AAII Sentiment Survey: Optimism at Second-Highest Level of the Year

Posted on May 23, 2013 | AAII Survey

Optimism jumped to its second-highest reading of 2013 in the latest AAII Sentiment Survey. Accompanying the increase was a drop in pessimism to its lowest level in more than a year.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 10.5 percentage points to 49.0%. This is the highest level of optimism since January 24, 2013 (52.3%). This is also just the second time in the past 10 weeks that bullish sentiment is above its historical average of 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, fell 2.7 percentage points to 29.5%. This is the first time in five weeks that neutral sentiment is below its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 7.8 percentage points to 21.6%. This is the lowest level of pessimism recorded by our survey since February 9, 2012 (20.2%). The historical average is 30.5%.

Both bullish and bearish sentiment are near the outer edges of what we consider to be normal readings. Though optimism is high and bearish sentiment is low, neither are at unusual levels. One standard deviation above average for bullish sentiment is 49.3%. One standard deviation below average for bearish sentiment is 20.5%.

Since bearish sentiment peaked at 54.5% on April 11, 2013 (nearly a three-year high), it has fallen by a cumulative 32.9 percentage points. Over the same period of time, bullish sentiment has rebounded by a cumulative 29.7 percentage points (from a low of 19.3%).

The market’s resilience and the ongoing record highs being set by the Dow Jones industrial average and the S&P 500 index are keeping AAII members optimistic about the short-term outlook for stock prices. Also helping sentiment were the first quarter’s better-than-expected earnings, signs of continued economic growth and a lack of new bad news. Some investors remain cautious, however, because of current valuations, the actual pace of economic growth and a lack of progress on key issues by the White House and Congress.

This week’s special question asked AAII members for their opinion of the current dividend yields. Nearly one in four respondents (23%) described current yields as being low or too low. Another 16% described dividend yields as being higher than bond yields. A similar percentage thought dividends could be or should be raised. Many in this third group expressed a desire for companies to divert money from share buybacks to dividend increases. More than one in five respondents described dividends as either being good or satisfactory.

Here is a sampling of the responses:

“I would rather see companies pay shareholders with increased dividends than share buybacks.”
“Getting leaner as we speak. Searching for value more is difficult every day.”
“Share price increases have pushed dividend yields too low.”
“Yields could be higher. More cash rich companies should declare dividends than hoarding cash beyond reasonably foreseeable requirements.”
“Definitely beats the current yield on bonds.”
“Reasonable considering the other options for income.”

This week’s AAII Sentiment Survey results:

Bullish: 49.0%, up 10.5 percentage points
Neutral: 29.5%, down 2.7 percentage points
Bearish: 21.6%, down 7.8 percentage points

Historical averages:

Bullish: 39.0%
Neutral: 30.6%
Bearish: 30.6%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online at: http://www.aaii.com/sentimentsurvey

Master Limited Partnerships: Income from a Unique Structure and Industry

Posted on May 22, 2013 | AAII Journal

MLPs are pass-through entities and have been able to pay consistent distributions due to steady demand and federally regulated prices.

Kenny Feng is president and CEO of Alerian. I spoke with him about master limited partnerships and the Alerian MLP exchange-traded fund (AMLP), which is held in our Model ETF Portfolio.

Charles Rotblut (CR): Could you explain what a master limited partnership (MLP) is and how it differs from a traditional corporation?

Kenny Feng (KF): Sure. Energy master limited partnerships are engaged in four primary businesses, which are the exploration and production, transportation, storage and processing of natural resources and minerals. By confining themselves to these specific activities, MLPs are not subject to entity-level taxation as a traditional C-corporation would be. They are, however, subject to the same reporting requirements (annual reports, filing 10-Ks, filing 10-Qs, filing notices of material changes and complying with the Sarbanes-Oxley act) as publicly traded corporations. It is also worth mentioning that they trade on the public exchanges; about two-thirds of the energy MLPs trade on the New York Stock Exchange and a vast majority of the remaining one-third trade on the NASDAQ.

CR: And with their structure, the earnings flow through, correct?

KF: Exactly. They are pass-through entities.

CR: I know that creates different tax issues for investors than investing in a traditional corporation.

KF: Exactly. If you were to invest in IBM (IBM) or any other publicly traded corporation that pays a dividend, you would get a Form 1099, and you would report the payments as dividend income.

BUY OF THE WEEK 5/22/2013

Posted on May 22, 2013 | Podcast

AAII Journal Editor Charles Rotblut Editor explains to Chuck Jaffe of MarketWatch why Molina Healthcare (MOH) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week

CI DOWNLOAD OF THE WEEK

Posted on May 22, 2013 | Computerized Investing

You Need A Budget 4 – You Need A Budget is a popular budgeting program that seeks to help people avoid living from paycheck to paycheck, get out of debt and save more money.

Immediate or Income Annuities

Posted on May 21, 2013 | Financial Planning

An annuity is a contract, purchased from a life insurance company, that provides for a set stream of payments or income for a set length of time, usually until the death of the annuity holder.

The concept of an annuity can be confusing because life insurance companies use the term to describe two different types of contracts: deferred annuities and immediate annuities.

Deferred annuities allow investors to put away money on a tax-deferred basis so that a lump sum can be accumulated at a later date; that lump sum can then be used to fund an annuity (the stream of payments), although many investors choose to simply withdraw the accumulated amount as a lump sum rather than use the annuity feature.

An immediate annuity has no accumulation period—an investor simply pays the insurance company a lump sum, and then receives the stream of payments for the set time period.

Annuities are primarily used as a means of securing a steady cash flow during retirement.

Creating the Revised Graham Enterprising Investor Screen

Posted on May 21, 2013 | Computerized Investing

Creating a more realistic version of the popular Graham Enterprising Investor screen using Stock Investor Pro.

BUY OF THE WEEK 5/21/2013

Posted on May 21, 2013 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Phillips 66 (PSX) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the Week

Master Limited Partnership Tax Rules

Posted on May 16, 2013 | AAII Journal

The unique structure of MLPs gives them tax advantages, but also makes them more complex. Find out how distributions and gains are taxed.

For those who are new to them, the first thing to understand is that an MLP is simply a publicly traded partnership (PTP). (Not all PTPs are MLPs, however; a number of PTPs are simply commodity pools.) By buying shares, technically referred to as “units,” in an MLP, you become a partner (or a “unitholder”) in this very large partnership. As a partner rather than a corporate shareholder, you enter a whole new world of taxation. Partnership taxation is what makes MLPs a tax-advantaged investment, but it also makes them more complex than many other investments.

As a partnership, an MLP is not considered to be a separate entity for tax purposes the way a corporation is, but rather is a pass-through entity—sort of an agglomeration of all its partners. An MLP does not pay corporate tax; instead, all the things that go into calculating tax—income, deductions, gain, losses and credits—are divided up among the unitholders as if they had earned the income themselves. Part III of the K-1 tells you your total share of each of these items.

You pay tax on your share of the partnership’s taxable income, as determined by all the items on the K-1. It is important to remember that you will owe tax on this income whether or not you receive a cash distribution.

What about the distributions? Do you pay tax on them as well? You might think so, since the quarterly cash distributions look a lot like dividends; however, MLP distributions are not dividends, but quite a different creature. When you fill out your tax return, the only thing you have to worry about paying tax on is your share of net partnership income. The portion of the distribution that is equal to net income is covered by that tax payment.

AAII Sentiment Survey: Slightly Less Optimism and Slightly More Pessimism

Posted on May 16, 2013 | AAII Survey

Individual investors are slightly less optimistic and slightly more pessimistic than they were a week ago, according to the latest AAII Sentiment Survey. Even with the changes, the sentiment readings are close to their historical averages.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.3 percentage points to 38.5%. The decline puts optimism below its historical average of 39.0% for the 10th time in 12 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 0.4 percentage points to 32.2%. This is the fourth consecutive week that neutral sentiment is above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.9 percentage points to 29.3%. This is the first time pessimism has risen in five weeks. The historical average is 30.5%.

All three measures of sentiment are near their historical averages. The bullish sentiment readings reflect the ongoing record highs being set by the Dow Jones industrial average and the S&P 500 index, better-than-forecast earnings, signs of continued economic growth and a lack of new bad news. Keeping some investors cautious or pessimistic are current valuations, the actual pace of economic growth and a lack of progress on key issues by the White House and Congress.

This month’s special question asked AAII members if they are holding onto stocks they think are overvalued or overbought. Close to 40% of respondents said no, they are not. Nearly a third of respondents, however, said they were. Dividends were the primary reason given as to why respondents were holding to stocks they thought are overvalued or overbought, followed by an adherence to a long-term investment strategy. A couple of respondents opined that there are not any good alternatives to stocks right now.

Here is a sampling of the responses:

“No. I sell stocks that I think are overvalued and I buy on dips.”
“I’m holding onto a couple that are probably priced over fair value because of their dividend yield.”
“Yes, since I may well be wrong about the valuation. I am a long-term investor, so I don’t play my short-term guesses.”
“Where else would I put the sale proceeds?”

This week’s AAII Sentiment Survey results:

Bullish: 38.5%, down 2.3 percentage points
Neutral: 32.2%, up 0.4 percentage points
Bearish: 29.3%, up 1.9 percentage points

Historical averages:

Bullish: 39.0%
Neutral: 30.6%
Bearish: 30.6%

Freakonomics

Posted on May 16, 2013 | Computerized Investing

Freakonomics.com is a financial and economics blog that reveals “the hidden side of everything,” using statistical and behavioral economic models.

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