Price earnings ratios are falling. And earnings are falling faster. This means that since the denominator is going down, the stock price is going down as well.
Dividend yields are about 6% at market bottoms. but as firms cut dividends, this means it is harder and harder to find a 6% yield. This means, yes, stock prices are falling as there is more demand for yield to induce someone to buy the stock, read on. See this is why we study accounting.
Comments in yellow from Bob Bronson Associates.
S&P 500: $16.6 billion in dividend cuts in first quarter
Dow Jones Industrial Average has worst weekly loss since Oct. 10
By Kate Gibson, MarketWatch
Last Update: 4:45 PM ET Feb 20, 2009
NEW YORK (MarketWatch) -- The stock market's fall Friday had the S&P 500 Index near its bear-market low as companies listed on the broad-market index engaged in another record-breaking quarter of slashed dividends.
After lapsing more than 200 points, the Dow Jones Industrial Average recovered some to end at 7,365.67, down 1.3% for the day and 6.2% from last Friday's close, its worst week since Oct. 10. Earlier, the blue-chip index fell to an intraday low of 7,249.47, its lowest level since October 2002. The S&P 500 also pared losses, falling 8.89 points, or 1.1%, to end at 770.05, down 6.9% from a week ago. The Nasdaq Composite declined 1.59 point, or 0.1%, to 1,441.23, leaving it down 6.1% on the week.
After leading losses earlier on, financials fronted sector gains in afternoon trade, which also had gold futures closing above $1,000 an ounce. Read Metals Stocks.
"Given the uncertainty with corporate earnings, gold is one area investors should be looking at to hedge themselves against the perception that the dollar decline is somewhere on the horizon," said Dan Greenhaus, an analyst at Miller Tabak.
Gold is often purchased as a hedge against inflation, which is not an immediate concern, with consumer prices flat for the past 24 months. Read Economic Report.
While inflation could be on the more distant horizon, it is an unlikely cause for concern for near-term investors, analysts said.
"The rational investor is hiding, not investing in gold, money markets and Treasurys -- those harbors of safety represent pent-up demand for stocks," said Art Hogan, chief market strategist at Jefferies & Co.
Dividend reductions within the S&P 500 in the fourth quarter of 2008 came to a record $15.9 billion, according to Howard Silverblatt, senior index analyst at Standard & Poor's.
"Now, 50 days into the quarter, the record has already been broken, with 26 issues cutting $16.6 billion," the analyst said, adding that further cuts are expected.
Those cutting dividends in February included motorcycle maker Harley-Davidson Inc. (HOG), retailer Macy's Inc. (M) and institutional money manager State Street Corp. (STT).
Conversely, agricultural giant Archer-Daniels Midland Co. (ADM), beverage giant Coca-Cola Co. (KO) and paint supplier Sherwin-Williams Co. (SHW) all boosted their payouts to investors during the month.
The S&P, trading near its Nov. 20, 2008, [closing] low of 752.96, has shed $7.02 billion -- more than half its value -- since its Oct. 9, 2007, highs, said Silverblatt.
Still, he managed to find a silver lining in the losses: "We've already lost more than is left, so things have to be better ahead than behind." [A variation on the glass is half empty versus half full]
Another positive, according to Jefferies & Co.'s Hogan, is that the once-wide gap between top-down and bottom-up estimates of corporate earnings for 2009 has narrowed, with consensus estimates effectively adjusted to a level "that is probably attainable." [not a chance: even bullish S&P has their bottom-up, or aggregate of individual analyst’s, estimate for 2Q ’09 operating EPS at $52.42 and their top-down, or investment strategist(s), estimate for 3Q ’09 operating EPS at $42.03, and these constantly being revised estimates are triple their estimate for “as reported” GAAP EPS for 3Q ’09 at $14.15]
A $60 estimate for 2009, multiplied by 12.5 times, yields a 750 target on the S&P, which is "extremely fairly valued," said Hogan.[who was unrepentantly bullish all the way down in the dotcom mania bust, and still remains disingenuous in his utterings]
Greenhaus instead opted to use an 11 times multiple in light of a more disruptive-than-usual economic contraction, saying $60 times his now-reduced multiple puts the S&P's "fair value" at 660, assuming the multiple and price target hold.
Kate Gibson is a reporter for MarketWatch, based in New York.
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