I’ve mentioned this before at RealMoney, but in early 2000, I was doing some serious thinking about investing. I decided to e-mail Ken Fisher a question that he had touched on in one of his Forbes pieces. That began an e-mail dialog that forced me to ask hard questions about how I did value investing. Personally, I was surprised how much time he was willing to waste on me, but I had read the three books that he had written up to that time, Super Stocks, 100 Minds that Made the Market, and The Wall Street Waltz. I had a good idea of how he approached investing.

He challenged me to throw away the CFA Syllabus and think independently — to focus on my own competitive advantage. That led me to analyze what had worked and failed in my prior efforts in value investing, and that led to what would become the Eight Rules. I did well in the prior era, but much better after my discussion with Ken Fisher.

A decade ago, the leading Internet companies were AOL (TWX), Amazon (AMZN), eBay (EBAY), and Yahoo (YHOO). With the exception of Amazon, which is experiencing a renewal as it embraces digital distribution and cloud computing, they all fell by the wayside because they failed to adapt to a major market transition. For AOL, it was the transition to broadband. For eBay, it was the rise of search as the primary way to find goods to buy online. And even Amazon had its dark days.

Is a Market Crash imminent?

Recently there have been two discussions of a possible market crash. The first warning comes from the Bob Janjuah, the credit strategist at RBS. The second is a more nuanced discussion coming from Todd Harrison, who writes at Minyanville.

The chance of a Market Crash is unlikely. Understand that Market Crashes are tail (low probability) events. Even if we accept that stock returns are not normally distributed but have fat tails, even fat-tailed events are still relatively low probability events.

Market Crashes occur because of the Wily Coyote effect. (Remember when he runs off the cliff in the Roadrunner cartoon, looks down and realizes that there is nothing beneath him?) In order for that to occur, investor sentiment needs to be fairly sanguine. Given that we have had two discussions of a possible Market Crash within the space of a week and the most recent AAII sentiment survey readings are now in the bearish territory (contrarian bullish), it seems unlikely that Wily Coyote has stepped off that cliff.

All this doesn’t mean that the equity market can’t fall – it’s just unlikely to crash. I have been looking for a panic sell-off to mark an intermediate term bottom (see my recent post). Mark Hulbert reports that current sentiment readings, while bearish, isn't bearish enough for a capitulation bottom. This suggests a scenario where the market breaches its March lows and continues to decline.

Hindenburg omen is one of the rare stock market crash signals. The fact that it is rare makes it even more significant. A rare signal or event in the Shannon’s information theories (the backbone of the modern day digital communications) is considered to contain a higher amount of information. And this information from Hindenberg’s omen is obviously not a good news.

I have written about Hindenburg omen (H.O.) before  in 2006. Although in 2006 the H.O. signal did generate a 7% decline out of the stock market, it was by no means a “stock market crash." The current Hindenburg omen was triggered on June 6, 2008, and has been confirmed by subsequent repeated H.O. signals. The previous confirmed H.O. was in October of 2007, and stock markets definitely had a serious correction afterwards. The success rate for H.O. is only about 25%, or 1 crash in every 4 signals, and it will last for about 120 days during which it could crash. But if you could avoid those mini-crash period as a buy-and hold investor, you obviously will do so much better.

So far I have only concentrated on the idea of picking up great companies which have a history of increasing payments and which have a higher than average probability of increasing their payments in the future. I have explored the ideas of dollar cost averaging, my screen for entry criteria and my ideas on portfolio diversification . But when would I consider actually selling a dividend stock?

To be perfectly honest the answer is not a black and white one.

In life there are precious few things that are lily pure in which nothing negative could rightfully be said about them. I am not foolish enough to believe that dividends are the ultimate panacea. Join me today as I don myself in black and explore the the Dark Side of Dividends.

Here are the top five reasons for not paying a dividend:

1. In the U.S. and some other countries, dividends are double taxed. Corporations pay taxes on their earnings, then when dividends are paid to shareholders they must then also pay taxes these distributed earnings.
2. When an individual pays taxes on a dividend distribution, the future earnings associated with the taxes are forever lost. Some would argue that capital gains are better for this reason, since the investor chooses when to incur the tax.
3. Companies in new and growing industries need every cent for future growth, thus can't afford to pay dividends. In fact they are usually issuing stock and debt to raise additional capital.
4. If a company has old debt with a very high interest rate, it might be better off to reduce the debt prior to initiating a dividend program.
5. It puts pressure on management to sustain the dividend in the future.

1. It is true that dividends are double taxed in some countries. Many governments, including the U.S. have recognized this, and have provided tax breaks to minimize the double taxation. In the U.S., qualified dividends are taxed at a reduced rate of 15%.
2. It is true that when an individual pays taxes on a dividend distribution, the future earnings associated with the taxes are forever lost. Ultimately, we will need to convert our investments to cash either through dividends or capital gains. Dividend consistency is related to the quality of the company we have invested it, while capital gains are often at the mercy of the market (good companies are often punished in a down market).
3. It is true that companies in new and growing industries need every cent for future growth, thus can't afford to pay dividends. New companies rarely ever qualify as a good dividend company. Get back with me once you are grown and mature.
4. It is true that a company with old debt with a very high interest rate might be better off reducing the debt prior to initiating a dividend program. Again, this is likely to be a new or middle aged company, not yet mature enough to be a good dividend company.
5. It is true that paying an ever-increasing dividend puts pressure on management to sustain the dividend in the future. Isn't that why we shareholders pay them the mega-bucks to generate value for us by running a superior operation?

I just mentioned RKH, the HOLDRS regional banking ETF, on Wednesday in Regional Banking Woes Worsen, where I also posted a graph of RKH’s six-month stock price and 30-day implied volatility.

I am revisiting RKH today with a slightly different chart, also courtesy of the ISE, that compares RKH’s implied volatility and historical volatility over the past six months. In the chart below, notice that the implied volatility in this ETF has been more of an uptrend than the spike from mid-March. Notice also that implied volatility appears to have hit a plateau and is still far below the mid-March peak.

In response to a (somewhat ridiculous) proposal that we "sue OPEC" over high oil prices, Mark Thoma writes:

[I]t's unlikely that [monopoly power] is the factor behind the run-up in prices. Monopoly power explains the level of prices, i.e. why price is $8 rather than $5, but it doesn't explain the change in prices, i.e. why the price would change from $8 to $12. There are ways to tell this story, e.g. a war or some other event giving a cartel the cover it needs to raise prices and blame it on external factors, but I don't think that's what's going on in oil markets today, at least I don't think this is a significant factor behind the oil price increases.

2008-06-20T16:00:45-04:00 Steve Waldman

Steve Waldman submits:

In response to a (somewhat ridiculous) proposal that we "sue OPEC" over high oil prices, Mark Thoma writes:

[I]t's unlikely that [monopoly power] is the factor behind the run-up in prices. Monopoly power explains the level of prices, i.e. why price is $8 rather than $5, but it doesn't explain the change in prices, i.e. why the price would change from $8 to $12. There are ways to tell this story, e.g. a war or some other event giving a cartel the cover it needs to raise prices and blame it on external factors, but I don't think that's what's going on in oil markets today, at least I don't think this is a significant factor behind the oil price increases.

Complete Story »

DBO USO OIL UCR USL Steve Waldman

Japanese Banks Ramp Up Overseas Investment

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By Jason Simpkins

Barclays PLC (ADR: BCS), the United Kingdom’s fourth-largest bank, may get a $927 million cash infusion from Japan’s Sumitomo Mitsui Financial Group Inc. by the end of the month. The investment, which will be made through the group’s Sumitomo Mitsui Banking Corp. unit, underscores an evolving trend among large Japanese banks that have so far been unaffected by the subprime collapse.

2008-06-20T15:43:39-04:00 Money Morning

Money Morning submits:

By Jason Simpkins

Barclays PLC (ADR: BCS), the United Kingdom’s fourth-largest bank, may get a $927 million cash infusion from Japan’s Sumitomo Mitsui Financial Group Inc. by the end of the month. The investment, which will be made through the group’s Sumitomo Mitsui Banking Corp. unit, underscores an evolving trend among large Japanese banks that have so far been unaffected by the subprime collapse.

Complete Story »

BCS Money Morning

Multinational Corporations Step Up the Search for the Next China

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By Jason Simpkins

As far as foreign direct investment in Asia is concerned, China is still the undisputed leader, drawing approximately $42.78 billion in just the first five months of the year, an increase of 55% from the same period a year ago.

2008-06-20T15:20:11-04:00 Money Morning

Money Morning submits:

By Jason Simpkins

As far as foreign direct investment in Asia is concerned, China is still the undisputed leader, drawing approximately $42.78 billion in just the first five months of the year, an increase of 55% from the same period a year ago.

Complete Story »

CNY CYB CAJ NSANY HBI FRN Money Morning

Can Inflation Save Canada from Recession?

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 By Mike Caggeso

Canada’s consumer price inflation rose 2.2% year-over-year in May, edging ahead as the Bank of Canada signaled it would last week. The spike suggests Canada’s economy of is also sputtering alongside that of the United States, but soaring commodities costs just may help our northern neighbor skirt recession. 

2008-06-20T14:40:40-04:00 Money Morning

Money Morning submits:

 By Mike Caggeso

Canada’s consumer price inflation rose 2.2% year-over-year in May, edging ahead as the Bank of Canada signaled it would last week. The spike suggests Canada’s economy of is also sputtering alongside that of the United States, but soaring commodities costs just may help our northern neighbor skirt recession. 

Complete Story »

FXC CUD Money Morning

Apple's iTunes: Rapid Sales Acceleration

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iTunes has long been looked at as the loss leader, the bridge that links Apple’s (AAPL) assorted media products. It drives product sales and helps power iPods, iPhones, Apple TV and Mac multimedia.  But that role of servitude hasn’t stopped it from turning into a significant force. 

Apple announced today that the iTunes store crossed the 5 billion song barrier.  That’s 5 billion songs sold, up a billion from the 4billion announced in January.   

2008-06-20T14:18:30-04:00 Seth Gilbert

Seth Gilbert submits:

iTunes has long been looked at as the loss leader, the bridge that links Apple’s (AAPL) assorted media products. It drives product sales and helps power iPods, iPhones, Apple TV and Mac multimedia.  But that role of servitude hasn’t stopped it from turning into a significant force. 

Apple announced today that the iTunes store crossed the 5 billion song barrier.  That’s 5 billion songs sold, up a billion from the 4billion announced in January.   

Complete Story »

AAPL NFLX Seth Gilbert

Big Swing in Shanghai Market

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After trading up exuberantly by 5.24% Wednesday the Shanghai market was hit pretty hard with panic selling, to drop 6.55%.  Once again smart investors used the strength in the market to unload their positions, overwhelming a rally early in the morning. 

It is not completely clear why the panic selling took place Thursday.  PBoC Governor Zhou said yesterday that "tackling inflation remains the most important task", and the fear that the government would rather squeeze the economy than let inflation rise further could have hurt sentiment.  There are also rumors raging about a new investigation into illegal behavior among some major players in the market, nervousness about global conditions, and the inevitable worry about whether or not the government has any tricks left up its sleeve to halt the decline.  My student Shang Ning tells me that the internet is buzzing with angry denunciations of the government for not doing anything to help the market, but I don't think there is a whole lot left they can do.  We are now well under the 3000 level, below which, as everyone knew, the government would never let it fall.

2008-06-20T14:14:06-04:00 Michael Pettis

Michael Pettis submits:

After trading up exuberantly by 5.24% Wednesday the Shanghai market was hit pretty hard with panic selling, to drop 6.55%.  Once again smart investors used the strength in the market to unload their positions, overwhelming a rally early in the morning. 

It is not completely clear why the panic selling took place Thursday.  PBoC Governor Zhou said yesterday that "tackling inflation remains the most important task", and the fear that the government would rather squeeze the economy than let inflation rise further could have hurt sentiment.  There are also rumors raging about a new investigation into illegal behavior among some major players in the market, nervousness about global conditions, and the inevitable worry about whether or not the government has any tricks left up its sleeve to halt the decline.  My student Shang Ning tells me that the internet is buzzing with angry denunciations of the government for not doing anything to help the market, but I don't think there is a whole lot left they can do.  We are now well under the 3000 level, below which, as everyone knew, the government would never let it fall.

Complete Story »

FXI PGJ Michael Pettis

ASM Rejects Applied Materials, Again

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ASM International (ASMI) today rejected a joint bid from Applied Materials (AMAT) and Francisco Partners for the company’s front-end semiconductor tool business as too low. The company asserted that the offer “significantly undervalues” the businesses involved and “fails to reflect its future prospects.”

This is the second time ASM has rejected AMAT’s bid. The first time, AMAT offered $400 million to $500 million for ASM’s Atomic Layer Deposition and Plasma Enhanced Chemical Vapor Deposition units. After that offer was rejected, it came back with a new bid, this time with Francisco. AMAT did not change its own offer, but added a bid from Francisco of $225 million to $300 million for the rest of the company’s front-end businesses, including Epitaxy and Vertical Furnaces.

2008-06-20T14:13:53-04:00 Eric Savitz

Eric Savitz (Barron's) submits:

ASM International (ASMI) today rejected a joint bid from Applied Materials (AMAT) and Francisco Partners for the company’s front-end semiconductor tool business as too low. The company asserted that the offer “significantly undervalues” the businesses involved and “fails to reflect its future prospects.”

This is the second time ASM has rejected AMAT’s bid. The first time, AMAT offered $400 million to $500 million for ASM’s Atomic Layer Deposition and Plasma Enhanced Chemical Vapor Deposition units. After that offer was rejected, it came back with a new bid, this time with Francisco. AMAT did not change its own offer, but added a bid from Francisco of $225 million to $300 million for the rest of the company’s front-end businesses, including Epitaxy and Vertical Furnaces.

Complete Story »

ASMI AMAT Eric Savitz

Winnebago Industries, Inc. F3Q08 (Qtr End 05/31/08) Earnings Call Transcript

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