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Dividend Alerts, February 23rd 2011
February 23, 2011


23 February 2011

  • Update on Dividend Income Investor.com

  • The Super Cycle is upon us . . .

  • Remember 1936 – 1942?

Dear Subscriber

In this issue of Dividend Alerts I am focusing on some of the big issues currently around although I am not touching upon the unbelievable Mid East rollercoaster of bringing down dictatorships, its mid-term impact on petrol prices and, I am sure, further increases in inflation, etc, etc.

Instead, I am looking forward to sharing with you Gerard Lyons’ rather surprising announcement that we are already ten years into a new Super Cycle – you may not have noticed – as well as looking backwards at 1936, seeing too many similarities to feel optimistic for 2011 and beyond.

But first let me provide you with a quick update on where we are with the launch of Dividend Income Investor.com

I apologise, but unfortunately, we are a bit delayed, due to integration issues and (re-)testing, etc, but I remain confident that we will make the March 1st deadline.

To complicate things a bit further, we have now also decided to integrate a so-called affiliate program which would benefit subscribers as they would be able to “earn back” their own one or two year subscriptions in no time, and potentially even much more.

Furthermore, we are also looking into the possibility of an exclusive discount coupon for you, thereby further reducing your subscription fee, if you decide to subscribe.

By all means, have a quick look to see how we are progressing.

Finally, I have now also entered Twitterdom, and, if you like you can follow my unfrequent comments at Twitter.com, by searching my Twitter name: investoretire. Thanks.

Now, back to business . . . I am sure you have noticed that

The Super Cycle has been underway for some time!

At the Davos Summit earlier in January, Gerard Lyons, chief economist and group head of global research in London for Standard Chartered, re-introduced the notion of the “Super-Cycle”, a reference to a rather rare global economic phenomenon.

The Super-Cycle is said to have happened only twice since the end of the 18th century: the four decades prior to World War I and the three post World-War II.

According to Lyons the world may be experiencing its third super-cycle, with the current one having started as early as 2000, defined as

“a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.”

In his 152-page Super-Cycle Report, published earlier in November, Lyons and his team are predicting that global GDP will peak in 2030 with China and other emerging markets being responsible for approximately two-thirds of the predicted increase to $143 trillion over the current $62 trillion.

In fact, he expects that China will overtake the U.S. to become the world’s largest economy by 2020, helped by faster expansion and an appreciation of its currency.

By the way, the Chinese economy overtook the U.K. as the fourth largest in 2005 and tipped Germany from third place in 2007.

China’s economy will be twice as large as the U.S.’s by 2030 and account for 24 percent of global output, up from 9 percent today. India will surpass Japan to be the third-biggest economy in the next decade, according to the Report.

Lyons also guesstimated that the boom will last a generation and will “lift all economies simultaneously”. The implications for Standard Chartered and any other UK companies with increasing earnings coming from the Asia region are obvious.

This confirms Dividend Income Investor.com stance on Tesco as we have outlined in Dividend Income report, which you can access by clicking on: Sample Issue.

Lyons' Report, if accurate, will mean a long-term growth cycle that will reflect on stock exchanges globally. Then again the Report also outlines a number of hurdles along the way, including:

“If we are right about this being another super-cycle, it does not mean that growth is strong and continuous over the whole period. The first super- cycle, for instance had bouts of high inflation and of deflation. Much will depend on monetary policies adopted across the globe.
Now that’s comforting, then.

But has it started in 2000, or in 2009, or not at all?

Lets have a look at another major event for any precedents . . .

Remember Good ‘old’ 1936?

Earlier in February, the S&P 500 Index closed at 1336.32, double its post-crisis low of 666.79, touched in March 2009.

I repeat . . . since its low in March 2009 the S&P 500 Index has doubled.

Why is this of any importance to us?

According to The Wall Street Journal it was the fastest doubling since 1936. That rally began in March 1935 and reached the 100 percent gain mark in 501 days.

This time the S&P 500 Index needed a bit longer to double ... 707 days.

The Dow Jones Industrial Average (“DJIA”) is not there yet, as at 12288 it’s ‘only’, up 88% from its March 9, 2009, closing low.

What the Journal did not mention was what happened afterwards

I have been researching this period in some detail, as I believe there appear to be some discomforting similarities.

Immediately after the S&P 500 index had doubled in 1936 a short-term correction followed. But then the rally reassured itself.

It lasted another seven months, until early Spring 1937, and gained 15 percent. However, that was the end of the party as the S&P 500 experienced a 40 per cent slump the following year.

The final low of this bear market came as late as 1942. Many analysts conclude that the bear-market bottomed in April 1942 marking the real end of the Great Depression era.

The same applies very much to the Down Jones Industrial Average (“DJIA”) which increased a massive 370 per cent from its low in July 1932 to its peak in March 1937, but it did not surpass its 1937 high until December 1945.

Commenting on the dividend returns to have had during 1932 - 1937, Russell Napier in his Anatomy of the Bear - a must read for anybody interested in market cycles - says:

"As well as this spectacular capital gain, an investor who purchased at the bottom in July 1932 secured a dividend yield of 10%, based upon the dividends actually paid in 1932, and a growth in dividends to 1937 of 60%".

However, with unemployment rates still very high at 14.3% this party ended in the course of 1937. Napier comments on this, as follows:

"The crisis of confidence in equities was based on poor long-term returns and some disconcerting false dawns for the market and the economy. While investor enthusiasm had rebuilt in the 1932 – 1937 bull market, the inability of the economy and the market thereafter to produce a normal, sustainable, cyclical recovery undermined faith in the long-term outlook for equities."

That somehow sounds quite familiar to me . . .

Are we in a comparable situation, right now?

I see an interesting analogy here since the bull market of 1936-1937 followed the most severe financial crisis in U.S. history, and the current rally follows the second-most severe one.

In 1936 hopes ran high that the crisis was over and a sustainable recovery had started. But as it turned out the economic slump was only interrupted.

Instead, another grave economic downturn started in May 1937 and lasted until June 1938 with US GDP declining 3.4 percent. Only the outbreak of WWII put an end to the Great Depression.

As in 1936 hopes are again running high that the “Great Recession” of 2008/09 and the associated crisis is over and that a sustainable rally has started. This may also turn out to be a false hope. Why?

Well, the underlying problems of over-indebtedness have not been solved — not even addressed in my view. Quite to the contrary.

All that has happened is that the various Governments have stepped in and shifted some of the most pressing debt loads of numerous financial institutions from the private sector to the public sector.

That's not a solution; it’s just storing up more problems!

In the mid-1930s the stock market and the economy were recovering from a major crisis, and the stock market was clearly overvalued, in hindsight.

The majority of market participants and economists however were sure a sustainable recovery had just begun. Their hopes were quickly dashed.

Will it be different this time around?

Probably not because we're in a similar situation today - recovering from a major crisis, U.S. unemployment rate “stubbornly” remaining above 9 percent since May 2009, an overvalued stock market and expectations that with commentators claiming that the “worst is well past us”.

The latter reminds me of former Queen Wilhelmina of The Netherlands (I am Dutch) famously telling her subjects during an evening radio address, in Spring 1940, that The Netherlands was a ‘neutral’ country and therefore the Dutch can all sleep easy as the Germans wouldn’t invade the country. It took five days to overrun the country in May 1940. Anyway, that’s all history now. . .

Let’s see how it turns out the next few months. . .

Thank you for reading.

Watch out for the next announcement with regards to the launch of Dividend Income Investor.com.

Until next time.

Kind regards

Steven Dotsch
Editor
Early Retirement Investor.com

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