That should be it for awhile!  Last week’s nosedive created  one of the most sold out conditions we have ever seen or ever hope to see.  For what it’s worth, the baby went out with the bathwater and the shares of great companies were just tossed away as if zero was around the corner.  Enough is enough.  At top left, just one sign of the sold out mess that we believe finally reversed Friday.  We can count at least three significant rally phases since the 2007 peak in prices and after the most recent collapse, another is way overdue.

Regarding the odds for a TEOTWAWKI ("the end of the world as we know it") scenario, the stock market appears to have already discounted as much as a 50/50 chance that doomsday in the form of another Great Depression is well on the way.  At this point, we believe the crisis is as much psychological as it is due to factors such as the enormous derivative blowups of the last several months.  As consumers have seen their 401ks, IRAs and pension plan holdings evaporate, they have pulled back significantly from their former spending habits.  This should change the day after Thanksgiving, also known as Black Friday, when the holiday shopping season begins in earnest.  Retail sales are one third of the economy and one third of retail sales are focused in the month between Thanksgiving and Christmas.  While we expect consumers will buy cheaper “stuff” than last year, this is one tradition that is not likely to fall by the wayside, despite the collapse of stock prices.

As well, we would expect heightened anticipation of good things to come as the inauguration approaches, now less than two months away.  Clearly, Barack Obama can do no wrong before he takes the oath of office.  The public’s love affair with the president-elect has already reached a fever pitch as the Ludlum Elementary school in Hempstead, New York was just renamed to Barack Obama Elementary school.   

For many years, one of the most successful, elegant and simplest strategies was to buy the ten highest yielding Dow stocks at the end of the year. And hold them for the following year.  While the strategy did not always work, it certainly provided investors with an advantage, knowing that whatever the stock market did the following year, they would at least, earn dividends.  

The collapse in stock prices has significantly expanded the yields of dividends and if the bottom does not completely fall out for the economy, we can see very decent values for the first time in many years.  Our chart below left purposely omits General Motors (GM), Citigroup (C) and Bank of America (BAC) for obvious reasons.  GM will certainly not be paying a dividend anytime in the near future while those of C and BAC are in some doubt.

The average yield for this group of ten Dow stocks is 6.4%.  While the overall Dow yield is only 3.8%, yields are the best they have been since 1988, the year after the Crash of ’87.  Despite the fact that yields are also far from the 6.67% that history has commonly cited as “undervalued,” our group of ten nevertheless is beginning to appear quite attractive.  If we pared the three lowest yielding issues from the group of ten (KFT, INTC & HD), we would be left with a group of seven that yields 7.3%.  Given the last decade and virtually zero improvement in price by the major indexes, dividends are certainly going to be in very high demand going forward.  The Dogs of the Dow could well prove to be an investor’s best friend, if not now, soon.

We also note that for the first time in 15 years, the price-to-dividend ratio has finally fallen into more fairly valued territory.  By this measure, stocks are no longer grossly overvalued.  While this factor does not act as a guarantee against further declines in price, it does tend to remove one of the long standing obstacles to a reasonable buy and hold strategy.  We note with emphasis, as we have on previous occasions, that the period of gross overvaluation commenced as stock options became a driving force for wealth accumulation by highly placed corporate executives and employees.  We have long believed that this process (read greed) fed upon itself, tempting corporations to enhance earnings by any method available to drive share prices higher and to reduce dividend payouts, since retained dividends would also keep share prices higher.  Given so many years of abuse and public outrage about compensation, there is hope that dividends will once again earn the respect they were once accorded. 

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 roughly every three weeks 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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