Crosscurrents September 21/04
September 21/04
by Alan M. Newman
If ever there was a reason to buy and hold shares, dividends are it. Payouts for the S&P 500 companies have increased 12.1% over the past 12 months while the index itself rose 8.9%. Trouble is, yields have remained constant, barely budging from 1.71% to 1.76%, so there is still a huge gap between what used to function as fair value and today. Can this gap endure forever? Not likely. As we have shown with countless charts in the last five years, bear markets typically begin when the dividend yield sinks below roughly 3% and bull markets commence when the yield rises to about 6%. Courtesy of our colleague and technician Ian McAvity, the following trivia becomes pertinent. The last time the S&P yield was above 4.00% was Oct 26, 1990 at 4.01%. The last time the S&P yield was above 6.00% was Aug 20, 1982, at 6.07%. At the Friday Oct 4, 2002 bottom, the S&P yield was 1.98%, in stark contrast to the record low 1.07% yield at the Sep 1, 2000 secondary top. (yield levels since Sept 1995 have been above the prior record levels, dating from 1928. At the 'generational low' of Oct 4, 1974, the S&P 500 yield was 5.97%. At the 'valuation low' of that era, Aug 6, 1982, the S&P 500 yield was 6.63%. We extrapolated dividend growth at the last 12 month’s fairly generous rate out five years to make our point. According to McAvity, the average yield over 75 years from 1928 to 2003 has been 4.007% and the median yield was 3.765%. After five years, we can expect S&P dividends to be 78% higher than today, provided we also submit that all goes well with the economy, earnings, interest rates and a host of other factors. Yet, at the average yield, the S&P would trade at only 933 and at the median, the S&P would still trade down as low as 876. In either case, the result is at least 17% lower than today and a good reason to abandon the theme of buy-and-hold.
Recently, a new "four letter" word had entered the
vernacular. Semi. If you dared utter it, all around became
tense and angry, reminded of the dramatic collapse in semiconductor stocks
from their January 2004 highs. Well, if you were ever looking for
the reason why you are a subscriber to our perspectives, hark back to
our February 23, 2004 issue (available in the subscriber archives) and
re-read our analysis on "Semi Lemmings?" We pointed out the horrific
ratio of insider sells to buys and an 82.4 P/E ratio for the top ten semi
issues as evidence that " ....something does not compute." We were
actually a bit late, as the top for the SOX came on January 12th and a
day later for the SMH, the easy way for Joe Everybody to play the entire
Semiconductor group via the obligatory ETF route. The SMH had shed
9% before we were aroused, but even from the signaling of our tardy alarm
bells, semis lost roughly one-third of their value. Within the group
of ten that we had illustrated, Wall Street analysts had placed Buy recommendations
on 51.2% and Sells on only 6%, leaving the remainder of 42.8% as "holds,"
that ubiquitous term that leaves virtually everything in doubt.
The good news is that much of the potential for damage we alerted readers
to has now occurred and prices are at more reasonable levels. As
the recent semi rally commenced, P/E multiples had dropped to under 30
(imagine that!) and insider sales had fallen by 65%, a rather substantial
amount.
The bad news is that Wall Street analysts are really
no more inclined to do whatever it is they have been doing for years,
rating the semis quite approximately as they had before and leaving no
room for conjecture whether value exists now as opposed to back then.
Of the top ten semis, buy ratings comprise 50.8% of the total and sell
ratings only 3.6%. Holds came in at 45.5%. The overall ratings
by analysts hardly budged! How can anyone make sense of this drivel?
Prices plunge yet opinions waver only in the slightest degree. The
group was a buy then, the group is a buy now. Who in heaven's name
can know from analysts that seemingly never waver more than a hair from
here to there? And there’s more bad news. Although sales dropped
and the number of shares sold plunged even more, the ratio of shares sold
to shares bought by insiders actually rose from 171-1 to 608-1, more proof
that the industry is clearly not favored by those in the know!
Despite the recent comeback in share prices, the reasons
for apprehension cited in our February 23rd article still seem quite valid
and follow for your edification. "Macabe Keliher recently reported
in the Asia Times Online that China is about to flood the world with chips.
The story claimed that "Beijing is funding and bankrolling what is being
called reckless expansion in semiconductor fabrication plants."
The Chinese government appears dead set upon providing the world with
at least 20% of total chip capacity next year. In fact, Morris Chang,
the chairman of Taiwan Semiconductor Mfg. Co. told Asia Times that China's
semiconductor industry would cause an industry wide recession in 2005.
Keliher's story offers perspectives from Rick Hsu, semiconductor analyst
at Nomura Securities, who claims "The overcapacity will be massive....taken
with a modest fall in global chip sales, there will be a rough landing
for the industry," and from Dan Hutcheson, president of US-based VLSI
Research Inc, who says "Enjoy it while it's great, but expect a decline
on the order of 30 percent to start in late 2005." Insiders apparently
started their exodus early. That they are still in exit mode does
not calm our apprehensions about 2005. February’s fears would still
seem intact.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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