Weekly Risk Report 03/09/2009
Only if we tune out the bad news can we even begin to hear any positive information. The bad news has been unrelenting. Whether true or just “headlines”, the pace of the talking heads chattering about the end of the world has brought on a negative response in consumer confidence and spending (see Blog entry from 02/23/2009). On top of that, the SEC had removed a key component from its tool chest in mid 2007 when they eliminated the “UpTick Rule” which gave some order to the market when short selling of stocks occurs. It now appears the SEC will revisit this question.
Three of the i-Wave components fell in indicated risk while one remained unchanged this week. The overall effect was to take our market risk indicator down to a very low level. This equates to an excellent time to be either adding to positions already owned by investors or starting new investments.
The graphic shown here relates what very low risk 13 week Treasury’s pay vs. what the median dividend rate of the Value Line universe of 1700 stocks. When the Treasury rate is high and dividends are low, this has been a risky time to own stocks and mutual funds. Opposite that is when interest rates are very low (like now) and average dividends are quite high (like now). Such times are quite low in risk for investors since it usually corresponds with markets that are depressed in price.
As you can see here, with the 13 Week Treasury Coupon Rate being under 0.3% and the median dividend of all stocks in Value Line that pay such dividends at 4.0% the graph goes well below the zero mark. The current reading is then minus 3.716. In the eleven years shown here that is the lowest level achieved. In this case, short term treasuries have a very hard time competing with even the average dividends of stocks. This is just one more indication that the market is heavily over-sold.
Should any of you be motivated to contact the SEC to state your opinion relative to restoration of the Up-Tick Rule here’s their address:
SEC Headquarters, 100 F Street N.E., Washington, DC 20549, Attention: Mary Schapiro – Chairman
For over 70 years the Up-Tick rule helped make for orderly markets during both good times and bad. It never inhibited short sellers, but only made for a better planned sale by someone determined to “short” a stock, or as now with “short index funds”, short the market. Their test period for deciding whether the rule was still needed was about two years during a very bullish and low volatility market. Since removal, volatility has soared and shorting has been unmerciful and without logic. Think of it as the “dark side” of irrational exuberance. Feel free to Google “Uptick Rule” and also to read about it at the SEC web site: http://www.sec.gov by using their SEARCH function in the upper right hand corner of the home page. It is interesting to note that since the removal of this rule “short index funds” and “ultra short index funds” have blossomed as new products. Now, an investor, with the click of a button can short the entire group of 2000 stocks in the Russel 2000 Index. Indiscriminate shorting of all companies, whether they are earning money, growing or are going out of business. I don’t know what they were thinking. I can imagine there was a very strong “lobby” working on SEC to have had them make this change, however.
Please remember that our letters to our government do have an impact. SEC is a government agency. They need to hear from us or they have no direction.
