Think There's Value?

For those who think we're on our way to a new bull market, please consider the fundamentals.

S&P 500 Month End Data 3/31/2009:

P/E 56.62 (WTF!!!!)
Dividend Yield 3.03 (%)
Earning Yield 1.80 (%)

By comparison, the 10 yr note is yielding 2.91(%). Thinking in terms of yield, the 10 yr note actually has a 61% margin of safety over the current S&P 500 earnings yield.

The annual EPS estimate for 2009 is $34.74. At current prices that still leaves typical value investors wanting, with a P/E of approximately 23. The accuracy of those estimates of course, is up for debate.

More reliable than current EPS & estimated EPS is the cyclically adjusted EPS (more simply the 10 year average). At current prices that gives a cyclically adjusted P/E of 10.50; historically an indicator of great value. In terms of earnings yield, the S&P 500 is at around 10%, a 300% margin of safety over treasuries!

However, these are not historically normal times. Because this recession/depression is being fueled to the downside from excessive leverage that propped up malinvestment; expect overshooting to the downside. I would not be shocked to see a cyclically adjusted P/E of 7 (the 1929 low P/E), which at this level would be around the neighborhood of 544. This is also in line with my most recent Elliott Wave Update.

News this past week has been difficult to keep up with; S&P-Record Number Of Firms Cut Dividend In Q1:

NEW YORK (AP) -- Standard & Poor's said Tuesday that a record number of companies cut their dividend during the first quarter, while a record low announced plans to increase dividend payments.

It was the first time since S&P started tracking dividends in 1955 that dividend decreases outpaced dividend increases. The total dividend payments during the quarter declined by $77 billion, S&P said.

"Many companies were paying dividends on unrealistic earnings expectations," said Don Wordell, portfolio manager of the RidgeWorth Mid-Cap Value Equity fund. To be included in the fund Wordell manages, a company must pay a dividend.

"It's not surprising at all," that some companies would be cutting dividends, Wordell added. "The economic environment is very, very bad."

The ongoing credit crisis and recession have been the primary reasons given by many companies for cutting dividends in recent quarters. The financial services sector has been among the most active in cutting dividends, as it faces the worst credit crisis since the Great Depression.

If a company cannot pay dividends without access to credit, it should never have been paying them in the first place. However, I do agree with the comment I highlighted in red; back to the article:

Among 7,000 publicly owned companies that report dividend information to S&P, 367 slashed their payments during the first quarter, more than quadruple the amount that cut their dividend during the first quarter of 2008. A total of 83 firms cut their dividend payments during the first quarter last year.

Of the companies tracked by S&P, only 283 announced plans to increase dividends during the first quarter, a 53 percent drop from the 598 companies that announced dividend increases during the first quarter last year.

Since 1955, the average had been 15 increases for every one decrease. During the first quarter, there were about three dividend increases for every four decreases.

That's bearish news for stocks since investors have historically paid higher than average multiples for dividend paying stocks and high growth momentum stocks are all but myth right now.

Furthermore, respected Dow Theorist Tim Wood recently confirmed that the primary bear market trend is still intact.

Government PPIP, SEC Uptick Tomfoolery and Mark-to-Market shenanigans aside, fundamentals and select technicals suggest probability to the downside below the March 9th lows is still perfectly reasonable.

There are mountains of negative economic data and reality that can be added to this argument, but for sake of staying on topic that discussion will be left for another post.

In summary, on an individual basis, there are HUGE values out there. Buyer beware though, further downside prices are considered probable at this point in time and there certainly is no hope for a grand new bull market in the next few years.