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Monday, July 26, 2004
Good evening Friends,
Market Recap
The market was essentially flat with basically no movement on the Dow as it closed down a fraction. The S&P 500 was down -2 points, and the NASDAQ continues to move lower daily, losing another -10 points. The Dow's 50 SMA has crossed below its 200 SMA ever so slightly with today's trading. The 200 SMA is at 10,218 and the 50 SMA is at 10,214. That is just four points lower, but it is lower, and that means on a closing basis we have a negative cross over. The NASDAQ had this same cross over a while back and has not recovered since. In fact, these two lines are growing further apart on the NASDAQ chart. The S&P has not suffered this cross over yet, but I am willing to bet that it is only a matter of time before it too succumbs to this downtrend.
Short List
Our short list continues to grow with more stocks being added to the short list tonight. Under these circumstances, I cannot add any stocks to our long list. The market continues to be over sold so I would not be chasing short positions now. Wait for the dead cat bounce and short as stocks rally on low volume.
Dividends Revisited
In light of the recent declaration of a special dividend by Microsoft, I would like to revisit this topic. Dividends were discussed in the May 2 commentary of this year. To re-read that commentary, it is available in the file index. In fact, I want to speak directly about one of the key points of that commentary, specifically, the impact of a special dividend on a stock.
With Microsoft's declaration, just about every analyst out there has been calling upon every other company with a stash of cash to distribute their money as well. Microsoft has the largest cash position of any company I have ever heard of; I believe it is the largest cash accumulation in history. Microsoft also cannot find a use for $75 billion that has accumulated over the years. I think they would rather use the cash to purchase rival companies and expand the reach of Microsoft's products. But given all the pressure and government resolutions against Microsoft in recent years, it has left Microsoft with no chance of buying out competitors. The monopoly concerns the government would not allow it. Their decision has been to buy back there own stock and give the cash back to the shareholders.
If there is enough pressure placed on the other companies with large cash holdings, we may begin to see a run in those stocks. INTC is now considering a similar move with either a cash distribution or a repurchase of stock.
A cash distribution will typically drop a stock by the same amount as the distribution. People who are unaware of this when they hold a stock often get scared when the stock price suddenly drops after the X dividend date. Conversely, when people hear that a company is ‘handing out free money'; they often flock to the stock hoping for a handout.
A dividend can be a good thing to a value investor who buys a stock, never sells it, and really appreciates a yearly dividend. Many people invest this way, they search for stocks that pay dividends, then buy and hold them for the long term. This generates income for them, but of course, these stocks are usually older, more mature companies whose stock prices do not move very much in either direction. This is good for older individuals closer to retirement age.
If you review the May 2nd commentary, you will find a strategy that you could put to use in the coming weeks and months. If Intel breaks down and decides to issue a distribution, we may begin seeing the rest of the cash rich companies following suit. If that's the case, we could benefit from a short term run-up in stock price into the distribution date. Just remember: these distributions take value right out of the stock the second they are handed out so you would want to sell before the X dividend or there is no benefit for the short term trader.
OTC BB Watch List
- None
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