23 February 2009

SP 500 Still Overvalued by 46% as Dividends Plummet at Record Pace

We have not reached a sustainable bottom yet in US equity prices despite the infomercials and chief strategist's exhortations to buy them while they are cheap on the financial news channels.

Stocks are valued based on their returns, and those returns are based on real cash flow and profits paid out to shareholders as dividends or stock buybacks to boost share prices.

For too many years US companies have essentially robbed Peter to pay Paul, servicing short term profits by offshoring US jobs, manipulating their balance sheets, and appropriating the savings of the world through the US reserve currency mechanism.

We've just about run out of track on that line, and are heading for a hard stop at a much lower level. At some point the market will perceive that the economy is improving and that the outlook for corporate profits is positive. Stocks will reflect this about six months in advance.

But there will be no recovery until the banking system is reformed and restructured, and the median wage begins to increase enough to support both savings and increased consumption.

Making additional debt available first as a cure is nonsensical, because the debt we have cannot be serviced and must be written off. To do so is Ponzi economics, which is what Greenspan was practicing, and why the decline has been so precipitous.

The longer we avoid making the necessary changes, the more we risk an involuntary default.

Dividends Falling Most Since ’55 Means S&P 500 Still Expensive
By Michael Tsang

Feb. 23 (Bloomberg) -- The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data. (And don't bother factoring in anything for that old-fashioned concept called 'risk' - Jesse)

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.” (The real disaster is that the US is running out of greater fools. - Jesse)

Twenty-five companies in the S&P 500 saved almost $17 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942 ...