Unexpectedly Intriguing!
October 6, 2008

We're going to break news regarding the principal reason stocks are being hammered in the world's stock markets today later in this post, but first, let's consider our comments from last week on why stocks were not collapsing after the biggest one-day drop in the stock market in recent years (emphasis ours):

Having just gone through one of the largest one-day point drops in stock market history, an event driven by the failure of the U.S. House of Representatives' leadership to address a building credit crisis in the financial sector of the U.S. economy, one might reasonably expect that the market would have continued to decline as the leadership of the U.S. House then chose to go on a two-day holiday.

Instead, stocks rallied upward sharply on the day following the market carnage in one of the largest recorded one-day gains.

That's partly due to expectations that the U.S. Senate, which continued in session, will take a more responsible approach to addressing the crisis in U.S. credit markets, but is mostly due to the underlying strength of the dividends that support stock prices. Without a corresponding collapse of expected corporate dividend payouts to shareholders, stock prices will not continue to plummet.

We wrote that on Wednesday, 1 October 2008. On Thursday, the U.S. Senate acted to pass a "rescue" bill for the U.S. financial industry, and early on Friday, the U.S. House of Representatives followed suit. President George W. Bush signed the bill into law by midday on Friday, 3 October 2008.

If today's worldwide stock market declines were driven by that event, it had adequate time to happen last Friday. Instead, what happened is that corporate dividends were slashed well below anticipated levels. That change is reflected in Standard & Poor's Estimates and Earnings spreadsheet, which was updated late last Friday with the third quarter dividend per share data for the companies of the S&P 500.

Instead of coming in at a trailing year level of $29.51 per share (or $7.69 per share for 2008Q3), the trailing year dividend for the quarter came in at $28.85 per share (or $7.04 for the quarter). That's just $0.14 per share more than the trailing year dividend per share recorded in the previous quarter, and also means that there's really no chance in hell that the S&P is going to hit anywhere near the target $30.30 dividends per share announced by S&P back in December 2007.

That's the principal reason why stocks are dropping everywhere today. Even though this news has not yet been confirmed by S&P, the world's biggest financial firms are aware of the change in outlook and are acting accordingly, reducing the values of stocks.

This action is no surprise to readers of Political Calculations. We first indicated that dividend cuts were in the offing on 4 August 2008. Here's our chart indicating the relationship between stock prices and dividends for 2008 from that post:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, January 2008-July 2008

As recently as last week, stock prices were still being supported by the anticipation of those larger dividend payouts (Note: we removed the "likely overestimated" comments from the chart for the sake of decluttering it to focus on the completed data through the end of September):

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, January 2008 through September 2008

Now, here's how that chart looks today, incorporating the third quarter of 2008's dividends per share data:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends Per Share, January 2008 through September 2008, with preliminary 2008Q3 dividend data

The horizontal "compression" of dividends per share shown in the chart verifies that distress is building in the stock market. That distress level will peak when the change in year-over-year trailing year dividends per share reaches a value of, or near, zero (or, in other words, when the level of dividends per share is flat as compared to one year ago.) At that point, it's very likely that the market will be very near its bottom. At least, if the market performs similarly to how it has in the past.

We'll be working on updating our market distress chart that we first introduced in that post. In the meantime, here is a dynamic (sortable) table of S&P's indicated changes for dividends in the month of September 2008:

Changes in S&P 500 Company Dividends, January 2008 Through August 2008
Company Ticker Month of Action Type of Action Old Value New Value Percentage Change Industry Sector
Amer Capital Ltd ACAS SEP INCREASE 3.51 4.09 16.52% Financials
Amer Intl Group AIG SEP SUSPENSION 0.88 0.00 -100.00% Financials
Campbell Soup CPB SEP INCREASE 0.88 1.00 13.64% Consumer Staples
Citigroup Inc C SEP DECREASE 1.28 0.64 -50.00% Financials
Comerica Inc CMA SEP DECREASE 2.64 1.32 -50.00% Financials
Federal Home Loan FRE SEP SUSPENSION 1.00 0.00 -100.00% Financials
Federal Natl Mtge FNM SEP SUSPENSION 0.20 0.00 -100.00% Financials
Freeport McMoRan Copper & Gold FCX SEP INCREASE 1.75 1.81 3.43% Materials
Kraft Foods 'A' KFT SEP INCREASE 1.08 1.16 7.41% Consumer Staples
Lehman Br Holdings LEH SEP SUSPENSION 0.68 0.05 -92.65% Financials
Lehman Br Holdings LEH SEP DECREASE 0.05 0.00 -100.00% Financials
Lockheed Martin LMT SEP INCREASE 1.68 2.28 35.71% Industrials
Masco Corp MAS SEP INCREASE 0.92 0.94 2.17% Industrials
McDonald's Corp MCD SEP INCREASE 1.50 2.00 33.33% Consumer Discretionary
Microsoft Corp MSFT SEP INCREASE 0.44 0.52 18.18% Information Technology
Natl Semiconductor NSM SEP INCREASE 0.24 0.32 33.33% Information Technology
Texas Instruments TXN SEP INCREASE 0.40 0.44 10.00% Information Technology
Tyco Electronics TEL SEP INCREASE 0.56 0.64 14.29% Information Technology
Tyco Intl TYC SEP INCREASE 0.60 0.80 33.33% Industrials
Verizon Communications VZ SEP INCREASE 1.72 1.84 6.98% Telecommunication Services
Wachovia Corp WB SEP SUSPENSION 0.20 0.00 -100.00% Financials
Washington Mutual WM SEP SUSPENSION 0.04 0.00 -100.00% Financials
Wyeth WYE SEP INCREASE 1.12 1.20 7.14% Health Care

Update: Most (if not all) typos have been fixed, one minor change in wording: (or, in other words, when the change in year-over-year dividends per share is flat.) has been changed to (or, in other words, when the level of dividends per share is flat as compared to one year ago.) in the second to final paragraph. Hopefully, our regular readers knew what we really meant!

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