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[TTHQ Staff]

 

HOME OF "PICTURES OF A STOCKMARKET MANIA" September 21, 2004 Longboat Global Advisors CROSSCURRENTS Alan M. Newman, Editor This excerpt from the September 20thissue has been posted to coincide with receipt by snail-mailsubscribers.  If ever there was a reason to buy and hold shares,dividends are it.  Payouts for the S&P 500 companies have increased12.1% over the past 12 months while the index itself rose 8.9%.  Troubleis, 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 valueand today.  Can this gap endure forever?  Not likely.  Aswe have shown with countless charts in the last five years, bear marketstypically begin when the dividend yield sinks below roughly 3% and bullmarkets commence when the yield rises to about 6%.  Courtesy of ourcolleague 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 starkcontrast 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&P500 yield was 5.97%. At the 'valuation low' of that era, Aug 6, 1982, theS&P 500 yield was 6.63%.  We extrapolated dividend growth at thelast 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 2003has 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 wealso submit that all goes well with the economy, earnings, interest ratesand a host of other factors.  Yet, at the average yield, the S&Pwould trade at only 933 and at the median, the S&P would still tradedown as low as 876.  In either case, the result is at least 17% lowerthan today and a good reason to abandon the theme of buy-and-hold. Recently, a new "four letter" word had enteredthe vernacular.  Semi.  If you dared utter it, all around becametense and angry, reminded of the dramatic collapse in semiconductor stocksfrom their January 2004 highs.  Well, if you were ever looking forthe reason why you are a subscriber to our perspectives, hark back to ourFebruary 23, 2004 issue (available in the subscriber archives) and re-readour analysis on "Semi Lemmings?"  We pointed out the horrific ratioof insider sells to buys and an 82.4 P/E ratio for the top ten semi issuesas evidence that " ....something does not compute."  We were actuallya bit late, as the top for the SOX came on January 12th and a day laterfor the SMH, the easy way for Joe Everybody to play the entire Semiconductorgroup via the obligatory ETF route.  The SMH had shed 9% before wewere aroused, but even from the signaling of our tardy alarm bells, semislost roughly one-third of their value.  Within the group of ten thatwe had illustrated, Wall Street analysts had placed Buy recommendationson 51.2% and Sells on only 6%, leaving the remainder of 42.8% as "holds,"that ubiquitous term that leaves virtually everything in doubt.  Thegood news is that much of the potential for damage we alerted readers tohas now occurred and prices are at more reasonable levels.  As therecent semi rally commenced, P/E multiples had dropped to under 30 (imaginethat!) and insider sales had fallen by 65%, a rather substantial amount.  The bad news is that Wall Street analystsare really no more inclined to do whatever it is they have been doing foryears, rating the semis quite approximately as they had before and leavingno 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 sellratings only 3.6%.  Holds came in at 45.5%.  The overall ratingsby analysts hardly budged!  How can anyone make sense of this drivel? Prices plunge yet opinions waver only in the slightest degree.  Thegroup was a buy then, the group is a buy now.  Who in heaven's namecan know from analysts that seemingly never waver more than a hair fromhere to there?  And there’s more bad news.  Although sales droppedand the number of shares sold plunged even more, the ratio of shares soldto shares bought by insiders actually rose from 171-1 to 608-1, more proofthat the industry is clearly not favored by those in the know! Despite the recent comeback in share prices, thereasons for apprehension cited in our February 23rd article still seemquite valid and follow for your edification.  "Macabe Keliher recentlyreported in the Asia Times Online that China is about to flood the worldwith chips.  The story claimed that "Beijing is funding and bankrollingwhat is being called reckless expansion in semiconductor fabrication plants." The Chinese government appears dead set upon providing the world with atleast 20% of total chip capacity next year.  In fact, Morris Chang,the chairman of Taiwan Semiconductor Mfg. Co. told Asia Times that China'ssemiconductor industry would cause an industry wide recession in 2005. Keliher's story offers perspectives from Rick Hsu, semiconductor analystat Nomura Securities, who claims "The overcapacity will be massive....takenwith a modest fall in global chip sales, there will be a rough landingfor the industry," and from Dan Hutcheson, president of US-based VLSI ResearchInc, who says "Enjoy it while it's great, but expect a decline on the orderof 30 percent to start in late 2005."  Insiders apparently startedtheir exodus early.  That they are still in exit mode does not calmour apprehensions about 2005.  February’s fears would still seem intact. INTERESTED IN PERSPECTIVES YOU'LLFIND NOWHERE ELSE? ENROLL IN OUR FREE TRIAL IF YOUHAVE NOT ALREADY DONE SO BEFORE. WATCH FOR OUR NEXT REPORT IN TWOWEEKS ON OCTOBER 6th.  DON'T WAIT! ASK FOR YOUR FREE TRIALNOW! ABOUT ALAN M. NEWMAN Alan M. Newman has been the Editor of CROSSCURRENTSsince the first issue was published in May of 1990. Mr. Newman is alsoa member of the Market Technician's Associationand has been widely quoted for years by the financial press, media, andother newsletters and has written articles for BARRON'S. The newsletter is published about 20 times per yearand focuses on economic and stock market commentary, often covering controversialsubjects. Several proprietary technical indicators are usually featuredin every issue accompanied by current interpretation.  Broad samplesof our work can be viewed at http://www.cross-currents.net/.  Subscription rates are $169 for one year and $89for six months.  A FREE 3 issue trial subscription is available byemailing us (click the "free trial" link above).  Pleasenote: trial requests must include name, address and phone numberand must originate from the email address the trial is to be delivered. Trials are only available by Email (.pdf files).  U.S. Mailsubscriptions are available but include a nominal surcharge for postageand handling.