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Farrell: Dividends Come Into Focus

Wednesday was the 33rd birthday of the Vanguard 500 Index Fund. The annualized return for the 33 years is 9.6% (thanks to my pal Jon Osbon of Osbon Capital for this info), and "almost half" of that return came from dividends. Remarkable, and an indication to me of what might lie in store for the next few years. In the slow-growth economy we foresee for the next few years, growth will be hard to come by and cash flow and dividends will be much more a focus than they have been the past few years. This is one of the reasons we have been keeping a list of the large-cap companies that have raised their dividends in the last six months. Raising a dividend in the teeth of the financial storm we have gone through is quite a statement. (Call your Soleil salesman for the list.)

While the Case-Shiller home price index was down 18% year-over-year, the sequential monthly decline was 0.6%. That compares with a decline of 2.2% the prior month and is an indication that the turn may be at hand. On the other hand, Fannie Mae reported that 3.42% of the mortgages it holds are at least 90 days past due. The prior month saw 3.15% of such past-due pieces of paper. Freddie Mac had a 2.62% rate, and that was worse than its prior month of 2.44%. These represent prime mortgages, as that is what they traffic in, and, with unemployment likely to rise, these numbers are sure to worsen. Foreclosed homes are bound to rise, so any enthusiasm about the housing market should be tempered by these facts. I think the housing market is bottoming, but the size and speed of any turn is bound to be muted.

The National Association of Realtorsreports that about 4,000,000 homes are offered for sale, well above normal. That number is likely to grudgingly go down, as foreclosures are likely to grow with the unemployment rate. And, as we expected, mortgage applications were down 18.9% last week, reflecting with amazing speed the rise in mortgage rates.

The Institute of Supply Management(ISM) number came in in-line with expectations at 44.8. 50 is the dividing line between expansion and contraction, but this number is the best since the Lehman collapse, and the way the math is done indicates modest GDP growth of perhaps 0.5%, if you read the excellent work done by the folks at Capital Economics. The "employment component" of the index rose to 40.7 from 34.3, which offers hope that the Bureau of Labor Statistics report on Thursday will be in line with last month's better-than-expected showing. While the number of lost jobs of about 350,000 last month was staggering by normal definitions, since it was expected to be 200,000 worse, the markets were happy to see "less-bad" numbers.

General Mills, Buy-rated by Soleil's Ed Roesch, reported better-than-expected numbers and raised guidance for next fiscal year. Ed would buy the stock at the current price of $58, as that would be a group multiple of 13.5 times the company-guidance estimate of $4.25. Ed's price target is $65, or 14.5 times the estimate, and that is still a discount to its five-year range of 15 to 18.5 times. The company also pays a dividend that exceeds 3%.