Monday, May 31, 2010

Better Investing's Most Active

Following is a list of companies attracting the most interest from members of BetterInvesting, based to their recent buy and sell decisions, as reported by a small, informal sampling -- 160 transactions -- for the trailing 4-week period ended Monday, May 31, 2010.

Figures in parentheses provide the previous ranking four weeks ago. This listing is presented as a source of stock ideas in the current market. No investment recommendation is intended.

Disclosure: Long ABT, GE

Seems Like The Market Is Oversold

The S&P 500 Index return of -7.99% for May 2010 was the worst since May 1962. This poor May performance seems to be validating the mantra, "sell in May and go away." Just as selling in May 2009 was not the right investment approach, could selling now be equaling bad timing given the magnitude of the market's decline in May?

The sharp sell off has resulted in a number of technical indicators suggesting an oversold market. The percentage of S&P 500 stocks selling below their 50-day moving average is near levels achieved in early 2009.

Additionally, individual investor sentiment become significantly more bearish last week. The American Association of Individual Investors reported bullish sentiment declined over 11 percentage points to 29.83%. The bull/bear spread became more negative at -21%.

Lastly, S&P notes that with 99% of companies having reported first quarter earnings, the rolling four quarter reported earnings per share totals $60.93. As the below chart notes, earnings have crossed the value for the S&P 500 index. Could this be a form of the technician's golden cross? Earnings estimates for the S&P in 2010 total $64.84 and the 2011 estimate is $80.92. Company fundamentals do seem to be favorable.

If there is a concern, beyond those in Europe, it is deleveraging that is occurring at the moment. This deleveraging process is taking away some of the strength that would come from the consumer. With job growth weak, consumers are feeling stressed and with out a confident consumer, economic growth might continue, but on the weaker side.

Saturday, May 29, 2010

Market Corrections Not Unusual

A bull market is defined as one that achieves a return greater than 20%, conversely a bear market is one that declines over 20%. Market corrections are ones where the decline is greater than 10% , but does not exceed 20%. The market's recent decline from its April high was -12.3%; thus qualifying it as a correction. Corrections do not necessarily lead to bear markets though.

According to a recent report from Fidelity, the following aspects of market corrections are pretty typical:

  • It’s been about 14 months since the current bull market began on March 9, 2009, which is in the neighborhood of the average length of time that has passed from the start of prior bull markets to a first correction (17 months, see above table).
  • The stock market gained 80% before the recent correction. Historically, the first correction in a new bull market has come after average gains of 57%, implying the current bull market was overdue for a correction on a price appreciation basis.
  • The main factor that has differentiated this recent correction is that it has taken place at a fairly swift pace compared to history. It took 27 days for the market to surpass the 10% decline threshold, which is half the time it’s historically taken on average for a correction to occur (54 days).
  • Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory. Whether the market recovers again from here and avoids a bear market remains to be seen, but at the very least the more surprising development based on historical patterns would have been a continued bull market rally without a 10% pause.
In the short term, the S&P 500 index has bounced 2% off the May 26 low of 1,067. A number of equities are now trading at attractive valuations; maybe giving investors an opportunity to pick up some decent companies at attractive prices/valuations.


Stock Market Corrections: Unsettling But Not Unusual (PDF)
Fidelity Management & Research Company
By: Dirk Hofschire, CFA
May 21, 2010

Tuesday, May 25, 2010

Are You A Contrarian Investor?

Volatility remains the order of the day and the market is down over 13% from its recent high. One can go back to 1998 and the S&P was trading at the 1055 level so in 12-years, on a price only basis, an investor has essentially made no money investing in the S&P 500 Index.

One question might be to determine if you are a contrarian investor. A recent MarketWatch article, The Bearish Bandwagon, noted that as of a couple of weeks ago, market timing newsletters were recommending investors allocate 80% of their Nasdaq-oriented portfolios to stocks. Today they are recommending minus 45%. The article notes, "this represents an extraordinary shift away from excessive bullishness to aggressive bearishness in a remarkably short period of time."

Sunday, May 23, 2010

Markets Are Increasingly Volatile

Recently, investors seem to be pulling the sell trigger first and asking questions later during down market days in the stock market. At one time in the not to distant past investors believed 1% daily moves in the market were rare. Now 1% daily moves seem almost commonplace. Now the new standard is 2% daily price swings.

According to Standard & Poor's:
"the number of days in the past year that the S&P 500 fell by 2% or more in a single day began to accelerate. Indeed, May 4 and May 6 were the two most recent times the 500 dropped 2% or more in a single session. In the past 12 months (ended May 14), the 500 fell by 2% or more 13 times vs. an average of seven per year since 1970. Of course, these readings are nowhere near the peak of 54 declines experienced in mid-2009 as a result of the megameltdown in equity prices."
The quick sell mentality of investors seems to be driving higher volume on down days as well. Year to date through May 14th, S&P reports the volume of trades in S&P sector ETFs on down days equals 278.4 million shares. The volume on up days is 177.1 million shares. As a result the percent of down volume to up volume is 61%.

This higher volatility is an aspect of investing that investors need to be aware of going forward. A key focus of the investing approach utilized at HORAN Capital Advisors is to construct the foundation of ones portfolio in a way that minimizes this volatility.


Learning to Live with Increased Volatility
Standard & Poor's
By: Sam Stovall
May 17, 2010

Friday, May 21, 2010

Launching A New Era In Wealth Management

I am pleased to announce the formation of HORAN Capital Advisors (HCA) in conjunction with Mark Bennett, CFA, Nick Reilly, HORAN Associates and Terry Horan.

HORAN Capital Advisors expands on the larger HORAN organization by expanding on HORAN's wealth management services. The combination of HORAN’s well-established wealth management practice combined with the intellectual capital and depth of experience of HORAN Capital Advisors creates a strong resource for individuals, families, and institutions.

HORAN Capital Advisors expands on the value HORAN provides to current clients while advising on over $550 million in assets. HCA extends the expertise of HORAN’s wealth management practice by providing clients with superior market knowledge and a proven, sound approach to investment solutions.

The foundation for HCA was established by Jack Horan in 1948. By satisfying the needs of their clientele for over 60 years, HORAN Associates has grown to become one of the region’s largest privately held financial services companies. HORAN has over 6,500 clients in 40 states while managing diversified products for more than 500 companies and 170,000 individuals.

To learn more about our thinking and approach to managing wealth for individuals and institutions, visit HORAN Capital Advisors' website and the HORAN organization website.

Horan Capital Advisors
Horan Associates

Wednesday, May 19, 2010

Higher Yielding Bonds Tend To Hold Up Better In Rising Interest Rate Environment

If an investor maintains any cash in a money market/savings account today, they know interest rates are at levels approaching zero percent. Consequently, it does not seem as though rates can go much lower. When (not if) interest rates do begin to trend higher, be it 6, 9 or 12 months from now, the impact on the price or value of bond investments will be negative. As bond investors know, there is an inverse relationship between bond prices and interest rates. As interest rates rise, the price of bonds will decline. In simple terms, the magnitude of the bond price decline is dependent on the maturity length of the bond or bond fund and the coupon yield for the bond.

Fidelity recently published a research report showing the impact on bond returns during one of the toughest periods for a bond investor: 1941 - 1981. During this stretch of time, intermediate treasury rates rose from .5% to over 16%. As detailed below, bonds that had higher rates tended to generate better returns over the early period of the '41 - '81 time period. The reason for this is bonds with higher coupons and or shorter terms returned cash to an investor sooner that could be reinvested at the then higher rates.

As mentioned earlier, the concern with the Fed moving to an increasing interest rate environment is the potential for an investor to experience negative total returns in the bond portion of their portfolio and many investors use bonds as an insulator or shock absorber to counteract volatile equity markets. I believe Fidelity's research article sums up the situation pretty well:
Investors have reason to worry about future prospects for bond returns—history shows that current low yields may be expected to result in below-average performance, especially if interest rates rise. Investors particularly concerned about the possibility of rising rates may want to diversify their fixed-income portfolios into less interest-rate sensitive sectors. However, the great bond bear market of 1941-1981 also offers some more comforting lessons as well. High-quality bonds are much less volatile instruments than stocks, and they do not lose that attribute during periods of rising rates. Even during a prolonged period of rate increases, owning bonds lowered the volatility and improved the risk-adjusted returns of an overall investment portfolio. As a result, investors may not look with much excitement at the near-term outlook for bond returns, but that doesn’t mean they should over-react by shunning bonds altogether.
Of particular concern is record levels of cash continue to pile into bond funds as reported by ICI. The previously reference link also shows investment flow activity after the flash trading market correction from a few weeks ago. In aggregate, investors have withdrawn large sums of money from all types of investment funds, with the largest dollar amount coming out of equity funds. subsequent to the flash trading event. The Zero Hedge website contains a chart of the S&P index graphed with the fund flow data.

For bond investors, pay attention to the maturity (better yet, duration) of the bond or bond portfolio. Additionally, staying invested on the shorter end of the bond curve could minimize the impact that a rising interest rate environment will have on a particular bond or bond fund's price.


Perspective on the Potential Downside for Bonds
Fidelity Management & Research Co.
By: Dirk Hofschire, CFA
April 23, 2010

Sunday, May 16, 2010

A Lot Of Good Economic News Too

Much of the financial news has been centered on the EU and its dealings with the Greece sovereign debt issue. Rightfully so the debt issue is one that could have consequences beyond Greece itself. On the other hand, quite a bit of good economic news has been reported recently as well.

Industrial Production

  • Industrial production jumped up at an annualized rate of 10.0 percent in April, following an upwardly revised 2.5 percent gain in March.
  • Over the past 12 months, industrial production is up 5.2 percent, its highest growth rate since June 2000.
Consumer Sentiment

  • The University of Michigan Index of Consumer Sentiment edged up in early May, increasing from an index value of 72.2 to 73.3.
  • Both the current conditions and consumer expectations components posted modest increases, contributing to the overall increase.
Retail Sales

  • Total retail sales rose 0.4 percent (nonannualized) in April, following an upwardly revised 2.1 percent jump in March.
  • Over the past 12 months, retail sales have risen 8.8 percent (their highest growth rate since July 2005).
Factory Orders

  • New orders for manufactured goods increased 1.3 percent (nonannualized) in March, following an upwardly revised 1.3 percent jump in February.
  • New orders excluding transportation rose 3.1 percent in March and are now up 15.6 percent over the past year.
  • The I/S ratio for manufactured goods continues to decline from its peak reading of 1.47 months in January 2009 to 1.27 months.
ISM Index

  • The ISM’s Manufacturing Purchasing Managers Index (PMI) continued improve in April, increasing 0.8 index point to 60.4 (its highest level since June 2004), following a 3.1 point jump in March.
  • The new orders index jumped up from 61.5 to 65.7 in April, continuing its rebound from an all-time low of 22.9 in December 2008.
  • The production index rose 5.8 points to 66.9 during the month, marking its eleventh month above the diffusion index growth threshold of 50.
  • The employment index surged to 58.5 its highest level since January 2005.
Nonfarm Payroll Employment

  • Nonfarm payroll employment grew by 290,000 in April, topping expectations for roughly a 200,000 gain. Census hiring inflated April’s figure by 66,000, but private payrolls still increased 231,000 when discounting the government’s boost.
  • Revisions to February and March figures were solid as well, tacking on an additional 121,000 jobs and leaving those months’ respective gains at 39,000 and 230,000.
  • Jobs in goods-producing industries expanded by 65,000, and services expanded 166,000, its largest increase in over three years.
From a stock market perspective, the S&P seems to have held support at its 200 day moving average at around 1,100. The 50 day moving average is now serving as resistance for the index at the 1,174 level. With the index closing at 1,135 on Friday, if it reaches the 1,174 resistance level, that would be a pretty decent return. Additionally, the selling volume seems to be subsiding as it is in a downtrend at this point. A number of investors likely got stopped out during the 1,000 point decline that occurred on May 6 and are trying to reenter the market.

Economic Data Source: Federal Reserve Bank of Cleveland

A Look At The Market Around The Presidential Election Cycle

I have noted in the past that the market, the Dow Jones Industrial Average ($INDU) in this case, tends to follow a pattern around the presidential election cycle. It is believed tougher economic policy is followed early in the presidential election period if necessary. The hope is the economy will recover in time to re elect the party that is in power. If the market follows this same pattern, a sideways trend may be the norm until the 4th quarter of this year with a stronger advance in the pre-election year period.

Given the extent of potential tax increases in 2011 and sovereign debt issues, a strong market advance is not assured next year. In this environment, an investor should consider constructing the foundation of their investment portfolio in high quality companies.

Friday, May 14, 2010

The Two Sides Of Risk

I read an interesting newsletter written by Howard Marks of Oaktree Capital where he opines on two main investment risks: the risk of losing money and the risk of missing opportunity. In the Howard Mark's newsletter, he notes:
You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention.

During bull markets, when asset prices are elevated, there’s great risk of losing money. And in bear markets, when everything’s at rock bottom, the real risk consists of missing opportunity. Everyone knows these things. But bull markets develop for the simple reason that most people are buying – ignoring the risk of loss in order to keep from missing opportunity – just when elevated prices imply losses later. Likewise, markets reach their lows because most people are selling, trying to avoid further losses and ignoring the bargains that are everywhere.
The entire newsletter can be read at the original post on Zero Hedge's website. Mark's provides some thoughts pertaining to the current market environment as well.

Thursday, May 13, 2010

Dividend Aristocrats Outperforming Year To Date

In a volatile market environment like the one experienced over the last several weeks, investing the foundation of ones equity portfolio in high quality dividend paying stocks can be beneficial. As the below table displays, S&P's Dividend Aristocrats are outperforming the broader S&P 500 Index on a year to date basis through 5/13/2010. The higher quality nature of dividend payers tends to provide a cushion in highly volatile down trending markets.

Data Source: Standard & Poor's

The S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

Sunday, May 09, 2010

Events Last Week Were An Excuse To Take Some Profits

As typically is the case, the event(s) that precipitates a market correction is typically unforeseen. Last week's 1,000 point plunge in the Dow at mid week was no exception. Not wanting to make light of the cause for the correction, the S&P 500 Index ($INX) seems to have bounced off its 200 day moving average this past Friday.

From a fundamental perspective, bottom up 2010 and 2011 earnings estimates for the S&P 500 Index are expected to total $81.06 and 94.87, respectively. The $94 estimate would surpass the $92 earnings achieved near the market's peak in late 2007. At that point in time the S&P 500 Index traded in the 1,500 area. Is it possible or better yet probable that the market gets back to this level in 2011?

Through the end of April, the only S&P sector trading near its October 2007 high is the staples sector. As the below table indicates, most sectors are still below their highs by double digit percentages. The S&P 500 Index itself remains over 24% below its October 2007 high.

As I noted in October of last year, anecdotal evidence of a pickup in trucking activity seemed evident during an out of town trip. An article from a week or so ago, Riding the rails: Road map to recovery, also cited a pick up in trucking and rail activity as a sign of improved economic activity. Although first quarter GDP of 3.2% came in lower than the 5.6% reported for the fourth quarter of 2009, it was growth nonetheless. From a positive perspective the growth came from the consumer and business (excluding inventory restocking). Longer term, a lack of saving by the consumer is a problem.

In the recent edition of Standard & Poor's The Outlook, they note that, "no bull market since 1949 has lasted fewer than 24 months." So can this bull market run through March of 2011?

Disclosure: Long NSC

Friday, May 07, 2010

Don't Let Government Dictate Whether One Is In Or Out Of The Market

Tom Gallagher, ISI Group's Washington Analyst, provides insight into recent policy action and its future impact on the market in this recent WealthTrack video. His view on government's impact on the market is an interesting one.

As some readers of this blog know, ISI is a highly respected research and strategy group with many of its analyst top rated by independent outside sources. Tom's strategy team team has been rated #1 by Institutional Investor magazine for 7 straight years.

Tom notes investors should expect somewhat lower returns in their equity investments in the coming years. A part of this is a direct result of the government's action in this post bubble period. Tighter credit standards are being forced on financial institutions and consumers are attempting to reduce the leverage on their own balance sheets at the same time. He notes in the video that yield will become an even more important part of an investor's returns in the coming years versus just capital appreciation.

Lastly, Tom makes some interesting comments about the potential long term opportunities that exist in the emerging markets. He cautions there may still be some downside risk in those markets; however, long term value is present.

Thursday, May 06, 2010

Does May 2010 Lead To A Repeat of March 2009

For investors, today's market action may have felt like late 2008 or the first quarter of 2009. One aspect of the 2008 and early 2009 market was investors had an opportunity to reassess their comfort level with the potential volatility associated with equities. Many were questioning whether they should be reducing their equity exposure during that time period. If they stayed the course, they were able to recover a large portion of paper losses during the last 15 months.

In the strong market advanced achieved since March of last year, investors need to be cautious in not letting emotions get in the way of sound investment decisions. If an investor was uncomfortable with the market environment in March last year and today were uncomfortable with their investments due to today's 1,000 intraday market decline, then an investor might want to consider lightening up on equities at this point in time keeping in mind equities are a long term investment choice.

As it turned out though, a majority of today's market decline was the result of an erroneous trade. For the trade in question, a trader selling shares of Procter & Gamble (PG) inadvertently entered the shares in billions versus millions. With Procter & Gamble being a Dow component, the 37% drop in P&G's stock contributed about 170 points to the Dow's decline. 3M (MMM) fell over $18 and represented over 140 points in the Dow's decline.

Without a doubt there are some uncertain market events in play at the moment, specifically events in Greece and the potential contagion in the sovereign debt markets. From a fundamental perspective though, the U.S. market does not seem to be extended on a valuation basis. Bottom up 2010 earnings for the S&P 500 Index are estimated at $81.06. This represents a projected P/E ratio for the S&P Index of just under 14. Top down 2010 earnings estimates are $65.37 and equates to a P/E multiple of 17. The market is not cheap, but it is does not appear expensive either.

Below are a couple of charts that display a few technical aspects of the market as it relates to the percentage of S&P 500 stocks that are trading above their 50 day and 150 day moving averages. These percentages have decline quite a bit from a few months ago.

For investors then, the sovereign debt issues are certainly events that will continue to impact the markets in the near term. The biggest concern is whether Greece's issues will spill over into other countries like Spain, Italy and Ireland, to name just a few. Investors should keep in mind that it is May and the market is entering a seasonally weak period. Absent of what I think are reasonably sound fundamentals for many high quality U.S. stocks, investors should keep the big picture in mind as it relates to the overall asset allocation for their investment portfolio.

Tuesday, May 04, 2010

Dividend Payers Outperforming Through April

For the first four months of the year, the dividend paying stocks in the S&P 500 Index are outperforming the non-dividend payers, 11.87% versus 10.17%, respectively. The payers have trailed the non-payers in the strong market advance over the last 12-months, however, investors seem to be rewarding the payers now.

Data source: Standard & Poor's

Sunday, May 02, 2010

The Beginning Of May And The Market

Now that it is May some investors are reminded of the adage, "sell in May and go away." Selling in May in 2009 certainly would have left investors on the sidelines during one of the strongest bull markets of recent years.

The tough part with the selling in May strategy this time around is where does an investor go with the cash. As the above table shows, even the low rates of return in the May to October period would be better than money market investments in this market. As a recent Bloomberg BusinessWeek article notes, the May to October period has seen gains in 12 of the last 20 years. The Sell in May and Go Where? article provides an investor with some areas of the market that have tended to perform well during this period, i. e., Health Care and Staples are a couple of sectors.


Stocks: Sell in May?
Bloomberg BusinessWeek
April 27, 2010

Sell in May and Go Where?
The Outlook
By: Sam Stovall
May 5, 2010