Thursday, May 24, 2012
Tuesday, May 15, 2012
Thursday, April 26, 2012
How The Bettors Are Handicapping the U.S. Political Races
Politics matters to the financial markets, but unfortunately the results of many presidential elections are not known until the final night. To gain at least an educated guess of what the likely election results will be, a few years ago we started tracking various European wagering sites that take bets on U.S. political races. It might seem odd that we would look to Europe for U.S. political guidance, but the research shows that the ones betting are mostly Americans who are using the foreign sites because in many countries on the Continent political betting is legal.
The site we have come to trust the most is www.intrade.com. As with many other European betting sites, on Intrade.com one can bet on just about anything from NASA offering proof of alien life forms to global warming. It's a bettors' paradise or nightmare, as the case may be.
We have watched www.intrade.com for the last few elections and we have been very surprised how accurate their predictions have been. If you go to the site you will see some of the academic research that has been done on the accuracy of the betting.
There are literally hundreds of U.S. political races on which an individual can place a bet via the Intrade.com site. We will track three races in particular: the presidency, control of the House of Representatives, and control of the Senate. We have also thrown in the current betting on one other political matter. Please read on to see some surprising early wagering.
The Presidential Race
Bettors currently are wagering that there is a 60% chance of President Obama retaining his job. The chart shows how the betting has progressed since January of 2011. He was above 60% for the first six months of 2011, before slipping to as low as 47% in October. Bettors then pushed his probability of winning back to the 60% range in February of 2012, where it has remained for the last three months. We would expect some softening in President Obama's lead as challenger Romney begins his campaign in earnest.
The site we have come to trust the most is www.intrade.com. As with many other European betting sites, on Intrade.com one can bet on just about anything from NASA offering proof of alien life forms to global warming. It's a bettors' paradise or nightmare, as the case may be.
We have watched www.intrade.com for the last few elections and we have been very surprised how accurate their predictions have been. If you go to the site you will see some of the academic research that has been done on the accuracy of the betting.
There are literally hundreds of U.S. political races on which an individual can place a bet via the Intrade.com site. We will track three races in particular: the presidency, control of the House of Representatives, and control of the Senate. We have also thrown in the current betting on one other political matter. Please read on to see some surprising early wagering.
The Presidential Race
Bettors currently are wagering that there is a 60% chance of President Obama retaining his job. The chart shows how the betting has progressed since January of 2011. He was above 60% for the first six months of 2011, before slipping to as low as 47% in October. Bettors then pushed his probability of winning back to the 60% range in February of 2012, where it has remained for the last three months. We would expect some softening in President Obama's lead as challenger Romney begins his campaign in earnest.
Control of the House of Representatives
The Republicans are the runaway favorites to maintain control of the House of Representatives. This past week that probability rose to 80%, the highest betting level it has been since late in 2011. We don't see too many political pundits that disagree with this prediction.
Control of the United States Senate
The betting on this outcome will surprise you. Sixty-five percent of betters are wagering that the Republicans will take control of the Senate. We are not seeing that high a probability of Republican election success among the recognized polls. This one will be interesting to watch.
Bonus Betting
Probably one of the hottest political topics of the year has not been about politics directly, but about the constitutionality of Obamacare, the president's revamping of U.S. health-care. The Democrats bet the ranch, so to speak, when they pushed through the legislation. The Republicans have attacked it before, during, and after its passage. Now the whole matter is in the hands of the Supreme Court, who has promised to render its verdict in June. Below is the current betting on the issue.
Unconstitutionality of Obamacare
After watching the six hours of Obamacare testimony before the Supreme Court in late March, the betting here does not surprise us. The sharp upward spike during the testimony shows that bettors were not convinced the president made his case. Currently bettors have placed a 60% probability that the Supreme Court will rule Obamacare unconstitutional.
We will continue to track the races we have discussed in this blog from now through the end of the election. Things will definitely change over the course of the next few months. The constitutionality of Obamacare will be decided in June.
Saturday, March 31, 2012
Wells Fargo Tops Our New Fundamental Index
We describe our new Donaldson Fundamental Index in an article we wrote for Seeking Alpha financial website. Please follow the link to see what our model has to say about the prospects for Wells Fargo.
http://seekingalpha.com/article/468621-wells-fargo-the-highest-ranked-stock-in-our-new-fundamental-index
http://seekingalpha.com/article/468621-wells-fargo-the-highest-ranked-stock-in-our-new-fundamental-index
Friday, February 24, 2012
Taxes on Dividends: A Very Bad Idea Is in the News Again
Greg,
I just read an article about Obama's new proposed tax rates. I will be paying 43.4% Federal + 5% State & Local = 48.4% on interest & dividends. God helps us!
This is just one of scores of emails we have received from clients regarding President Obama's recent announcement of his proposal for new taxes on dividends. If Obama's plan comes to pass, it would mean taxes would rise by 2.5 times their current level. (From about 20% for Indiana residents to nearly 50%).
The above email was short and to the point. Here was my answer: "Fear not. This does not have a chance of passing the present Congress. It's pure politics." My reason for such a short response was not as a time saver or to be flip, it was to state the obvious. We already have ample evidence of failed attempts by President Obama seeking to raise taxes on the rich. Republicans in the House of Representatives have blocked all tax hike attempts from the president, even if it meant shutting down the government. I can see no reason why they would suddenly change now.
I also disagree with a recent Wall Street Journal article entitled "Obama's Dividend Assault," suggesting that the entire stock market would come under pressure if the tax hikes were to be enacted. That just will not happen. You only have to go back and look at what happened prior to and after President George W. Bush pushed through the dividend tax cuts of 2003. Dividend-paying stocks acted no differently from non-dividend payers immediately prior to or after the cuts. The reason for this is simple, as much as 70% of all stocks are held by non-taxable accounts such as retirement plans, foundations, life insurance, annuities, trusts, and mutual funds that have the ability to manage taxes.
We have been talking about the potential for a hike in taxes on dividends ever since President Obama took office. That is because President Clinton dramatically raised taxes shortly after he took office. It is important to remember that Clinton's plan taxed dividends about the same as President Obama is now proposing. We figured he would get around to attacking dividends sooner or later.
My own personal view and that of our Investment Policy Committee is that it is far too early to make changes based on something that might happen. Indeed, as we understand it, the tax increases would only affect individuals with adjusted gross income of $200,000 and joint filers with $250,000. For people above those levels we have other strategies to diminish the impact of taxes.
We will have much more to say about Obama's proposed tax hikes in the weeks and months ahead. We wanted to get out our early thoughts on all the buzz surrounding the hikes. We have traveled this road before when President Clinton hiked taxes dramatically on dividends. We lived through that, I am confident we will make it through whatever providence places before us.
I just read an article about Obama's new proposed tax rates. I will be paying 43.4% Federal + 5% State & Local = 48.4% on interest & dividends. God helps us!
This is just one of scores of emails we have received from clients regarding President Obama's recent announcement of his proposal for new taxes on dividends. If Obama's plan comes to pass, it would mean taxes would rise by 2.5 times their current level. (From about 20% for Indiana residents to nearly 50%).
The above email was short and to the point. Here was my answer: "Fear not. This does not have a chance of passing the present Congress. It's pure politics." My reason for such a short response was not as a time saver or to be flip, it was to state the obvious. We already have ample evidence of failed attempts by President Obama seeking to raise taxes on the rich. Republicans in the House of Representatives have blocked all tax hike attempts from the president, even if it meant shutting down the government. I can see no reason why they would suddenly change now.
I also disagree with a recent Wall Street Journal article entitled "Obama's Dividend Assault," suggesting that the entire stock market would come under pressure if the tax hikes were to be enacted. That just will not happen. You only have to go back and look at what happened prior to and after President George W. Bush pushed through the dividend tax cuts of 2003. Dividend-paying stocks acted no differently from non-dividend payers immediately prior to or after the cuts. The reason for this is simple, as much as 70% of all stocks are held by non-taxable accounts such as retirement plans, foundations, life insurance, annuities, trusts, and mutual funds that have the ability to manage taxes.
We have been talking about the potential for a hike in taxes on dividends ever since President Obama took office. That is because President Clinton dramatically raised taxes shortly after he took office. It is important to remember that Clinton's plan taxed dividends about the same as President Obama is now proposing. We figured he would get around to attacking dividends sooner or later.
My own personal view and that of our Investment Policy Committee is that it is far too early to make changes based on something that might happen. Indeed, as we understand it, the tax increases would only affect individuals with adjusted gross income of $200,000 and joint filers with $250,000. For people above those levels we have other strategies to diminish the impact of taxes.
We will have much more to say about Obama's proposed tax hikes in the weeks and months ahead. We wanted to get out our early thoughts on all the buzz surrounding the hikes. We have traveled this road before when President Clinton hiked taxes dramatically on dividends. We lived through that, I am confident we will make it through whatever providence places before us.
Friday, February 10, 2012
To Dividend or Not to Dividend, That Is the Question?
To dividend or not to dividend, that is the question? In 2011, most of what we have been saying about dividend stocks for the last 15 years came into full view for everyone to see. In a weak stock market, the cash payments distributed by dividend-paying companies were more highly valued than betting on the come with the non-dividend payers. During most of the year, the dividend yields of many stocks were higher than the yield on a 10-year U.S.Treasury bond. This fact alone lifted many consumer staple, energy, health-care, and utility stocks. Taken as a group, dividend-paying stocks significantly outperformed non-dividend paying stocks.
In 2011, dividend-paying companies, particularly those that have a history of consistently raising dividends, gradually were seen to be bond substitutes. This is due to the compounding effect of rising dividends. A company with a 3% dividend yield today will be yielding 6% in ten years if its dividend grows at a 7% annual rate. A company yielding 2% today with its dividend growing 12% per year will yield near 7% in 10 years.
During the year, dividend paying stocks became the equity asset of choice. There was almost a perfect symmetry between dividend yield and total return: The higher the stock's dividend yield, the higher was its total return for the year. For example many utilities enjoyed total rates of return of 15% or more in a year when the S&P 500 grew by about 2%.
But here in 2012, the robust early gains for the S&P 500 (5%) and the Global Dow (10%) have presented investors with a very difficult question: Do we continue to focus on the "knowns"of dividend investing, or do we abandon them for the "unknowns" of gut feelings and hot tips?
The reason this question is so important is because the impressive stock market gains in the new year have caused many strategists to raise their estimates of 2012 stock market performance to 15% or more. A 3% dividend yield looks good in a 2% stock or bond world, but it does not stack up so well against 15% returns. Because of this many articles have been written arguing its time to move away from dividend investing and start pursuing growth again.
We would argue that dividend paying stocks are likely to perform just as well as non-dividend payers, even if stocks rise by 15%. The reason is simple, our valuation models now predict that the average stock in our portfolios, which has a 3.5% dividend yield, is undervalued by almost 25%. You must remember, we focus on rising dividends. To achieve a steady stream of rising dividends, a company must also have a solid stream of growing earnings.
In short "To Dividend or Not to Dividend" may be a false question. Dividend-paying stocks can offer market-type returns when stocks grow by up to 15%. In our experience, dividend-payers only begin to lag the overall market when the S&P 500 grows by 25% or more. Even then, they will get most of the gains.
Considering how well the dividend payers do in down markets, and in view of all of the uncertainties in the world, we still believe "To Dividend" is the right answer for most people.
We own dividend-paying stocks.
In 2011, dividend-paying companies, particularly those that have a history of consistently raising dividends, gradually were seen to be bond substitutes. This is due to the compounding effect of rising dividends. A company with a 3% dividend yield today will be yielding 6% in ten years if its dividend grows at a 7% annual rate. A company yielding 2% today with its dividend growing 12% per year will yield near 7% in 10 years.
During the year, dividend paying stocks became the equity asset of choice. There was almost a perfect symmetry between dividend yield and total return: The higher the stock's dividend yield, the higher was its total return for the year. For example many utilities enjoyed total rates of return of 15% or more in a year when the S&P 500 grew by about 2%.
But here in 2012, the robust early gains for the S&P 500 (5%) and the Global Dow (10%) have presented investors with a very difficult question: Do we continue to focus on the "knowns"of dividend investing, or do we abandon them for the "unknowns" of gut feelings and hot tips?
The reason this question is so important is because the impressive stock market gains in the new year have caused many strategists to raise their estimates of 2012 stock market performance to 15% or more. A 3% dividend yield looks good in a 2% stock or bond world, but it does not stack up so well against 15% returns. Because of this many articles have been written arguing its time to move away from dividend investing and start pursuing growth again.
We would argue that dividend paying stocks are likely to perform just as well as non-dividend payers, even if stocks rise by 15%. The reason is simple, our valuation models now predict that the average stock in our portfolios, which has a 3.5% dividend yield, is undervalued by almost 25%. You must remember, we focus on rising dividends. To achieve a steady stream of rising dividends, a company must also have a solid stream of growing earnings.
In short "To Dividend or Not to Dividend" may be a false question. Dividend-paying stocks can offer market-type returns when stocks grow by up to 15%. In our experience, dividend-payers only begin to lag the overall market when the S&P 500 grows by 25% or more. Even then, they will get most of the gains.
Considering how well the dividend payers do in down markets, and in view of all of the uncertainties in the world, we still believe "To Dividend" is the right answer for most people.
We own dividend-paying stocks.
Friday, December 16, 2011
Dividend Investors Are Willing to Pay Much More For a Bird in The Hand Than for Multiple Birds in the Bush
Dividends matter and a brief look at our three investment strategies reveals a remarkable symmetrical total return distribution. All three strategies are selected from the same stock-filtering and valuation models. Stocks are slotted into each individual strategy by our Investment Policy Committee based on financial strength, dividend yield, and rate and consistency of dividend growth.
The Income Builder Strategy -- High Dividend Yield, Low Dividend Growth
Cornerstone, which is our flagship investment strategy, has had good returns over the last twelve months but has under-performed the Income Builder Strategy, even though Cornerstone companies have increased their dividends at twice the rate of Income Builder companies. Finally, Capital Builder companies have had one of the best earnings and dividend performances we have witnessed in many years, yet the strategy has not performed as well as either of the two higher-yielding strategies.
What are we to glean from these data? The obvious and most simple answer is that in this very low interest rate environment (10-year US Treasury Bonds are yielding under 2.0%), investors have been willing to pay up for higher dividend yield, while dividend growth is being discounted, if not ignored.
While the data clearly show the attraction of high dividend yields, history reveals that over longer periods companies with higher dividend growth normally outperform slower growing companies. In short, companies that can increase their dividends at low to mid-double digit rates fall in and out of favor, but the long-term trend line of their total return growth is higher than the trend growth of slower growing companies. This means that today the high growth companies are becoming spring-loaded. That is they are very cheap, and as the European crisis begins to subside, we believe higher growth companies will run away from lower growth companies.
Then the question becomes: when do these spring loaded companies start springing? Our answer is we don't know. Furthermore, we don't think anyone knows.
In keeping with the old fashioned concept of "the trend is your friend" we have tilted all of our portfolios to a slightly higher dividend yield relative to the S&P 500 than normal. Our models tell us that the high-yield, low-growth stocks, which include many utilities, are still undervalued based on historical measures of dividend yield and growth versus interest rates. For this reason, we believe quality, high yield stocks have room to go higher.
However, because the high dividend growth companies have become the most undervalued of all types of stocks, we continue to nibble on selected stocks, even though they are flat lining price wise.
Our best guess is that there might be as much as six more months of this symmetrical affinity for relative dividend yield. After the Fed has completed its "Operation Twist" initiative, the markets will no doubt reappraise inflationary forces and reprice long time bonds and high dividend yielding stocks. Until then, the markets are clearly saying that they are willing to pay more for the bird in the hand than the birds in the bush.
Next time we'll talk about another high dividend yield stock that we believe is still undervalued.
The Income Builder Strategy -- High Dividend Yield, Low Dividend Growth
- Current dividend yield approximately 4.50%
- Last twelve month dividend growth 6.0%
- Total Return last twelve months approximately 10.0%
- Current dividend yield approximately 3.5%
- Last twelve months dividend growth of almost 12.0%
- Total Return last twelve month of almost 7.0%
- Current dividend yield approximately 2.2%
- Last twelve months dividend growth of approximately 15%
- Total Return last twelve months of approximately 4.0%.
Cornerstone, which is our flagship investment strategy, has had good returns over the last twelve months but has under-performed the Income Builder Strategy, even though Cornerstone companies have increased their dividends at twice the rate of Income Builder companies. Finally, Capital Builder companies have had one of the best earnings and dividend performances we have witnessed in many years, yet the strategy has not performed as well as either of the two higher-yielding strategies.
What are we to glean from these data? The obvious and most simple answer is that in this very low interest rate environment (10-year US Treasury Bonds are yielding under 2.0%), investors have been willing to pay up for higher dividend yield, while dividend growth is being discounted, if not ignored.
While the data clearly show the attraction of high dividend yields, history reveals that over longer periods companies with higher dividend growth normally outperform slower growing companies. In short, companies that can increase their dividends at low to mid-double digit rates fall in and out of favor, but the long-term trend line of their total return growth is higher than the trend growth of slower growing companies. This means that today the high growth companies are becoming spring-loaded. That is they are very cheap, and as the European crisis begins to subside, we believe higher growth companies will run away from lower growth companies.
Then the question becomes: when do these spring loaded companies start springing? Our answer is we don't know. Furthermore, we don't think anyone knows.
In keeping with the old fashioned concept of "the trend is your friend" we have tilted all of our portfolios to a slightly higher dividend yield relative to the S&P 500 than normal. Our models tell us that the high-yield, low-growth stocks, which include many utilities, are still undervalued based on historical measures of dividend yield and growth versus interest rates. For this reason, we believe quality, high yield stocks have room to go higher.
However, because the high dividend growth companies have become the most undervalued of all types of stocks, we continue to nibble on selected stocks, even though they are flat lining price wise.
Our best guess is that there might be as much as six more months of this symmetrical affinity for relative dividend yield. After the Fed has completed its "Operation Twist" initiative, the markets will no doubt reappraise inflationary forces and reprice long time bonds and high dividend yielding stocks. Until then, the markets are clearly saying that they are willing to pay more for the bird in the hand than the birds in the bush.
Next time we'll talk about another high dividend yield stock that we believe is still undervalued.
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