84.29
Stocks sold	September 7, 1937	164.39	95	$3,606.61
Funds reinvested	June 23, 1938	127.41
Stocks sold	March 31, 1939	131.84	3.5	$3,732.28
Funds reinvested	July 17, 1939	142.58
Stocks sold	May 13, 1940	137.50	(3.6)	$3,727.10
Funds reinvested	February 1, 1943	125.88
Stocks sold	August 27, 1946	191.04	51.9	$5,653.71
Funds reinvested	October 2, 1950	228.94
Stocks sold	April 2, 1953	280.03	22.3	$6,911.01
Funds reinvested	January 19, 1954	288.27
Stocks sold	October 1, 1956	468.70	62.59	$11,236.65
Funds reinvested	May 2, 1958	459.56
Stocks sold	March 3, 1960	612.05	33.18	$14,965.17
Funds reinvested	October 10, 1961	706.67
Stocks sold	April 26, 1962	678.68	(3.96)	$14,372.43
Funds reinvested	November 9, 1962	616.13
Stocks sold	May 5, 1966	899.77	46.04	$20,988.88
Funds reinvested	January 11, 1967	822.49
Stocks sold	October 24, 1967	888.18	7.99	$22,665.20
Funds reinvested	October 1, 1968	942.32
Stocks sold	February 25, 1969	899.80	(4.51)	$21,642.49
Funds reinvested	October 27, 1969	860.28
Stocks sold	January 26, 1970	768.88	(10.62)	$19,343.09
Funds reinvested	September 28, 1970	758.97
Stocks sold	July 28, 1971	872.01	14.89	$22,224.03
Funds reinvested	February 10, 1972	921.28
Stocks sold	March 23, 1973	922.71	0.16	$22,258.52
Funds reinvested	November 5, 1974	674.75
Stocks sold	October 24, 1977	802.32	18.19	$26,466.78
Funds reinvested	June 6, 1978	866.51
Stocks sold	October 19, 1978	846.41	(2.32)	$25,852.84
Funds reinvested	May 13, 1980	816.89
Stocks sold	July 2, 1981	959.19	17.42	$30,356.34
Funds reinvested	October 7, 1982	965.97
Stocks sold	January 25, 1984	1231.89	27.53	$38,713.07
Funds reinvested	January 21, 1985	1261.37
Stocks sold	October 15, 1987	2355.09	86.71	$72,280.75
Funds reinvested	January 7, 1988	2051.89
Stocks sold	October 13, 1989	2569.26	25.21	$90,505.85
Funds reinvested	June 4, 1990	2935.19
Stocks sold	August 3, 1990	2809.65	(4.28)	$86,634.86
Funds reinvested	December 5, 1990	2610.40
Stocks sold	August 4, 1998	8487.31	225.13	$281,679.77
Funds reinvested	September 15, 1998	8024.39
Stocks sold	September 23, 1999	10,318.59	28.59	$362,212.97
Funds reinvested	June 9, 2003	8,980
stocks sold	January 7, 2008	12,827	30	$470876.86
Funds reinvested if sold today	July 23, 2009 November 20,2009	9,069.29 10,318.16	12.1	$527,852.96

• The period from July 12, 1897 to 1999 was derived from the book Dow Theory for the 21st Century by Jack Schannep published 2008.
  
• The period from 2003 to the present is based on my own interpretation of Dow Theory.
  

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Dow Theory: Transport Triple Top Threat

One of the most challenging chart patterns is now upon the Dow Jones Transportation Index. That chart pattern is the triple top formation. Triple tops can be considered challenging because they imply a three strikes rule of baseball. If the batter swings and misses three times then they're out for that at bat.

The triple top usually indicates that investors have, or are about to give up on the particular stock or index. This could be an instance of the market bulls capitulating to whatever forces are at play. One thing is certain, if the downtrend of the Transports continue on this downward trend then we could expect the index to go to the previous low of 3600, which implies a Dow Industrials of 9700.

The implications of a triple top is troubling primarily because the Transportation Index has spent the better part of the last two months resisting going over the November 4, 2008 peak. The Transports have not been able to confirm the Industrials in this regard which, to this point, is a Dow Theory non-confirmation.

In addition, the volume on the Transport Index has fallen off a cliff in the most recent rise from the November 2nd low. This indicates a lack of interest in market participants. Lack of interest in the rise generally means that the current levels in the Transports will be difficult to sustain. Additionally, the MACD and the RSI have appeared to top out and are headed lower.

The threat of a triple top shall remain in place unless the Tranports can exceed the 4072 level. All of the indications mentioned make me wonder if this means the end of the bull run within the secular bear market. Touc.

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The Language of Wall Street

• An old man's sayings are seldom untrue.
• Get an investment that will let you sleep.
• They who lose to-day may win to-morrow.
• Opportunity is often lost by deliberating.
• Illusions ruin all those whom they blind.
• The maxims of men disclose their hearts.
• The poorer the sheep, the harder it bleats.
• A little loss frightens- a great one tames.
• Where something is found there look again.
• He that will have eggs must have cackling.
• The best is always the cheapest in the end.
• Liberality is not giving largely, but wisely.
• Get information before you invest, not after.
• Thrice happy they who have an occupation.
• Wisdom adorns riches, and shadows poverty.
• No lock will hold against the power of gold.
• Begin to buy when prices are dull and weak.
• Satisfy the rich and they will pay your price.
• His a wise man who wears poverty decently.
• Great minds have a purpose; other have wishes.
• An ounce of luck is worth a pound of wisdom.
• Great undertakings require great preparations.
• Of what use is a 10 per cent. margin in a panic?

Nelson, Samuel A. The ABC of Stock Speculation. S.A. Nelson. 1902.

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CIT's pain is Goldman's gain

In light of the recent apology that was offered up by Lloyd Blankfein, CEO of Goldman Sachs (GS), I came across something that highlights Goldman's role in the world of guerrilla investment banking. I pulled the old Value Line for CIT Group (CIT) dated November 24, 2006. I was trying to determine the pre-banking crisis book value of CIT.

What caught my eye was the brief historical description of CIT which indicated that the company was established in 1908. In 1915 the company moved from St. Louis, MO to New York City. According to Value Line:

"On 11/18/97, J.P. Morgan and Goldman Sachs jointly led CIT's initial public offering of 36,225,000 shares, priced at $27.00 per share on the NYSE. On 6/1/01, CIT was acquired by TCH, a wholly-owned subsidiary of Tyco Intl., Ltd. On 7/8/02, Tyco sold 100% of CIT's outstanding stock in an IPO, led by Goldman Sachs and Lehman Brothers*. Offering was for 200,000,000 shares, priced at $23.00 per share on the NYSE."

In the first public offering done with Goldman Sachs as the joint underwriter, CIT was valued at $978,075,000 or just less than $1 billion dollars. Four years later, Tyco International (TYC) acquired CIT Group in a cash and stock deal worth $9.2 billion. CIT was taken private for a year then relisted as an IPO. Who was there to administer the 2nd IPO but none other than Goldman Sachs, of course.

It is important to note that TYC shares were trading at a (pre-split) price of $57 a share when the acquisition of CIT took place. By the time that the 2nd IPO of CIT took place, TYC was trading at $12 a share (a decline of 80%.) What led to the dramatic decline in Tyco shares? Insiders at TYC were tried and convicted of manipulating the financials and using the company cash as a personal treasure chest. Based on the court proceedings that followed the trial of CEO Dennis Kozlowski and CFO Mark Swartz, it became apparent that the earnings that led to the high share price that allowed TYC to buy CIT Group was based on fraud.

What is most interesting about the second issuance of CIT Group was that somehow in a years time the company lost more than half of its value. The IPO on July 8, 2002 was valued at $4.6 billion, exactly half of the price that the company was initially paid for by TYC. Either TYC paid 100% more than CIT Group was worth or TYC raided the coffers of CIT.

TYC is a shadow of its former self. TYC had to do a reverse split in order to mask the deplorable condition of the company. At an all time high of $250 (pre-split $62.50) in January of 2001, the stock has fallen to the current $37.08 (pre-split $9.27), a decline of 85%.

As for CIT Group, well that company just recently filed for bankruptcy. CIT traded as high as $61 in May of 2007. The last quote of CIT on November 18, 2009 was $0.20 or twenty cents.

Goldman Sachs, doing God's work [the implied message in a recent interview], had no problems brokering fraudulent transactions. Some would say, "How could you accuse Goldman Sachs of knowing that Tyco was cooking the books?" I would suggest that the question should be, how could they not know? This is where knowledge of stock market history is plenty useful. There are too many examples to reference where corporate raiders descended upon hapless companies that didn't have the largess of a high stock price to defend themselves.

It is clear that somebody got hosed in the Tyco/CIT Group deals. One thing is for sure, Goldman Sachs wasn't one of them. Touc.

*Lehman Brothers is gone

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Wal Mart favored by Buffett

Dividend Inc. is at it again. Tooting our own horn, 'cause if we don't then who will?

According to news sources, Warren Buffett increased his holdings of Wal Mart (WMT) by 90% over the summer. This was an increase of 18 million shares above the reported June 30th holdings for Berkshire Hathaway. I would consider this the best buy recommendation Mr. Buffett could give aside from outright buying the company as was done with BNSF.

It should be noted that Dividend Inc. stated the case for Wal Mart in a June 18th article titled, "Values Biding Time." The article aptly started with a quote by S.A. Nelson saying,"Value go on increasing, while the market rests..." The overriding point of the article was that there were very few credible arguments that could be made against a company that had traded in a range for so long; especially a Dividend Achiever of 33 years.

Not to be outdone, in a recent article titled "Dividend Stocks Worth Your Time," Dividend Inc. placed WMT at number 1 out of 10 in a list of companies to consider investing in. Even at the current price, WMT is still reasonably priced. Close attention should be paid to the June 18th article since I dropped an investment grenade in the midst of all that "analysis." A little due diligence would wonderfully augment the investment decision to buy this stock. For all references to WMT on Dividend Inc. click on the following link.

It is my hope that regular readers of this blog have benefited from the insight and the opportunity. This is only one of many investments that Dividend Inc. has been able to jump on before any annoucements from Berkshire headquarters. Are we luck? Probably. Will we fight our luck? Nope. Keep reading and spread the word if you think that Dividend Inc. has proven useful. Touc.

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A Healthy Discussion on Investing

A reader, and personal friend of 15 years, responding to my most recent investment commentary said:

"[After] reading the following email [blog posting] a thought occurred to me as follows;

You won't go wrong in your analysis since you already know a whole lot how to use the Dow Theory (DT), but DT itself might go wrong, taking all the DTists down along with it. There is one particular weak-spot of this theory, I believe. It does not differentiate between the secular bear markets' "internal mechanics" versus that of the secular bull markets.

For instance, you recently blogged:

In category one, I have calculated the 100 year compound annual growth rate for the S & P 500 (this is being generous) at 11.57% (Jan. 1, 1908 to Dec. 31, 2008). To me, any investment return greater than 11.57% in less than a year is consider as a sell candidate.

Now, using CAGR for such an extended period to make any buy/sell criteria is not right in my opinion since bear and bull periods within such 100 year spans behave differently. They have aspects of stress and strain that impact them radically differently. Major departure in CAGR of period like 1966-1982 versus that of 1982-2000 needs to be accounted for and then only some criteria can be developed. Currently we are in a secular bear market which may last even a decade more. What CAGR should we use for this period? I believe a much lower figure than 11.57%. In that case how does your above criteria stand up? You might not be able to use this concept or the system at all.

These are just a few thoughts for you to ponder. Not really related to the DT but just the same.

DT is technical analysis used for stock picking/dumping. In super long, secular bear and bull stretches, asset allocation theories might work better, IMHO."

My response is as follows:

Dow Theory is an especially wonderful tool to deal with cyclical bull and bear markets. In fact, for many years I confused a secular bear market as strictly a bear market (i.e. 1966 to 1982) and nothing else. This would typically mean that I would not want to invest at all in a secular bear market. However, the reality is that Dow Theory responds perfectly to the short term issues that an investor must grapple with in all cyclical bull and bear markets. The ability to determine a secular bear or bull market is dependent on an extended review of history which only points out the obvious. This is where the cliche "hindsight being 20/20" is apropos.

I will reiterate, there is always a cyclical bull or bear market. This contrasts with the fact that sometimes there is a secular bear market and sometimes there is a secular bull market. Dow Theory responds to the need of have a reasonably objective view of the market, along with the multitude of other market and economic gauges and measurements.

On the issue of Dow Theory possibly being wrong, to my thinking, this is implied in the analysis. I expect the theory to be wrong and only succumb to the reality (that it has been right almost 80% of the time; 80/20 rule) after the fact. I do not make my investment choices based on the technical aspect of Dow Theory. The aspect of Dow Theory that I do use for my personal investments is regarding values.

Applying the focus on values (dividends being the primary precept), as laid out by Charles H. Dow, and Geraldine Weiss, makes investing, regardless of other overwhelming attributes, much easier. I do not care so much about an overvalued or undervalued market when deciding to buy or sell a stock.

Evidence of such an approach has been backed up time and time again but can be most accurately be found in Jeremy Siegel's article "The Nifty Fifty Revisited" or Geraldine Weiss' Dividends Don't Lie. However, the evidence doesn't stop there, if we pick any period when the market was at a peak (before a major decline) and look at the list of stocks that were at a new 52-week low at that same time, you will find that the "quality" stocks overperformed the market during the subsequent decline (went down less than the market) and recovered faster than the market or overperformed on the upside (8 times out of ten; 80/20 rule).

I had previously thought that value stocks must be bought only at market bottoms of secular bear markets, at the same time ignoring cyclical elements of individual quality stocks. Put differently, even if you bought undervalued quality stocks at the middle of a major declining trend like the period from 1929 to 1932, you would have broke even on your investment by 1934 at the latest. I love using the 1929 to 1932 period due to the extremity of the market and the lessons it can teach.

The issue of bringing up the "long term" was done only to placate those who continually argue that buy and hold is the way to invest. Because the concept of investing for the long terms is accepted as gospel, I have to respond to those who place so much emphasis on the idea even though the majority of investors have an investment time horizon (in a substantive manner) of only 20 years at the most. With such a short investment time frame, as compared to the "long term" period of 100 years or more, it is ridiculous to bring up the matter of long term investing. Again, not wishing to break with investment orthodoxy, I have made the effort to respond to such an issue despite my understanding to the contrary.

It is likely that I will pay dearly for having such a cavalier attitude in what I have been able to observe and prove. However, the evidence that I have is far from anecdotal. The case I make is even more compelling because I was a vehement market critic or perma-bear for over 15 years. Despite my unwillingness to acknowledge the facts, the market truths kept pounding down every argument that I raised. I have acquiesced on this matter only grudgingly but continue to seeking information that can resolutely refute my claims. Thus far, I have been met with good arguments and interesting facts but nothing to show that using my own money and my current approach to investing will need to change. On this matter I feel confident.

However, please continue to show either weakness or defects in my logic. It will always be openly discussed and shared with the readers of my blog. I will gladly change my view at the drop of a hat when I can apply any new idea or concept better than my current approach when it comes to buying and selling stocks. In the most self deprecating manner, Touc.

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Dividend Stock Review

On October 9, 2009, I created a list of ten Dividend Achievers that I felt were the best investments at the time. After having passed the 1 month period, I feel that it is necessary to review the performance of the stocks that were on that list. As with the original article I will show the performance based on those that were ranked from 1st to 10th (chart).

1. Wal-Mart (WMT) up 6.46%
2. Cardinal Health (CAH) up 14.43%
3. Weyco (WEYS) down 0.8%
4. Bard Inc. (BCR) up 3.62%
5. Northwest Natural Gas (NWN) up 1.01%
6. Piedmont Natural Gas (PNY) down 3.67%
7. Becton Dickinson (BDX) up 5.77%
8. McCormick & Co. (MKC) up 6.71%
9. Abbott Laboratories (ABT) up 5.73%
10. ExxonMobil (XOM) up 4.62%

As an investor, I believe that the performance of these stocks need to be put in perspective. There are three tiers that I like to categorize my investments:

1. As compared to the historical CAGR of the stock market
2. As compared to the gains in a single month
3. As compared to if the money was in government guaranteed alternatives

In category one, I have calculated the 100 year compound annual growth rate for the S & P 500 (this is being generous) at 11.57% (Jan. 1, 1908 to Dec. 31, 2008). To me, any investment return greater than 11.57% in less than a year is consider as a sell candidate.

Category 2 is wholly dependent on category one. If the gain of a stock has exceeded, in one month, more than half what could have been received based on the historical return of the stock market then I need to consider selling the stock.

Category 3 tells me whether or not I'm doing, at least, better than the alternative guaranteed sources. If I can't beat the government protected sources then I need to re-evaluate the investment position. For the stocks that have lost money so far (WEYS and PNY) the dividend payments allow the investor to wait for a reversal of the declining trend. WEYS has a dividend yield of 2.60% while PNY has a dividend yield of 4.70%. Both instances provide the ability to compete against government guaranteed alternatives over the coming eleven months.

Based on the aforementioned thoughts, I would recommend that all of the stocks (except WEYS, NWN, and PNY) be sold at the earliest opportunity. For anyone to claim that a stock, which has gained 3 percent in a month, could continue the same trajectory over the next 11 months is going to be highly disappointed. Below is the hypothetical annual return if the past month were to continue at the same rate until October 9, 2010:

1. WMT up 77.52%
2. CAH up 173.16%
3. BCR up 43.44%
4. NWN up 12.12%
5. BDX up 69.24%
6. MKC up 80.52%
7. ABT up 68.76%
8. XOM up 55.44%

Only one of the above stocks has the ability to fulfill the projections with ease and that is Northwest Natural Gas (NWN). Suffice to say, all NWN needs to do is go up 7.32% and combined with the dividend of 3.8% you have acheived the 12.12% annual return. If we exclude the dividend, then NWN would have to rise 11.11%. In either case, NWN has the highest probability of continuing the current trajectory.

Keep in mind that I tend to invest 100% of my portfolio in 5 companies at the most. Truth be told, I have been invested in 2 or 3 stocks since December 2008. This means 33% to 50% in one stock at a time. Obviously, my approach isn't for everyone however it is worth your time to critically examine the approach that I advocate. Touc.

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Dow Theory: Q & A

Question:

On Nov. 11, 2009, Richard Russell (Dow Theory Letters) stated the following:

"If the Transports close above 4045.11, I believe I will have seen enough to label both the primary and secondary trend of the market as bullish."

Could this be true under the interpretation of the Dow Theory such as yours?

Answer:

Thanks for the question. Dow, Hamilton, Rhea, Schaefer and even Russell have been clear on this matter. A bull market requires that the previous peak needs to be exceeded by the Transports and Industrials at the same time. For each successful breach of prior peaks by both indexes we get a confirmation of the bullish trend.

As yet, the Transports have not been able to exceed the prior peak of November 4, 2008 at 4072. In fact, markets in general, and the Transports specifically, have not been able to exceed the November 4, 2008 high. Each time the Transports go to the November 4, 2008 peak, markets in general have declined.

Presently, if we are lucky, the Transports are on course to break above the F1 and F2 double top. The F series double top is not above the November 4, 2008 peak. The F series double top is where the 4045.11 comes in. I would not be satisfied with the 4045.11 for a confirmation of a bull market based on the volumes of documented Dow Theory literature on this topic.

To get a confirmation of the bullish trend in the market, the Transports need to go above 4072 and the Industrials need to go above the 10,358. Without the confirmation of both indexes we only have a non-confirmation with a bullish bias until proven otherwise.

All of these concepts on Dow Theory are within the context of a secular bear market unless the Dow Industrials go above 14,279.96 and the Transports go above 5044.24. When these levels are exceeded, we'll be at the beginning of a secular bull market.

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The Language of Wall Street

• Hear-say is half lies.
• Talk little and well.
• Control your temper.
• Enough is great riches.
• No one is always right.
• The first loss is the best.
• All players cannot win.
• Press your luck to the finish.
• There is luck in leisure.
• Cheap advice is plentiful.
• A true word need no oath.
• Done leisurely-done well.
• Negotiate before slaughter.
• When in doubt do nothing.
• After one loss comes many.
• Wall Street easily forgets.
• Great vaunters, little doers.
• Learn to take a loss quickly.
• Information makes a market.
• Nothing risked, nothing won.
• For a lost thing care nothing.
• Losses make us more cautious.
• Little and often fills the purse.
• All is not lost that is in peril.
• When wisdom fails, luck helps.
• Punctual pay gets willing loan.
• Let profits run; limit all losses.
• Some men learn only by failing.
• Losers are always in the wrong.
• Cut a loss and let a profit run.
• A thing well bought is half sold.
• A plunger gets but seldom holds.
• Interrogate before you negotiate.
• Money is most valued when lost.
• Everyone is wise after the event.
• At a great bargain make a pause.
• Don't buy an egg until it is laid.
• Under fair words beware of fraud.
• liberal hands make many friends.
• Novelty always appears handsome.
• Business neglected is business lost.
• After extreme weakness buy stocks.
• More sheep than lambs are sheared.
• Better lose the wool than the sheep.
• It is fortune, not wisdom that rules.
• Fraud is built on misrepresentation.
• Don't put all your eggs in one basket.
• Better lose the saddle than the horse.
• The market will be here to-morrow.
• Small losses often prove great gains.
• Men often seem rich to become rich.
• Inspiration often means perspiration.
• By the husk you may guess at the nut.
• Hear the other side and believe little.
• Beware of one who has nothing to lose.
• Speculation begins when certainty ends.
• The rich buy in a hurry when the buy.
• In a trader's market-buy low- sell high.
• Delay overmuch is oftentimes great risk.

Nelson, Samuel A. The ABC of Stock Speculation. S.A. Nelson. 1902.

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Dow Theory: Event Horizon

There isn't much to say about the market's most recent movements other than the fact that the Transports will decide whether or not we are going to continue this run. It was of little surprise that Warren Buffett happened to buy out the share of Burlington Northern that he didn't already own which catapulted the Transportation Index off of the intermediate low. To those who have been following my Dow Theory commentary, I have been vociferous about the fact that the Transports are commanding the direction of stock market. I have a lot of problems with the methods used by Buffett to acquire BNSF. However, that is beside the point for the Transport Index.

The actions of Mr. Buffett provided the lifeline necessary to complete the reversal of the Transportation index one day earlier than my cycle projections had predicted. All that we need now is the capability to exceed the previous double tops at F1 & F2 as well as the November 4, 2008 high of 4071. The fact that these three points loom large over the Transports means that we're possibly approaching an event horizon for the stock market.

Not being able to breach 4071 and F1 & F2 could mean that the bull run has ended. Breaking through the aforementioned points could be the equivalent of a rabid bull market with no ability to see the cliff ahead. Based on the previous cycle data, we should expect that the Transports will get to the F1 & F2 highs on or near November 18, 2009. What lies beyond that point is unclear at this time.

The coming days will require that we proceed with caution. If you have profitable investment positions then be willing to accept that your gains were exceptional and be ready to unload your stocks to an all too eager public. Let new investment opportunities (Dividend Achievers at or near a new low) come to you. Take your time to investigate the companies that are of interest to you and accept the downside risks. Touc.

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Research Recommendation: Aqua America (WTR)

Today's research recommendation is AquaAmerica (WTR). According to Yahoo!Finance's water utilities review, WTR is ranked as the second largest water utility based on market capitalization.

The most important point about this research recommendation is that WTR has fallen to a brand new low during market hours on Friday October 30th. This low may soon match the 2-year low of around $14.50 set in mid-October 2008. This is fascinating because the actual lowest point after the market peak of 2006 at $30 is no longer on our last 52-week radar. However, we will watch to see if the ultimate low of $14.50 is reached.

According to Value Line Investment Survey, WTR normally trades around 1.6 times the per share dividend divided by the "interest rate" (1.6x $0.51/interest rate). Valueline doesn't tell us by which interest rate we should apply to the company, so I have decided to apply the 30, 20, and 10 year U.S. Treasury rate. The following are the mean prices that WTR would trade at for each interest rate:

• 30 year rate- $19.29
• 20 year rate- $19.47
• 10 year rate- $23.93

Based on the 30 year rate, WTR is selling 19.91% below the historical mean value. I chose the $19.29 value since it was the most conservative figure.

However, according to Investment Quality Trends, WTR is considered undervalued when it is selling for $12.27 or less. This indicates that WTR is not currently undervalued but could easily get to the $12.50 range if market conditions continue on the downside. Additionally, WTR has a large debt load and a high dividend payout ratio of 74%. This means that the stock could only "afford" a decline in earnings of 25% before the company has to borrow or issue more shares to service the dividend.

According to Dow Theory, the following are the most important downside targets to watch for:

• $14
• $11.25 (fair value)
  
• $9
• $6.50

These targets are supposed to act as support levels. Support levels are points which the stock falls to but should not go below. If the stock goes below one support level then we should expect the stock to decline to the next target level.

When you look at the 5 year chart of WTR, one support level that is significant is the $15 level. This happens to be the most obvious level that the stock needs to hold above. Falling below $15 could indicate the negative nature of the sentiment for WTR.

Although this is a water utility and water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold.

Take your time to consider this Dividend Achiever for the good and the bad attributes. Your careful analysis of this company might compel you to purchase the stock. It is my hope that the stock falls further before your next acquisition. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Value Metrics Q & A

Q: How do you calculate Dow Fair Value and why is 1.52 fair value?

A: Dow Theory is about long-term values as much as it is about technical analysis. For this reason, I have put in the right hand column some measures that I feel are necessary for gauging where the market is on a long term basis. One measure of long-term value is the Dow Fair Value indication. This measure tells us how close we are to a historical low in the value of the Dow Jones Industrial Average relative to the dividend yield of the same index.

To arrive at the fair value figure for the Industrials, I divide the P/E ratio by the dividend yield of the index. This data can be found in Barron's "Indexes P/Es and Yields" section. In the latest Barron's, the P/E for the Industrials is 16.38 while the dividend yield for the index is 2.80. Based on these two numbers, I arrive at a ratio of 5.85 (16.38/2.8=5.85). If, as I assert, the Dow is at fair value when the Industrials are at a ratio of 1.52, then the current level of the index is 385% above the historical fair value.

Where am I getting my data for this historical "fair value?" I am using the data from the Value Line Dow-Jones Long Term chart. This chart is free and contains the information necessary to calculate the fair value of the Industrials all the way back to 1920. Once you run the numbers you will see that almost anytime the fair value ratio is below 2 you're within reach of good values in the stock market. Whenever the Industrials are near 1.5 then you can buy stocks with little regard for values. Finally, when the Dow Industrials are below 1, you can buy stocks blindly with little regard for quality.

The following are the years when the Dow Industrials were below the ratio of 2 or less:

• 1920 at 1.55
• 1924 at 1.77
• 1941 at 1.69
• 1942 at 1.93
• 1947 at 1.81
• 1948 at 1.22
• 1949 at 1.07
• 1950 at 0.93
• 1951 at 1.54
• 1952 at 1.91
• 1953 at 1.74
• 1974 at 1.54
• 1977 at 1.96
• 1978 at 1.24
• 1979 at 1.13
• 1980 at 1.20
• 1981 at 1.37
• 1984 at 1.92

In every instance, if you had bought "for the long term" you would have never lost money in your investments. Obviously, had you selected the "lowest" ratio years you would have done even better. I'm not the creator of this method for looking at the market. However, I can say that it made enough of an impression for me to believe that it is worth carrying forward for the purpose of perspective on the market.

In my article on August 3, 2009, I addressed the question of whether the market would ever get to historical values again. I see no harm in repeating that, in order to have a perspective on the current market conditions, we must know the past. As time goes on, all the data from the past reverts to a mean. This allows us to make better decisions about the future. I do think that the historical norms will be visited by the indexes in the future, either by a market crash or by a long, drawn out secular bear market.

So far, we seem to be cursed by the Dow at multiples of one hundred. Dow 100 took 18 years to resolve. Dow 1,000 took 16 years to resolve. So far, depending how you look at it, Dow 10,000 has taken 10 years with no resolution yet. The long term still has an effect on our investments and for this reason 1.52 (the middle value; less than 2 and more than 1) seems to be the prevailing figure to watch for unless proven otherwise. Touc.

Dow Theory

It is without a doubt that I am probably running on luck more than anything else. However, the Dow Jones Transportation Index has made a tremendous turnaround today. Just when it appeared that the Transports would decline further, the index made a full recoup of yesterday's losses. All that needs to happen now is that the Transports do not fall below the low of 3629.94.

The fact that the Transports fell within 2% of the prior intermediate trough, set on October 2, 2009, tells us that we might be on our way back to the 4071 level. This implies that the Dow Jones Industrial Average is likely to go back to, and possibly above, the old high. Again, this thesis is contingent on the fact that the upward move in the Transports continues over the next couple of weeks.

The chart below shows how the Transports have completed the G1 and G2 double bottoms. We are now set for the next double top.

It is our luck that if this trend continues, the Transports will exceed the F1 & F2 peak to breach the November 4, 2008 peak. Notice that the RSI or relative strength (red circle) for this index has hit a major low, in fact the lowest so far, and is now in a rising trend. Additionally, The MACD (green circle) is at an all time low for the index. All of these indications point to significant upside from here.

However, the best that I can say at this time is that we are going to test the old high for the index. Failure to accomplish this marginal target will signal, in my opinion, a major decline in the markets. The question now becomes, am I willing to buy into this trend? My answer is no, I will only be considering selling into the strength of the rise and seeking out new investment opportunities as they come along. Seeking out new opportunities means doing the necessary research on companies with no particular desire to buy until the next confirmation of the bullish trend.

It is my hope that I am not incorrectly reading the current movement of this index. Touc.

China Insight Worth Considering

China's rivers of cash flowing wrong way
Sydney Morning Herald
by John Garnaut
October 26, 2009

"On Thursday, the National Bureau of Statistics spokesman Li Xiaochao had been comfortably batting away curly questions from the international media about what lay beneath China's spectacular headline GDP growth of 8.9 per cent through the year.

But one question from Shanghai's Oriental Post tied him hopelessly in knots: 'What is the amount and growth rate of consumption expenditure for government administration, compared with last year?'

The journalist was asking how much of China's spectacular retail sales growth - 17 per cent after adjusting for falls in prices - was simply the bureaucracy taking advantage of the fiscal stimulus to spend more money on itself. The question cut to the core of whether China's rivers of cash have flowed to the people or been invested by an ever-growing state."

continued...

Demand Deposits

It has been a while since I last mentioned the Demand Deposits of Commercial Banks. It is necessary for me to review what I said in my February 11, 2009 posting. At the time, I felt that what I was observing was so important that it deserved the title "Convergence of Extraordinary Forces." In retrospect, that article seemed prescient considering that only one month later the stock market would embark on the most unforgettable rises in history.

Let's review what I said back in February of 2009:

• The parabolic rise of demand deposits was likely to succumb to entropy
• The stock market would respond to the decline in demand deposits by rising violently
• The rise in demand deposits would peak in June of 2009
• At 59% y-o-y change, demand deposits would revert, at least, to the previous peak of 13% y-o-y
  

In the above chart, we can see that the 54% y-o-y change (previously 59% before revisions) was in fact the very top of the parabolic rise in demand deposits. The y-o-y change has now fallen to the level of 22% and is still on track to reach the 13% peak of 2003.

A look back at the data shows that after revisions were made by the Federal Reserve, the index actually peaked in December of 2008. This is a far cry from my June 2009 estimation of when the index would peak. However, the stock market has responded as expected by rising in a violent fashion.

Based on the cycles mentioned in the February 11, 2009 article the current downward trend in demand deposits is expected to end around September 2011. At which point, there would be a rise in demand deposits at commercial banks and a decline in the stock market.

It is hard for me to believe that we have another 2 years of market increases to go. However, when the Coppock Curve is applied to the total amount of demand deposits on a monthly basis we get an ascending trendline (green line) which suggests that June 2010 or April 2011 is the next low for demand deposits. However, achieving the 13% y-o-y level (mentioned above) could mean a reversal of the downward trend in spite of all cycle projections.

It is clear that my interpretations on the change in demand deposits is purely speculative. However, those who read this might be able to refine my thinking on this topic and bring some clarity to my thought processes to the fore. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

The Rise and Fall of Fiat Currencies

As explained in a Saturday morning cartoon from the late 90's that I really enjoyed. Pay no attention to the fact that TJ (main character) puts on the hat of "the working class" as he ascents to the top of the pecking order on the play ground. Try to avoid thinking of the U.S. dollar as one form of currency goes out of favor on the playground. Make no mention of the fact that this appeared on the Disney Channel.

To be honest, I have been looking for this for years. I hope you enjoy this as much as I do. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Dow Theory

The Dow Jones Transportation Average is really calling the shots in this market. Currently, we've managed to complete the F-series double top as the Transports fell 3.49% today to the 3804.95 level. The chart below shows the third double top on its way to a possible fourth double bottom. The Transports would have to fall to the 3636.28 level or point G2 as the next support level. After achieving the G2 support level the next stop would be E1 at 3544.15. Finally, the next decline would take us to the C2 level of 3048.83. Anything below C2 would require a big picture analysis that goes beyond the month of May.

The cycle sequence for the next Transports signal are the following dates:

• November 3rd-based on the 15 day average
• November 25th-based on the longest sequence
• October 25th-based on the shortest sequence

Again, the Transports faltered as it approached the November 4, 2008 peak of 4071. The blue arrow on the far right-hand corner of the chart indicates the level that needs to be beat by the Transports. The fact that the Transports cannot break through this resistance level, like the Dow Jones Industrial Average has, indicates that we may be looking at the top for this market. For now we can resign ourselves to the probability that the Transports are going to G2 before retesting the old technical level of 4071.

Thus far, Dow Theory has pointed the way without missing a beat. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

An Important Note About Coppock Curves

It has been proposed by some that the Coppock Curve has given both buy and sell signals for individual stocks and indexes. However, it is my understanding of the Coppock Curve that it is strictly for the purpose of giving buy signals. Sell signals are purely coincidental if they occur at all.

Drawing from Mr. Coppock’s own words in Barron’s October 15, 1962 article, Mr. Coppock states that, "It [Coppock Curve] gives a so-called buy signal."(page 5) Mr. Coppock goes even further to state that, “Because well-timed buying is far more difficult for the nonprofessional investor than timely selling, it is best to think of the curve as a very long-term buying guide. Its formula was devised for that type of use.” (page 5,16)

In James Dines’ 1972 book Technical Analysis (page 377) There is not mention of the Coppock Curve as being able to provide a sell signal or eminent market slumps. Any mention of the Coppock Curve was with the ability of the Curve to “pinpoint the start of new trends and enable investors to select future market leaders.” (page 378)

There seems to be no evidence that would suggest that the Coppock Curve should be used to determine potential declines. Instead, the Curve should only be tested on its ability to accurately call the bottom in a given stock or index.

Please revisit Dividend Inc. for editing and revisions to this post.

Stock Market Q & A

Q: What's your prediction on when a retest of the old lows will happen and what level are you projecting". And what do you mean by capitulation ... a term typically associated with market lows not market highs?

A: First, the word capitulate has been used, in many instances, in the wrong way. According to the Online Etymology Dictionary, the word capitulation originally meant “an agreement.” Capitulation later morphed into the modern word that means “to surrender.” In either case, capitulate means that two sides come to terms, reach an agreement or one side surrenders to the other.

When the folks on CNBC use the word capitulate, they blatantly show their bias for “the bulls” (you knew this already) by using the term capitulate to show that they want “the bears” to "surrender." So popular has the term capitulate been used to refer to the bears surrendering that the new meaning is to give up at the bottom of a bear market move.

As you read the beginning of my article on October 14, 2009, you’ll notice that I said that Dow Theory is all about confirmations. Confirmation is another kind of agreement. In this case, the Transports have retained a classic non-confirmation of the upward move in the Industrials. That being the case, capitulation (in this instance) means that either the Industrials confirm by falling instead of rising or the Transports rise instead of falling. Again, capitulation is what we’re seeking, regardless of the direction.

Dow Theory doesn’t assert to provide a time frame for when a particular event is going to take place. However, doing some cycle analysis points to the possible lows we might see in the near term.

There are two types of new lows that I see for the future of the Dow Industrials. The first is based on the premise that the Industrials can maintain the current upward trajectory. In the chart below, I have indicated point A and point B. If the market falls below the red trendline then we could see the Industrials fall to the corresponding X, Y, and Z levels on the way to 8100.

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 decline from 1968 to 1970. As more time passes, I expect the index to fall to 5474 if we do manage to complete a Wave formation on the downside.

After I ran the numbers, the cycle analysis method indicates that from January 24, 2010 to February 15, 2010 is the next expected low. From a purely technical analysis standpoint, the lows are expected between the December 9, 2009 and March 1, 2010. It is interesting to note that both methods arrive at a similar time frame. Therefore, we should be willing to accept the most conservative estimate and that would be the period from December to March.

In my last attempt to divine the future, on April 3, 2009, I had said that the Dow Industrials would be at 10,360.02 by late August 2009. In that same posting, I said that the Transports would be at 3,748.40 by mid-October 2009. I came pretty close on all accounts. This was done using the cycle analysis method mentioned above. Again, the projections that I’m making are haphazard guesses at best.

Finally, cycle analysis, the Wave principle and technical analysis in general are not part of Dow’s Theory for reading the overall trend of the markets. Although I can make a convincing case that they are all derived from Dow's observations. Such a flippant remark will have to be explained at a much later date. Thanks in advance. Touc.

More wordplay and finance: November 11, 2008

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Dow Theory

Dow Theory is all about confirmations. What happens in one index should occur for the other index. Without confirmation, the theory says, then all bets are off in terms of the preceding direction of the index. Today's action in the Dow Industrials was impressive, with the index hitting a brand new high since the March 9, 2009 low. Not to be outdone, the Transports were in a mood to go to new highs as well. As a critic of the markets and one who practices Dow Theory, I feel that the new highs are not completely to my liking.

First, let's review a little about what Dow's theory has done for us lately. From a literal and practical perspective, Dow Theory has definitely pointed the way to the increase in the market since June 23rd and possibly since my March 20, 2009 posting. So far, the March 20th article has been 100% accurate about the direction and extent of this market move upward. It is worth rereading that article to glean the nuances about Dow Theory that is seldom found anywhere else. However, attention to the details of the changes in the Transports and Industrials on March 9th made it possible for me to feel confident about my research recommendation of March 10th.

Additionally, Dow Theory served its purpose quite well when, on November 12, 2007 in Barron's, Richard Russell was explicit in his interpretation of Dow's Theory calling for a vicious bear market. A greater piece on the instructions to get out of stocks hasn't been written since WSJ editor William Peter Hamilton's "Turn of the Tide" call of the market peak of October 25, 1929 (using Dow Theory, of course.)

The chart below is a continuation of the chart that I posted on September 2, 2009. In that article, I expressed the view that future market movement was clearly being transmitted in the Transportation Index. At the time, it was clear that the Transports were exhibiting double tops and double bottoms as a means to provide support and resistance levels. Each test of double bottoms were easily resolved by the Transports moving above prior double tops. As we now know, every new high in the Industrials, since the March 9th low, has been grudgingly accompanied by new highs in the Transportation index. This is powerful stuff since the Transports have acted as the proving ground for any moves upward. Basically, we've needed the Transports to co-sign on the Industrials claims that this is a bull market. Up to this point, the Industrials have had their checks cashed. However, the current market moves hasn't had the full endorsement of the Transports based on the November 4, 2008 peak.

On September 11, 2009, I spoke at length about that fact that the Transports couldn't seem to go above the November 4th peak. Although both indexes have gone to new highs, the Transports have been able to close above 4,071.81. Without this barrier being crossed resoundingly, the bull market will be on hold. The chart below shows how close we are to a true confirmation of a continuation in the cyclical bull market trend within a secular bear market. Note that the volume in the Transports has been in a declining trend since March. This is in stark contrast to the volume on the Industrials, NYSE, and S&P 500 which has been relatively flat since mid-June. The declining volume in the Transports tells us to party while we can because when the music stops there'll be a big mess to clean up afterwards (a major retest of old lows.)

While most might be focused on the Dow Industrials or S&P 500, the Transports tell us what we need to know. Despite the fact that confirmation of this index is likely, even though the economic conditions don't seem to match the markets outlook, we should continue to watch closely for any signs of capitulation. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.