June statement values stable, rally intact! - - - The Investment Grade Value Stock Expectation Analyzer 

The Investment Grade Value Stock Index (IGVSI)

The IGVSI is a barometer of a small but elite sector of the stock market called Investment Grade Value Stocks.  Some IGVSs are included in all averages and indices, but even the well dressed Dow Jones Industrial Average includes several issues that are below Investment Grade and very few boast an A+ rating. The IGVSI tracks a portfolio of  approximately 400 stocks. The article below discusses the distinctions between Value Stocks, Growth Stocks, and Investment Grade Value Stocks.

The IGVSI peaked at 900 in the summer of 2007, but with the crisis that erupted in the financial sector, a steep decline followed. The slope of the downturn steepened throughout 2008 with very few even modestly encouraging months. Since its June 2007 peak, the IGVSI has lost roughly 43% of its value. 

The 4th Quarter 2008 was the worst calendar quarter  in recent stock market history, but it may have marked the bottom of a prolonged multi-market correction.  Although the downward trend continued through mid-March '09, when the November lows were tested, the markets have rebounded since in the form of a four month rally --- the first of that length since 2006. 

For the first time in nearly two years, all Working Capital Model components seem to be moving upward.

NOTE: Clearly, interest rate expectations (IRE) take a back seat to the realities of conditions in the financial sector. In spite of rapidly falling interest rates, the prices of rate sensitive CEFs were pummeled even as the prices of some individual income securities reached "bubble" levels. Strangely, fearful investors choose low yields and high prices over relatively high yields and much lower prices. As financial market conditions stabilize and improve, the potential for market value growth in income CEFs seems great--- and the bubble potential of treasury securities seems--- well, think about it. 

History of the Investment Grade Value Stock Index

The IGVSI was developed in December of 2007 to provide a benchmark for the Equity portion of portfolios managed according to the disciplines of the Working Capital Model (WCM). For more than ten years, Investment Grade Value Stock investors had been frustrated by the inadequacies of the DJIA and the NYSE. During that period. NYSE Issue Breadth and New High vs. New Low Statistics moved in different directions than the averages, nearly all of the time.

Since 2005, the popularity of Closed End Funds (particularly the index variety) has altered the statistical playing field, making NYSE "market stats" nearly worthless in monitoring the behavior of  IGV stocks. There are fewer than 400 IGV stocks, yet the NYSE "issue breadth" numbers report trading of over 3,000 issues per day. Similarly, the "most advanced" and "most declined" lists contain an ever increasing number of indexed derivatives, making it difficult  for IGVS investors to zoom in on their area of interest. 

Hoping to answer the now ludicrous question: "whatever happened to stocks and bonds?" Several old school diagnostics are presented here. The IGVSI chart tracks the most fundamentally sound companies on the planet. The IGVSI "bargain monitor" analyzes the prices levels of the index components to help you navigate the investment cycle for better decision making. IGVSI issue breadth and 52-week "high vs. low" numbers help to complete the equity environment trend picture, and the "expectation analyzer" discussion will help you fine- tune your portfolio performance expectations.

Two other indices, the Working Capital Model Select Income (WCMSI) and the Working Capital Model Select Municipals (WCMSM) report on the movement of managed closed-end income funds of the type contained in WCM portfolios. They should help you fine tune your performance expectations about the income bucket of your portfolio --- both have climbed sharply (nearly 20% since December 31st 2008). 

All of these important numbers are presented for your use right here, but what you do with them is totally up to you.

The IGVSI is a new index, but one that is becoming an accepted benchmark for assessing the performance of the "equity bucket" of Working Capital Model investment portfolios. If you own the "Brainwashing Book", you can subscribe to the IGVSI detail reports.

The income portion of a portfolio demands separate attention, and a pretty much blind focus on income. Click here for a helpful article on that subject, or study Chapter Five of The Brainwashing of the American Investor:  "What Your Mother Never Told You about Income Investing".  The WCMSI is presented with the IGVSI to give you a feel for what is going on in the income portion of your investment portfolio--- the WCMSM examines a sampling of closed-end Municipal Bond funds. .

Before you open your monthly account statement, have a look at the Investment Grade Value Stock Expectation Analyzer.

 Investment Grade Value Stocks (IGVS) Bargain Level Monitor (06/3/09)

The Bargain Stock Monitor is derived from the Month End Value Stock Watchlist Spreadsheet. The Watchlist Program identifies specific IGVSI Companies whose stock is trading at least 15% below the 52-week high water mark, and that also meet the price selection criteria outlined in The Brainwashing of the American Investor: The Book that Wall Street does not want YOU to read. (You really need to be familiar with the selection rules to get the most from the BS Monitor - chuckle - and from the Watch List program.) 

The fewer IGV stocks at bargain prices, the stronger the market and the more Smart Cash that should be found in portfolios. As the list of bargain IGV stocks grows, portfolio Smart Cash should be finding its way back into undervalued securities. 

• The 2007 Monitor showed a decreasing number of  IGV stock bargains through May, followed by rapidly increasing numbers toward year-end, when nearly half the IGVS population was down 15% or more from individual 52-week high levels.

• This trend worsened throughout 2008 and into the new year, in spite of a brief up-tick in December. The numbers bounced back encouragingly in March--- moving below the century mark for the first time in six months. The number of "bargains" increased in June, but remained comfortably below the 100 level. Second Quarter numbers were the best we've seen since the IGVSI correction began in June of 2007. 

• Although most market numbers are better today than they were in November, the correction is not over--- it's rumored that the fat lady is clearing her throat. The really good news is that WCM users have experienced an increased level of short term profit taking--- and the thrill of taking gains on income CEFs. On June 30th, only 71 Investment Grade Value Stocks met WCM purchase criteria--- quite an improvement from the 237 just four months earlier.

•  Is the IGVS Bargain Stock Monitor signaling a bottoming in Investment Grade Value Stocks? Only the shadow knows.

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

IGVS Issue Breadth Statistics (06/30/09)

Issue Breadth Statistics are the single most reliable indicator of what is going on in the stock market--- daily, monthly, annually, whatever. Clearly, if more issues are going up in price more often than down, most of the time, for a meaningful period of time, so should the Equity Bucket of the investment portfolio. Unfortunately, NYSE Issue Breadth Statistics have never been individual-equity-only statistics, and today, they count more derivative products than anything else.  

IGVSI "breadth statistics" signal changes in direction within Investment Grade Value Stocks only--- all CEFs, ETFs, REITs, and preferreds (and individual issues that are NOT investment grade) are excluded. Issue Breadth Statistics should allow investors to look inside an index to obtain a better feel for what has been going on--- these numbers will help you do just that. 

Cumulative issue breadth figures have been negative for roughly twenty-six months, a longer than usual span. On the bright side, we've had positive breadth over the past seven months, but just barely--- June was slightly negative in issues, but there was one more in the plus column.

With Congress finally making an attempt to fix it's regulatory and policy errors, and some hesitant confidence that a new President can make a difference, we're in for interesting times and (most likely) better numbers as we move further into 2009.  

We needed a breather in the "up"--- it's a good thing.

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

New 52 Week High and New 52 Week Low Statistics (06/30/09)

Another useful tool for analyzing an index that only includes your kind of equities is a comparison between the number of issues establishing new 52-week high ground and the number sinking to new 52-week lows. Superficial analysis is very straight forward--- there should be more new highs in an upward trending market and more new lows during a correction. 

Since December of 2007, there have been 5.12 times more new lows than new highs--- through June 2009, new highs have exceeded new lows one hundred times, or just 29% of the time. The New High and New Low issues themselves can identify weaker and/or stronger sectors within the Investment Grade Value Stock selection universe--- very important in helping investors determine where the bargains are and where profit taking opportunities should be.

Clearly, new high vs. new low statistics are about as negative as they could be--- with just four months in nineteen having more up days than downers. But, April through June were decidedly positive, with the June "shut-out" of down days the best month in over two years. 

As the 52-week highs themselves trend lower, it is likely that new highs will start to appear more regularly.

What does all this mean? See the Investment Grade Value Stock Expectation Analyzer.

Featured Articles

When All Stocks Are Value Stocks - Think QDI (July,2008)

Wall Street Wisdom... Value Stocks vs. Growth Stocks (Dec, 2007)

One would think that there would be a pretty clear distinction between Value Stocks and Growth Stocks. But an hour or less research, and some non Wall Street analysis, will muddy the waters significantly. In the back of our minds, most investors think of Value Stocks as more conservative investments than Growth Stocks, mostly larger, proven, and profitable companies that are quite a bit safer than their Growth Stock brethren. Value stocks, you will determine, are those that: 

•       Tend to trade at a lower price relative to their fundamentals. 

•       Are undervalued and have a good expectation of price appreciation. 

•       The marketplace perceives to be undervalued based on criteria such P/E,
        price-to-book ratio, dividend yield, etc.  

•       Have been out of favor and are relatively cheap compared to the value of their assets.  

•       Trade at a P/E ratio lower than the market average P/E ratio as a result of falling prices
        rather than improving fundamentals.  

      Surprisingly, the distinguishing feature of Value Stocks is price. How does the price of the stock relate to its fundamentals, and if it is truly under-valued, how good are the chances for the price to go up? The definitions mention dividends, various financial statement ratios, and market sentiment. The problem is that there are no real benchmarks or specifics to cuddle up to for selection decision-making purposes. What Wall Street labels as a Value Stock is, in reality, a stock that, at a certain point in time, is selling at a bargain price... a very temporary thing. Once the stock goes up in price, the Value Stock label disappears.  

      Growth Stocks, on the other hand, are most often thought of as flashy startups, high tech innovators, and generally more speculative entities that should be dealt with carefully. These are the bread and butter of both Growth and Index Funds and are the kind that the media covers most extensively. The most popular definitions describe Growth Stocks as those of companies that:  

•       Are growing earnings and/or revenue faster than their industry or the overall market.  

•       Pay little or no dividend, preferring to use their income to finance expansion.  

•       Are young, with little or no earnings history, and which are valued on the  basis of anticipated 
       future earnings.  

•       Have high price-earnings ratios.  

•       Are currently growing earnings with potential to continue growing earnings 15% to 30%
        annually for the next one to three years.  

      Equally surprising, to me anyway, is that price is only mentioned as a part of the high P/E ratio expectation that seems consistent with the Growth Stock identity. This is because price is a tertiary consideration in this inherently speculative area, and not nearly as relevant as those quarterly analyst projections that fuel the hysteria... in both directions.  

      I don't disagree with the need for distinctions such as this, but I have a problem with the lack of consistency in who does the labeling, how unbiased it can possibly be, and then this one big problem: almost any stock out there can be seen as one or the other, even at the same time, by almost anyone who owns a calculator and who thinks they have the ability to predict the future. Are the real estate, home building, and financial Growth Stocks of the past three years now Value Stocks, and which of the current Value Stocks will achieve Growth Stock prominence in 2008 or 2009?  Similarly problematic is the perception that a Value Stock must be safe and full of quality and the assumption that a Mutual Fund full of Growth Stocks just has to grow in... value!  

      Its time to refine these definitions a scooch, if for no other reason than to recognize that both are purposely flexible concepts that attempt to compare current equity prices either with past accomplishments or with future potential. Two things about publicly traded companies that most investors and speculators would probably agree upon are these: (1) High P/E, unprofitable, non-dividend paying, young companies are less likely to be around in their present form 10 years from now than profitable, dividend paying, low P/E, established companies; and (2) That the current Market Price of a security is as much or more a function of supply and demand, current events and their media spin, and world politics than it is a function of the company's financial statements. BUT, spending more time inside a company's financial statements certainly helps in identifying: stability, consistency, general quality, and long-term economic viability.  

      In other words, what I am looking for is a selection universe of fundamentally valuable companies that can be expected to remain that way for a significant period of time, not just a bunch of random symbols that someone believes are at garage sale prices. With a stable, fundamental-value or quality universe to select from, we can use Market Price to determine both: when a stock is available for purchase at a bargain price, and when each of our individual holdings has grown enough for us to realize a reasonable profit.  

      S & P Corporation publishes a standardized earnings and dividends ranking system which separates stocks with average and better fundamental qualities from those with lesser economic strength and viability.  It is particularly useful because it excludes market analysis and projections of the future, thus eliminating any form of hype whatever. It sticks with pure fundamentals, financial report numbers, and ratios... market price is not an issue. As with all marketable securities, every member of this select group of approximately 450 higher fundamental quality companies will vary in Market Price in either direction dependent on all of the usual market factors... but their basic quality remains constant, regardless. I think of this group of especially successful companies as Investment Grade Value Stocks, and I look to them to produce above average growth in Working Capital annually and in Market Value cyclically. Experienced investors know better than to relate Market Price with the soundness of a company's financial statements... particularly during stock market corrections.  

      Four new sets of statistics are being developed for the FREE and exclusive use of true Value Investors, and they should be available on the web early in 2008:  

• The Investment Grade Value Stock Index (IGVSI), which tracks the Market Value of the stocks described above.  

• Issue Breadth Statistics, of the approximately 450 stocks in the IGVSI, track the daily number of advancing and declining issues.  

• New High and New Low Statistics help to pinpoint cyclical developments within the Equity Universe.  

• A monitor of the number of "bargain stocks" within the IGVSI helps to confirm uninvested smart cash levels in equity portfolios.  

Note: The 2nd Edition of "Brainwashing" is here!

Steve Selengut