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:

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):

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

Labels: dividends, SP 500, stock market

- posted by Ironman at 3:34 PM | Permalink | Home |