August 2014 Monthly Outlook – profits are an opinion!

There is a saying among equity analysts that profits are an opinion, dividends are a fact.  I tend to agree with them and the numbers say it is true as well.  The charts below, courtesy of RiverFront Investment Group, bear this out.  The top chart shows Dividends per share in green and S&P 500 reported earnings in black, dating back to 1965.  Please note how smooth the dividend line is as compared to the up/down nature of earnings.

The bottom chart shows the dividend payout ratio – the percent of profits paid out as dividends.  Companies do not like cutting dividends, hence the spike in dividend payout ratio in the early 1990’s, early 2000’s and 2008 – 2009.  During those periods, corporate earnings declined significantly (as did the stock market) but most companies maintained their dividends. This ratio has averaged 50% since 1965 but has been running below 40% since 1995.  For the 2nd quarter of 2014 the ratio is only 33%. I anticipate that actual dividends will continue to be more stable than earnings and that over the next 5 years we will see the dividend payout ratio rise back to the 40% range.

Aug 2014 mthly outlook chart1

At the end of July, the equity markets took quite a tumble declining 2% on July 31st alone and dropping 2.88% over the last week (basis S&P 500).  I feel this decline was caused by concerns over a potential Argentina debt default, ongoing strife in Ukraine/Russia,  and the conflicts in the Middle East.  It wasn’t due to company earnings, as the consensus estimates for 2nd quarter 2014 earnings remain at +9%.  It wasn’t due to the economy, as the Bureau of Economic Analysts initial read on 2nd quarter GDP was +4%.

Economically, it appears a mutually reinforcing global expansion is underway and gaining strength.  ISI Group (one of the economic & investment research firms I use) reports that in July the Manufacturing PMI (purchasing manager index) for the US, China and Eurozone all increased to above 50% for the first time since 2011 (readings above 50% signal growth).  They also reported that for the week ending August 1, 2014, their proprietary Company Surveys showed all industry segments above 50% for the first time EVER!  (see chart below)

Aug 2014 mthly outlook chart 2

So for August I think we will see continued volatility in the financial markets based on geo-political events, continuing improvement in economic conditions and generally good earnings results from companies.   I am watching for a correction in the equity markets down into the 1,885 – 1,900 range on the S&P 500 with a slight uptick in interest rates into the 2.50% – 2.75% range on the US 10yr Treasury.

August 2014 Calendar of Events   (comments and suggestions always welcome)

August the “What will be your legacy” month.  Are you a good cook, do you love gardening or are you an animal lover.  These are all part of your “legacy”.  Take some time during August to think about and write down things you are passionate about and want to pass on to the next generation.

August 2nd           moving my youngest daughter, Caryn, into her 1st apartment in NYC

August 5th            International Beer Day

August 8th            my birthday

August 15th         India became independent nation in 1947

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 

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