Thursday, November 27, 2014

Happy Thanksgiving From All Of Us At HORAN

Below are excerpted comments from our firm's CEO, Terry Horan, that was sent via email to employees this morning and I want to share it with our readers, many who are clients.

"Best wishes to you and your family for a wonderful Thanksgiving Holiday. Have a great time and enjoy the time together with family and friends..."

"There was a bit of a discussion in the office about the timing of Thanksgiving. Of course, the Pilgrims were the first to celebrate the holiday as a way of giving thanks for surviving their first year in America. They were aided by an Indian tribe who taught them to plant and harvest food. In thanks, the Pilgrims invited their Indian friends to the first Thanksgiving celebration. It lasted three days."

"While many states and cities celebrated a Thanksgiving, it did not become an official holiday until Abraham Lincoln declared it so at the height of the Civil War in 1863. He asked the nation to pray for those who lost loved ones in the war. Lincoln decreed that Thanksgiving should be celebrated on the last Thursday of November. However, Franklin Roosevelt moved the holiday to the third Thursday of the month of November in order to spur retail sales during Christmas. This move was met with massive opposition and some derided the day by calling it "Franksgiving." Personally, I think he was the inventor of the first "black Friday." It was changed to the current date two years later and has stayed that way ever since."

"The concept of pardoning Turkeys by the President is rather recent. President Obama pardoned Mac and Cheese, two Ohio turkeys, yesterday. The first President to officially pardon turkeys was George H. W. Bush (41). Turkeys had been pardoned by previous Presidents, specifically Kennedy and Reagan, but it was not a regular part of the holiday."

"Enjoy the day, give thanks for this very unique American holiday and thank you [to all our clients and friends for allowing us to assist you in meeting your Health, Wealth and Life needs.]"


Wednesday, November 26, 2014

Declining Participation Rate A Function Of A Weak Labor Market

Today's report on jobless claims at 313,000 was higher than the expected level of 292,000. This level of claims was the highest since the week of September 20th when claims were reported at 295,000. This trend in claims would need to reverse going into year end or the higher trend would be an indication of a weakening job market.

From The Blog of HORAN Capital Advisors

Further, today's weaker than expected report possibly speaks to broader weakness in the overall economy. Labor market conditions in the U.S. have been far from robust. The potential canary in the coal mine has been the steadily declining participation rate in the U.S. as noted with the blue line in the below graph. A number of economists have attributed the declining participation rate to the increase in retirements of the baby boomers. This conclusion is important for those that believe the decline in the participation rate is baby boomer related, otherwise, the decline would be attributable to an overall weak economy and labor market.

From The Blog of HORAN Capital Advisors

Importantly, the baby boomer phenomenon is not isolated to U.S. demographics and was a result of the environment following World War II. As can be seen in the above chart, the participation rate in the U.K. has not seen the same level of decline as experienced in the U.S. In fact, if one looks at the U.S. headline unemployment rate compared to the U.K.'s in the chart below, both are at nearly the same level.

From The Blog of HORAN Capital Advisors

In the U.S. the headline unemployment rate is known as the U-3 rate. The broadest measure is the U-6 which includes discouraged workers, all other marginally attached workers and those workers who are part-time purely for economic reasons. As displayed in the below graph, the U-6 unemployment rate equals 11.5% versus the headline rate of 5.8%. The U-6 unemployment rate remains at a level higher than the 8% reached prior to the last recession.

From The Blog of HORAN Capital Advisors


An article earlier this year in The Economist magazine discussed the strength of the U.K employment market noting,
"The recovery is impressively robust. Employment set a new record in the three months to November, reaching 30.1m. The number of Britons in work has risen by fully 280,000 since the summer. Unlike in America, where unemployment is declining in part because discouraged workers are dropping out of the labour force, inactivity is declining in Britain. The share of people in work is within striking distance of an all-time high. Job growth has been strong across private industries; unemployment is falling for all age groups."
The Economist magazine article comments on the decline in the U.S. unemployment rate being a result of workers dropping out of the labor force.

In conclusion, the health of the U.S. labor market is anything but robust and indicative of a below potential growth in GDP. Ancillary support programs, such as food stamps and disability insurance, continue to show increasing and high levels of usage. The decline in the participation rate in the U.S. seems to be more a function of a somewhat weak labor market than an increase in baby boomer retirements.

From The Blog of HORAN Capital Advisors


Monday, November 24, 2014

Week Ahead Magazine: The ECB Pump

Last week was a mostly positive one for equity markets around the globe. The reason for all the optimism was unleashed on Friday when Mario Draghi indicated he was ready and willing to provide QE in an effort to stimulate growth in the euro zone. And not to be outdone, the People's Bank of China announced a reduction in its one year lending rate. These announcements moved equity prices higher on Friday and resulted in strong weekly gains for equities. For example, on the week, France's CAC Index was up 3.4%, Germany's DAX was up 5.2%, the S&P 500 Index was up 1.2% and the Dow was up 1.0%. The laggard continues to be U.S. small cap (Russel 2000 Index) which was down .1% for the week.

For the most part, economic reports in the U.S. were reported on the positive side of expectations. Housing reports were positive and one article link in the magazine notes the housing data provides strong confirmation that a U.S. recession is unlikely in 2015. The blog at the Stock Trader's Almanac notes one bullish indicator is when the S&P 500 Index is up double digits three year's in a row. Specifically, they note,
"As of the close yesterday, S&P 500 was up 11.1% year-to-date. Should these gains grow or at least remain intact through yea-rend, it would be just the fourth time in 84 years of S&P 500 data in which there have been three or more consecutive years of double-digit gains. In all past occurrences the year after the third year of double-digit gains was also up double-digits for an average gain of 23.1%."
This will be a shortened trading week due to the Thanksgiving holiday in the U.S. Important economic reports will be released during the week though.
  • GDP for Q3 (second report), consumer confidence and Richmond Fed Mfg Index (T)
  • Durable Goods Orders, Jobless Claims and Personal Income and Outlays and New Home Sales (W)
  • Chicago PMI (F)
For more insight into the coming week, below is the link to this week's magazine.


Sunday, November 23, 2014

Hedge Fund Activity In Third Quarter

Investment advisors having discretionary investment authority over $100 million or more in assets are required to report holding detail to the SEC in a 13F filing on exchange listed securities. In the third quarter of this year the filing deadline was November 14, 2014. S&P Capital IQ recently provided a summary of the changes made by ten large hedge funds in their third quarter filing versus the second quarter filing. A report summary can be found at the below link.

From The Blog of HORAN Capital Advisors

The sector attracting the most buying attention in the third quarter was the energy sector. Information technology saw the most selling activity. The attention given to the energy sector is not a surprise given the weak performance of the sector this year. The below chart created by the Bespoke Investment Group displays a heat map of the year to date S&P 500 sector performance over the course of this year. Notably energy is the laggard.

From The Blog of HORAN Capital Advisors

Investors should keep in mind that this type of hedge fund information can change significantly during the filing deadline date and quarter end.

Disclosure: Firm and/or family long ABBV, AAPL, TMO


Saturday, November 22, 2014

Lower Gas Prices Alone Do Not Equate To Higher Retail Spending

The pump price of a gallon of gasoline continues to drop in the U.S. This decline in gas prices is believed to result in a pickup in consumer spending since the consumer will be spending less on gasoline. Specifically, the spending increase is expected to flow through to an increase in retail sales. Guggenheim Partners wrote a comment, Falling Gas Prices Fuel Holiday Cheer, that noted an increase in discretionary spending as one's gasoline consumption as a percentage of disposable income declined. The chart below graphically depicts this relationship.

From The Blog of HORAN Capital Advisors

On the other hand, as the following chart indicates, if one compares the simple decline in a gallon of gas to retail sales (excluding sales at gasoline stations), declining gas prices do not seem to equate to an increase in retail sales. As the below chart shows, it actually appears as gas prices decline retail sales decline as well. So what is the broader implication then?

From The Blog of HORAN Capital Advisors

Certainly, a number of factors impact the price of oil and the resultant price of gasoline. A large factor influencing energy prices is of course supply. With the positive supply impact of fracking's success, this pushes gas prices lower. The primary contributor to retail sales growth is an increase in a consumer's disposable income. Disposable income certainly increases if consumers are spending less on gasoline. However, in our view, a greater impact on retail sales growth is the overall health of the economy which translates into job growth and wage growth.

On the wage front, employees have been experiencing real wage growth since the end of 2012 as noted in the below chart created by Doug Short at Advisor Perspectives. In a New York Times article from earlier this year, it was noted that some economists do believe the slowing in wage growth is behind us in this economic recovery.

From The Blog of HORAN Capital Advisors

From an employment perspective though, the economy and job market have not recovered at a rate commensurate with prior recoveries. The below chart looks at the trend in the unemployment rate and currently the rate equals 5.8%. However, the yellow line in the below chart displays the unemployment rate using the participation rate in March 2008. Using the 2008 participation rate results in an unemployment rate that turns out to equal a much higher 10.4%. There is debate about the cause of the declining participation rate. Some believe it is due to baby boomer retirements while others believe it is the result of individuals dropping out of the labor force. Bill McBride at Calculated Risk does a nice job providing analysis around the participation rate.

From The Blog of HORAN Capital Advisors

Lastly, given the decline in gasoline prices, one might expect individuals to travel more in a strengthening economy. Again, Doug Short has assembled a lot of good information on vehicle miles driven and one particular chart below shows a steady decline in miles driven.

From The Blog of HORAN Capital Advisors

Doug Short summarizes the above chart with the following comment,
"As is readily apparent, the correlation is fairly weak over the entire timeframe. And, despite the volatility in gasoline prices since the onset of the Great Recession, the correlation since December 2007 has been even weaker. There are profound behavioral issues apart from gasoline prices that are influencing miles traveled. These would include the demographics of an aging population in which older people drive less, continuing high unemployment, the ever-growing ability to work remote in the era of the Internet and the use of ever-growing communication technologies as a partial substitute for face-to-face interaction."
In conclusion, a decline in gasoline prices alone will not simply result in higher retail sales. Of primary importance is a strong economy where GDP growth is in the 4-5% range; thus, creating an environment where job and wage growth are strong. We believe the current economic environment is one where growth remains below the economy's full potential and results in under employment. The impact on the retail sector is one where investors will need to be selective. A rising economic tide currently being experienced is not likely to result in across the board strength in retailers. Recent earnings reports do reflect this situation, with some retailers exceeding expectations and others falling short of expectations. As an example, last week, Urban Outfitters (URBN) fell over 6.5% after missing earnings before recovering at week's end. Gap (GPS) exceeded 3Q estimates but was cautious on Q4 guidance. The stock fell over 4%. I could list a number of other retail reports, but suffice it to say, lower gasoline prices are not benefiting all retailers. In fact, a move higher in pump prices might be more of a sign of a stronger economy and have a greater positive influence on retail sales.

Updated (11/22, 3:14pm): Thomson Reuter's AlphaNow site provides a summary of Q3 retail reports in an article titled, Q3 Retail Same Store Sales Report: 50% Beat Estimates, 47% Fall Short.

Disclosure: No position in GPS or URBN.


Friday, November 21, 2014

A Strong Dollar Favors U.S. Large Cap Equities

Today China announced a rate cut, the first in two years, and Mario Draghi announced the ECB would expand its stimulus program if inflation did not return to the ECB's target level. These two announcements have resulted in global equity markets spiking higher. The two actions are likely to result in further strength in the US Dollar. With this in mind, investors should remain cognizant of market performance when the dollar strengthens. As the below chart shows, emerging markets historically underperform the S&P 500 Index in a period of Dollar strength.

From The Blog of HORAN Capital Advisors


Wednesday, November 19, 2014

One Chart The Bears Hate

In September I posted a similar chart as the one below; however, data in the earlier post represented returns and duration for the S&P 500 Index. The article was republished on Seeking Alpha and most of the comments to the SA article took exception to how the chart was constructed. One commented noted "More upside? Unlikely..." Absent the market's October swoon, the U.S. equity markets continue to close at record highs. The below chart of the Dow Jones Industrial Average is from Chart of the Day noting,
"The Dow just made another all-time record high. To provide some further perspective to the current Dow rally, all major market rallies of the last 114 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow with the majority of rallies referred to by a label which states the year in which the rally began. For today's chart, a rally is being defined as an advance that follows a 30% decline (i.e. a major bear market). As today's chart illustrates, the Dow has begun a major rally 13 times over the past 114 years which equates to an average of one rally every 8.8 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (blue dot labeled you are here) would be classified as well below average in both duration and magnitude."
From The Blog of HORAN Capital Advisors

Looking at the chart on its own would suggest this rally could have more room to run to the upside.


Monday, November 17, 2014

Week Ahead Magazine: Contrarian Investment Opportunities

Over the weekend Andrew Nyquist published an article on See It Market's website titled, Is The Nasdaq 100 Overheating? The article noted the sharp advance of the Nasdaq 100 Index in 2014 versus other U.S. focused indices as noted in the below chart from the article. The strong index performance can be partly attributed to the strength in Apple's stock as it comprises nearly 15% of the Nasdaq 100 Index.

From The Blog of HORAN Capital Advisors

Market commentary over the past week seems to be centered on the extended nature of the U.S. equity market and the possibility of an imminent correction. As we have noted, along with many others, the sentiment indicators seem decidedly bullish and they tend to be contrarian signals. Last week we noted the bullishness in the AAII individual investor sentiment survey while others have noted the extreme low in the Rydex Bear/Bull Ratio. As the first chart above notes, equity market strength has been centered in the larger cap U.S. markets (Nasdaq 100, S&P 500 Index and the Dow Jones Industrial Average) Markets that are not hitting new highs on a seemingly daily basis are those outside the U.S. The below chart shows the lagging MSCI EAFE Index and the lagging NYSE Composite.

From The Blog of HORAN Capital Advisors

I include the NYSE Composite for two reasons.
  • the NYSE Composite is represented by 32% of the country weight being outside the U.S., and
  • the technology weight in the index totals 4.9% versus 19.6% for the S&P 500 Index.
From The Blog of HORAN Capital Advisors
Data Source: NYSE

At HORAN we still maintain a positive view on U.S. equity markets. However, the lagging nature of markets outside the U.S. and lower valuations are presenting investors with potential investment opportunities if they believe the U.S. market is extended. If an investor desires to maintain exposure in the U.S., there are sectors that have lagged the broader market as well, for example, energy and materials, just to name a couple. It is difficult to time the market, but foreign oportunities are beginnig to look interesting if one's time horizon is three to five years out.

Some of the article links in the Week Ahead Magazine below look at potential contrarian investment opportunities.


Global Companies Report Lower Revenue And Earnings Growth In Q3

One factor evident this earnings season is the stronger US Dollar is likely having a negative impact on companies more exposed to global business. Certainly, the economic slowdown in Europe is having an impact as well; however, the recent strength in the US Dollar has been a headwind for multinational companies as well.

From The Blog of HORAN Capital Advisors

Factset recently summarized company revenue and earnings growth for S&P 500 companies that have reported third quarter earnings. As the below chart shows, companies with more than 50% of their business generated outside the U.S. have reported a lower revenue and earnings growth rate.

From The Blog of HORAN Capital Advisors



Saturday, November 15, 2014

REITs Will Be Separate GICS® Sector

Earlier this week S&P Dow Jones Indices, along with MSCI, announced real estate investment trusts (REITs) will be separated into their own sector under the Global Industry Classification Standard (GICS®). The current REITs contained within the S&P 500 Index are noted in the below spreadsheet.


This change will increase the number of GICS sectors to eleven from the current ten. In a post on S&P's website they note,
"Real Estate, previously part of the GICS financial sector, will be the 11th sector while the financials will now be limited to financial services such as banking, insurance or exchanges. This is the first time since GICS was launched in 1999 that a new sector is being added."
The changes to the indices are anticipated to be implemented after the market close on August 31, 2016; however, final details will be announced by March 13, 2015.


Friday, November 14, 2014

Individual Investors Becoming Too Bullish?

Yesterday the American Association of Individual Investors released their weekly sentiment survey. As the below chart clearly indicates, individual investors have certainly become more bullish. Some highlights from this week's survey report.
  • Bullish sentiment of 57.91% is a high for this year.
  • The bull/bear spread of 38.6% is at a high for the year and above the average plus one standard deviation totaling 26.8%.
  • Since mid October when the bullish sentiment fell to 35.42%, the S&P 500 Index is up over 9%.
From The Blog of HORAN Capital Advisors
Source: AAII

As noted in prior sentiment posts, these type of behavioral indicators are most predictive at their extremes.