Investing Insights: July 2014

Thursday, July 31, 2014

Increasing Dividends

By Gregory Dorsey, Leebs Market Forecast

Companies are returning more cash to shareholders in the form of stock dividends. According to Standard & Poor’s, net dividend increases for U.S. common stocks in the second quarter increased by a total of $12.6 billion. Although that trailed the $17.6 billion increase during the same quarter last year, it’s still an impressive figure. Taking a longer view, the 72 percent increase in dividends during the past four years is the fastest rate of increase in at least the last 60 years, and triple the average rate of increase over that time frame. The pace of dividend growth is likely to slow going forward, but should continue to increase at an above-average rate at least for the foreseeable future.

Also impressive is the sheer number of dividend increases among publicly traded companies, 696, compare to just 57 dividend cuts. That’s the largest number of increases since 1979. The trend among large-cap stocks is strong, too: 422 issues out of the S&P 500 Index currently pay a dividend, the highest percentage since September 1998.

In today’s world, where 2 percent yields are the norm, it’s easy to overlook dividends. Yet since the end of 1926, more than a third of the stock market’s total returns are attributable to dividends. And at times dividends’ importance has been significantly greater. You don’t have to delve deep into the history books for examples either. In this century, though 2012, dividends produced more than 100 percent of the market’s return. Those quarterly income checks add up, especially when we experience the inevitable downdrafts, something we’ve had little experience with during the last three years.

Returning to earnings and where we’re headed, analysts expect profits for the S&P to rise more than 16 percent in the next four quarters. That will be a tall order if the economy continues to expand merely in the 2 to 3 percent annualized range, as we expect. And even if companies do achieve that level of earnings increase, stocks appear to have already priced in the rosy scenario; they now trade at nearly 17 times projected forward profits—quite high by historical standards.

The takeaway: while the bull market should continue given current conditions, the ever forward-looking market has already discounted much of the good news. And increases in the market averages, therefore, are likely to be quite modest. Higher dividend payouts certainly won’t hurt.

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The D2 Capital Management Multi-Asset Income Portfolio is overweight in dividend funds. Current yield on the portfolio is 5.36% and year to date the portfolio is up 10.62%.

Disclosure: I own the D2 Capital Management Multi-Asset Income Portfolio.

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.

Friday, July 25, 2014

The Most Important Things To Understand About This Market Are...

By David D. Moenning, Founder, StateoftheMarkets.com & President, Chief Investment Officer Heritage Capital

This remains one of the most hated bull moves that I've seen in my career. Stocks have been running higher for more than 5 years now and the gains that have been available are downright impressive. And yet, investors continue to complain about valuations, the Fed "rigging the game", the state of the economy, global debt levels, etc.

It is also interesting to note that everyone and their grandmother sees bubbles forming everywhere these days. While only a select few saw the bubbles in technology or the housing/mortgage markets building in 2000 and 2007, today, one can read about bubbles every single day on the popular financial websites.

Heck, even former Fed Chairman Alan Greenspan, who has been criticized for allowing the tech and mortgage bubbles to build - and then pop - made headlines on the subject yesterday. Greenspan reminded us that all bubbles end in a "crunch." Thanks for that.

So, the first point on this fine Friday morning is to remember that bubbles don't develop and/or pop when EVERYONE is looking for them. By definition, bubbles become an emotional thing. Investors clamor for the hot dot and almost no one "sees" a problem.

But unlike the heady days of 1999 or 2006, today, the watchword is fear. In short, investors don't want to get fooled again. Remember, most investors are VERY adept at preparing for something that has already happened. Therefore, it seems that everyone is now ready for the next market calamity. Which, in short, means that the next bear market probably won't look anything like the last two.

The most important things to understand about the current market environment are as follows:

It's a bull market until proven otherwise
The latest leg higher is not hitting on all cylinders
Market Risk is elevated
This type of environment can last longer than most can imagine.

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Thursday, July 24, 2014

Rise of Tech Dividends a Boon for Funds

By Todd Shriber, ETF Trends

For years, technology was the not first sector investors thought of when they thought of dividends. The largest sector weight in the S&P 500 is changing that and that change has been a boon for an array of exchange traded funds.

Tech’s rise as a credible dividend destination is nothing short of impressive. “In December 2003, just 22 IT stocks paid a dividend. That’s jumped to about 45 in July of this year,” reports Bryan Borzykowski for CNBC.

The conservative dividend posture of more mature tech companies helped the sector and some Exchange Traded Funds remain durable even as Internet and social media offerings swooned earlier this year. Although stocks from those industries have bounced back, it is the tech ETFs heavy on older stocks that pay dividends that have stood out this year.

The average dividend increase from Apple, IBM, Cisco and Qualcomm this year is almost 14%. Microsoft’s last two dividend increases were 21.7% and 15%, respectively.

Tech dividend growth should be good news for the First Trust NASDAQ Technology Dividend Index Fund (TDIV).

Investors have embraced the ETF in a big way this year, sending it up 12.3% while plowing almost $268 million into the fund. That is 44% of the ETF’s current assets under management total.

TDIV tracks the NASDAQ Technology Dividend Index, which has a dividend yield of 3.3%. That is well above what investors normally expect of the tech sector and that yield comes by virtue of a mandate that states the index hold at least 20% of its weight in telecom stocks.

So while TDIV offers leverage to the dividend growth of companies like Apple and Microsoft, it is also features the decades-long dividend growth steady payers like AT&T (NYSE: T) and Verizon (NYSE: VZ).

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First Trust NASDAQ Technology Dividend Index Fund (TDIV) is a component of the D2 Capital Management Multi-Asset Income Portfolio. Current dividend yield of the portfolio is 5.36% (as of 24 July 2014). Year-to-date the portfolio is up 11.50%.

Disclosure: I own & manage the D2 Capital Management Multi-Asset Income Portfolio

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

Thursday, July 10, 2014

Bulls, Bears, and Elections

By James Stack, InvesTech Research

There has historically been a strong correlation between the stock market and the 4-year Presidential Election cycle. Generally, the first two years after a Presidential Election see very modest stock market gains, and bear markets, or recessions, are most likely to occur in these years.

Currently, we are halfway through Year 2. Based on historical performance, this should be the weakest period of the cycle. But with the S&P 500 (SPX) up about 6% year-to-date, the market is on a much stronger trajectory than usual.

Given the strong market performance year-to-date, what does that mean for the second half? To answer that question, we once again look at the past 18 election cycles to see what actually transpired in Year 2.

We looked at every mid-term election year since 1942, calculating the change in the S&P 500 in the first half of the year and then looked at second half performance from July through December. There are several notable conclusions to be drawn from examining these numbers.

First, bear markets are common during these mid-term election years, but they are far more likely to end than to begin in the months prior to Election Day. Fully one-third (six of the past 18) of the mid-term election years started with a bear market already in full swing.

Also, three bear markets began during the year, but two were very brief. The important point is that nearly all bear markets ended before elections in November. The lone exception was in 1946 when the new bear market extended through year end.

Second, double-digit gains during the second half of a mid-term election year have been far more common than double-digit losses. In fact, the nine years with double-digit gains outnumber the years with double-digit losses by a 3:1 margin. Any second half losses that exceeded 5% were associated with bear markets.

Third, and most importantly, healthy market gains in the first half of the year, such as we have seen in 2014, did not preclude further gains in the second half. There have been six mid-term election years with gains in the S&P 500 of greater than 5% from January through June.

Two of these six-month periods were followed by losses in the second half (1946 and 1986), but only one turned into a bear market that continued past year end.

The remaining four instances (1950, 1954, 1958, and 1998) all saw strong market performance in the second half, with three of the four seeing S&P 500 gains in excess of 15% from July through December.

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Wednesday, July 9, 2014

The stock market will make you rich?

By Cullen Riche, MarketWatch

Most market participants tend to think of their financial situation in nominal terms. But when you are looking at your portfolio performance it’s imperative to think in real terms. View your portfolio performance by the return that goes into your pocket. That means backing out inflation, taxes, fees and other frictions that reduce nominal return.

The stock market is not what makes us rich. The people on the Forbes 400 list didn’t get wealthy flipping stocks in their brokerage accounts. They got wealthy building and running fantastic companies. The stock market can protect your wealth and help you maintain purchasing power, but it’s not the place where most of us are likely to make our fortunes.

It’s hard to avoid the allure of trying to beat the market — to outperform on a consistent basis by simply picking stocks. In truth, most of us are not going to strike it rich in the stock market and most of us shouldn’t even try.

You don’t need to beat the market. Attempting to beat the market means taking risks that are probably not appropriate. Instead, you need to allocate assets in a manner consistent with your financial goals of beating inflation, without exposing your portfolio to disruptive levels of risk. Beating the market is probably not only unattainable for most, but likely to encounter disastrous financial turbulence along the way.

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A Correction is Coming

By Barry Ritholtz, Bloomberg View

Every market has regular pullbacks and consolidations. Since the market made its lows in March 2009, it has had nine corrections from more than 6 percent to almost 22 percent, beginning with a 9.1 percent decline five years to the day from tomorrow.

If these are a normal part of any market cycle, why do we fear them? Like the change of seasons, we should accept them as simply inevitable. Instead of fear, consider making preparations so that when the inevitable comes, you have a plan. The alternative is an emotional reaction -- and that's never good for portfolios.

As we have detailed far too many times, people are terrible at making predictions. You draw conclusions from a single data point. You don't know what the economy is going to do, or where interest rates are going. You can't even forecast your own behavior.

Forecasting the stock market is even harder. Yet people constantly try to time the market, pick the exact points to jump in and out. No one does this especially well, and that is before we consider costs and taxes.

Be aware of when you are letting predictions slip into your process.

Decide that a correction or crash is coming, and you will begin to see more and more evidence confirming that expectation. This is classic confirmation bias, where we find what we are hoping or expecting to see. Not only that, but we give it undue weight in our mental models, and we remember it longer and more clearly than the data that contradicts our expectations.

Confirmation bias doesn't only affect bears; the same is true for bulls. Believe that the rally or economic expansion will continue and soon after, everything you see will support that thesis. Shopping centers are very busy (bears see nobody carrying packages), restaurants are full (especially the cheaper ones, note the ursines), and of course, the market keeps reaching new highs (on less and less volume).

It's important to understand our own tendency to look for confirming evidence, rather than seeking to disprove our thesis. It is a problem inherent in human wetware.

Just because corrections are inevitable, doesn't mean you should be complacent.

For investors, anyone with a longer-term time horizon should look at a correction as an opportunity. Use any market decline to rebalance adding to those asset classes that have fallen. Review your portfolio, looking for holdings to trim or eliminate beforehand.

Investor changes, unlike those of traders, should be far more incremental. Less is more when it comes to making alterations to well-thought-out plan.

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Monday, July 7, 2014

Mid-Year Report to Clients - June 2014

Despite the early arrival of Summer (we had to turn on the air conditioning before Memorial Day!), the stock markets simmered but failed to generate much heat.

With the lack of Wall Street drama, the markets continued to head in one direction: up. U.S. stocks ended June and the second quarter higher and the Standard & Poor's 500 recorded the fifth consecutive month of gains and the biggest second quarter gain since 2009.

For the first half of 2014, the S&P 500 rose 6.1%. The good news is that a positive first half historically favors a positive full year result.

The first half of the year was filled with surprises that few could have foreseen - and yet the markets seemed not to notice. All the reasons that would have been expected to cause volatility up to this point (continuing turmoil in Ukraine and new conflict in Iraq) have had little to no impact.

The U.S. economy is improving but is still below trend-line growth and the global economic recovery also remains on track.

So can we continue to expect this relatively smooth sailing to higher highs in the stock market? Prudent analysis suggests “no.” We expect we’ll see some upward pressure on volatility which will translate into wider market moves than we have seen so far this year. The S&P 500 has not moved more than 1% in a single day since April 16th. The law of averages suggests a single or multiple headline events will spur market movement. It will keep working its way up until we start to get enough bad news from the rest of the world. So don’t be surprised to see the market pullback. This is nothing to be overly concerned about as it is part of the normal course of events. A correction is coming, it's just a question of whether it hits in summer or fall.

Most analysts we follow see stocks finishing the year with returns in the mid to high single digits and interest rates trending modestly up. Not a great year, but a decent one. While stocks are not cheap, consensus says they are not in a bubble. As the economy improves, stocks have room to move higher.

As we write this, the Dow Jones Industrial Average crossed 17,000 for the first time. The stock market has more than recovered from levels seen during the depths of the financial crisis more than five years ago. This rebound and subsequent climb to record levels has occurred in an environment highlighted by modest growth and low inflation. Stocks can obviously do well under those conditions. Slow and steady can win the race.

Now for some advice. Don’t be swayed by daily business headlines. You need to understand context. For example, the evening news will broadcast the Dow Jones Industrial Average dropped 100 points. The mere fact that the index dropped triple digits can cause needless worry. But given today’s value of the DJIA that 100 points equates to roughly .6%. Slightly more than half of a percentage point. A mere blip in the overall scheme of things. And as a reminder, the DJIA only reflects the 30 companies in that index. A slightly better way to get perspective is the Standard & Poor’s 500 Index. That index includes 500 of the largest companies in the U.S.

Those indices do not include international and smaller companies that make up the bulk of the stock market universe. Because our portfolios are globally diversified, relying on a DJIA or S&P headline may not be accurate. Besides, almost all of our portfolios hold some bond funds too and those funds often move opposite to the stock markets.

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