Your Economy (No Politics)

[Bullwinkle]

Longboat Global Advisors ~~Crosscurrents~~
Alan M. Newman, Editor
September 21, 2004

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 monthâs 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 thereâs 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 âs fears would still seem intact.

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