Has the Economy Turned the Corner or Just Turned Over?

It is fascinating to watch how emotions shift each week. Some view that the economy as turning some sort of corner. Keep in mind how equity markets behaved in the summer of 2000, the fall of 2007, the spring of 2008 and the fall of 2008 too — all huge head fakes.

The S&P 500 stood at 1,109 last Friday, 9/10/10.

The S&P 500 was also at 1,109 back on 4/1/88, over 12 years ago.
That is 12 years of nothing and the majority of talking heads believed/believe we were/are in a new bull market.

The S&P 500 was also at 1,109 back on 11/16/09, 10 months ago.
That is 10 months of nothing and the the majority of talking heads believed/believe we were/are in a new bull market.

Over this 10-month period, the S&P 500 has see-sawed above and below the 1,100 mark 15 times. Can you say roller coaster!

At what level would I be more bullish? Approximately 20% below 1,109 is a level I would consider to offer compelling value.

INVESTING WISDOM

“It is impossible to produce a superior return unless you do something different from the majority.”

Source: Legendary value investor, Sir John Templeton

"Paid to Wait" Analysis of Illinois Tool Works (ITW)

The following analysis of ITW is courtesy of Kelly Wright and the excellent research from his company, Investment Quality Trends.

Illinois Tool Works (ITW): Based in Glenview, Illinois, Illinois Tool Works is a multinational manufacturer of a diversified range of industrial products and equipment with approximately 840 operations in 57 countries. Illinois Tool Works reports in the following eight business segments: Transportation, Industrial Packaging, Food Equipment, Power Systems and
Electronics, Construction Products, Polymers and Fluids, Decorative Surfaces and All Others.

Over the past year, Illinois Tool Works has generated an 18.20% Return on Equity (ROE), which represents a 21% increase over the previous year. Additionally, the 10% profit margin is significantly higher than the 5.90% industry average.

Founded in 1912, ITW has paid an uninterrupted cash dividend since 1933 and has consistently increased the dividend for the last 47 consecutive years.

Investing Lesson
If you are going to invest in the stock market, why not get "Paid to Wait" for the future appreciation of the stock(s) that you own to unfold over time and ignore the day-to-day ups and downs!

Jive Talking!

Federal Reserve Chairmen have an uncanny ability to combine words in such a way as to use "jive talk" ('70s method of speaking) to confuse the reader.

“The economic outlook is unusually uncertain.”

Federal Reserve Chairman: Ben Bernanke

Paid to Wait Stock: Chubb

The information below is courtesy of www.dividendgrowthinvestor.com. The information is believed to be reliable. www.dividendgrowthinvestor.com is well known as a reliable source of quality information on the topic of dividend investing.

The Chubb Corporation (CB) provides property and casualty insurance to businesses and individuals. Chubb has increased dividends for 45 years in a row. The company announced a 5.70% dividend increase in February 2010, plus a 14 million share repurchase initiative.

Dividend Growth

• Over the past decade, this dividend stock has delivered an average total return of 5.90% annually.
• Annual dividends have increased by an average of 8.70 % annually since 2000.
• A 9 % annual growth in dividends translates into the dividend payment doubling almost every eight years.
• Looking at historical data, going back to 1984, Chubb has actually managed to double its dividend payment every nine years on average.
• The dividend payout ratio has been on the decline and is lower than our typical 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Current Stats

• Chubb is trading at 9.20 times earnings, yields 3.10%
• In comparison, rival Travelers Cos (TRV) trades at a P/E multiple of 8 and yields 2.90%, while Cincinnati Financial (CINF) trades at a P/E multiple of 9 and yields 5.90%.
• Berkshire Hathaway (BRK.B) is also a competitor, although it trades at a P/E of 22, and does not pay a dividend.

Future Potential

• The company allocates significant cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort.
• We like the company and its business model. Chubb (CB) is a way for investors to fill in the need for exposure to the financial sector, after companies like Citigroup (C) and Bank of America (BAC) cut their distributions.
• We believe that the company is attractively valued at this time and we would add to our position if a significant pullback were to occur.

Investing Lesson
If you are going to invest in the stock market, why not get Paid to Wait for the future appreciation of the stock(s) that you own to unfold over time and ignore the day-to-day ups and downs!

Presidential Analysis and the Economy

Joined At The Hip
Economics and politics are intertwined. This analysis is in no way a political statement. To ignore the past/current/future success or failure of the economic policies of Washington would be to ignore reality. As pictured above, neither party can claim that they are better than the other at implementing political decisions that have/may result in better economic outcomes for Americans.

Current Situation
At this point in time, President Obama is likely headed towards an outcome reminiscent of the Carter presidency. Carter was a very likable guy, just like Obama. Being likable does not, however, equal success. Obama has made many of the big decisions he wanted to make and at least thus far, they do not seem to be working. Our economic analysis has the U.S. economy on the brink of either:

a) A double dip back into recession
or
b) Possibly worse

What To Watch For
Between now and 2012, the Obama administration and the House and Senate will need a miraculous turnaround for the U.S. economy to get reelected. Barring a much better second half of the football game, Americans will once again seek change, hoping that change may foster a better economic result. I am on record as stating that of the two choices that were given, Hillary Clinton would have made a much better choice for a host of reasons. These include: More experience, more bipartisan, more pro business, more realistic about what the priorities should be and how much of the apple you can bite off at a time. I have no idea who the Republicans will choose in 2012, but I will not at all be surprised if Hillary breaks rank and runs against Obama.

The Men Above
Of the men pictured above, I could vote for Kennedy, Reagan and Bill Clinton. Nixon could have made the list, if not for Watergate. Bill Clinton, even with some stumbles along the way, gets a pass because he ran the economy very well.
INVESTING LESSON/OUTLOOK
Elections matter. Economic policy matters. Some get lucky; others do not. We can look back years later at our leaders and realize some had skill, while others did not. Only the history books can tell.

Regardless of what party occupies the White House, as an investment manager, I am left to navigate the markets, which I cannot overemphasize are impacted by many other factors than just current politics.

Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising, based upon the momentum of the herd vs. fundamental valuations. Our portfolios at WFG lagged a bit in the past six months as I was too early to reduce our equity exposure, not expecting the market to run up as far as it did. I believe that today, we now sit near the top, looking down the other side of the hill. With that in mind, our reduced equity exposure in our balanced accounts can allow for "shock absorption", if, and when, the footing takes the markets further down.

Support For Why 60% In Stocks Is Too High For Retirees/Pre-Retirees, At This Time

Recent bulletins to clients of my advisory firm, Wade Financial Group, Inc., have focused on why I believe that a 60% allocation to stocks is too high at this point in the economic cycle. The chart below makes a very important point: You must have a VERY long-term time frame for the odds to be in your favor-and that's IF you start retirement from a favorable stock market valuation.

Percentage chance of exceeding a 3% "real return" (return after inflation) with a 60% equity and 40% bonds portfolio (1889-2008)

INVESTING LESSON:
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.

Hostess Twinkies and Your Wealth: A Must Read

Seth Klarman is one of the most successful investors of all time. In a recent speech, he indicated that he is more worried now than at any time in his career.Below are several quotes from his speech.

"The possibility that the government will continue to print money to solve our economic problems has left me more worried than at any time in my career. There are not enough dollars in the world to do that, unless we greatly debase them."“A Hostess Twinkie is something that has made many childhoods slightly happier with totally artificial ingredients. That metaphor explains the prevailing environment in the U.S. over the last year, when virtually every market condition was maintained by the government, which kept interest rates at zero, bought up mortgage-backed securities, and installed far reaching lending programs. We don’t know the full extent to which we were manipulated. The government wanted people to buy equities, to invest so that the market would go higher, to build the wealth effect so that people would feel better, and to restore a degree of optimism so that the economy might recover.”

"I am worried about what would happen to the economy and the market if those artificial ingredients were removed and we realize it was in effect a Twinkie."

"That high degree of government involvement continues, with the gargantuan European bailout program, which is not likely to work and merely kicks the can down the road, serving as the latest example. It is one more manipulation tempting people to own things. It’s almost like the government was in the business of giving people bad advice. 'We’re going to hold rates at zero, so please buy stocks or junk bonds that will yield at least five or six percent so you might make something.’ In effect, it is forcing unsophisticated investors to speculate wildly on things that are fully too overvalued.”

INVESTING LESSON:
Only by standing against the prevailing winds–selectively, but resolutely–can an investor prosper over time. Such a strategy may underperform during markets that are rising based upon the momentum of the herd vs. fundamental valuations.