Sunday, January 30, 2011

Money Velocity A Key To Potential Inflation

Inflation pressures have been finding their way into commodity prices. Much of this commodity price inflation may be the result of investor speculation; however, commodity price pressures are having an impact on some of the emerging market economies. Inflation has not shown in the U.S. consumer price index, but an increase in the velocity of money may provide investors with insight into future inflation.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

The importance of the relationship between money velocity and inflation is explained by the quantity theory of money. One concern we have at HORAN is the fact banks are sitting on large amounts of deposits/cash at the federal reserve.

From The Blog of HORAN Capital Advisors

With economic conditions improving, along with banks seeming to get the lending side of their organizations in order, these reserve deposits can quickly find their way into the economy via more relaxed lending standards (increased velocity.) The Fed is doing all it can to stimulate money velocity including a reduction in the interest rate paid to banks on their reserve deposits.

From The Blog of HORAN Capital Advisors

Egypt, Investor Sentiment And The Market

The events in Egypt over the last week are now dominating headlines and impacting recent market actions. Many are commenting about the events in Egypt so I will not restate what is occurring in that part of the world. Readers can follow the news on Reuters live coverage link.

The events in that country have provided investors with a reason to take profits though. Often times market pullbacks or corrections occur as the result of unpredictable events. Given the strength of the market's advance since the lows in July last year, this pullback is not surprising.

From The Blog of HORAN Capital Advisors

As I noted in a post in mid December regarding the cup and handle formation of the S&P 500 Index, a breakout occurred around the 1,225 level. A retest of this level would not be surprising if the market falls through the 50-day moving average support. A retest of this cup and handle support would equate to a 4% decline in the market from Friday's close.

For investors then, they should maintain a focus on company fundamentals. With just over 40% of S&P 500 companies reporting earnings, Thomson Reuters notes 71% of those firms have reported earnings that exceeded analyst expectations. Additionally, the estimated earnings growth rate in Q4 is 36% and the forward four quarter (Q4 2010 – Q3 2011) P/E ratio for the S&P 500 is 13.3.

From The Blog of HORAN Capital Advisors

Investor sentiment figures reported by the American Association of Individual Investors is not overly bullish either. Last week's AAII sentiment survey reported that bullish investor sentiment declined nearly 9 percentage points to 42%. This compares to the long term average of 39%. Last week's bullish sentiment reading is down from the 63% reported in late December.

From The Blog of HORAN Capital Advisors

At HORAN Capital Advisors, we continue to be constructive on the longer term fundamentals for equities, especially compared to bonds. To us large multinational U.S. firms appear to be trading at more reasonable valuations vis-à-vis midcap and small cap equities. One factor we are focusing on is the ability of firms to generate top line revenue growth, and not at the expense of margins. The potential pullback the market may experience near term will likely give investors an opportunity to build or add to equity holdings.

Sunday, January 23, 2011

QE2: A Reason Risky Assets Are Inflating?

On August 27th of last year Ben Bernanke's speech at the Jackson Hole, WY meeting signal beginning of the Fed's second round of quantitative easing. Since the speech the stock market has responded favorably for long equity investors.

From The Blog of HORAN Capital Advisors

Not only have equity prices reacted favorably to the Fed Put, many commodity assets have responded as well and noted in our post, More Evidence Of Inflation In The System.

I do not recall the source of the below chart; however, during the Fed's first round of quantitative easing, the market experienced strong upward returns. The market's positive return during QE1 could be viewed as a coincidence; however, the quantitative easing dollars need to flow somewhere, and risky asset prices seem to be the beneficiary. This has been a stated desire by the Fed as well.

From The Blog of HORAN Capital Advisors

One question that comes to mind is what will be the market's reaction once QE2 comes to an end in June. One date that might be of importance is the Fed's Humphrey-Hawkins testimony before Congress in February. Given the change in the control of the House to the Republican side and their prior opposition to quantitative easing, might the Fed step up the QE program and have it end around the time of the Humphrey Hawkins testimony? Ron Paul, who has not displayed much favor for the Federal Reserve, has been named Chairman of the Subcommittee on Domestic Monetary Policy and Technology, the committee charged with overseeing the Federal Reserve.

Friday, January 21, 2011

Funds Flowing Out Of Bond Investments

Investors seem to be realizing that higher interest rates are not good for their bond investments. As we wrote in mid November in our article, Interest Rates On The Rise, higher interest rates translate into a declining value in the price of an investor's bonds. Recent mutual fund flow data shows investors have been placing less of their funds into bond mutual funds. The below chart shows the trend in the flow of funds into bond and equity funds through mid November. Bond inflows had essentially dried up.

From The Blog of HORAN Capital Advisors

The below table from the Investment Company Institute shows that bond flows have now turned negative with a majority of the outflow occurring in municipal bond funds.

From The Blog of HORAN Capital Advisors

This recent action reverses a long term trend of investors pouring investment dollars into fixed funds since 2006 and detailed by the red line in the below chart.

From The Blog of HORAN Capital Advisors

Wednesday, January 19, 2011

4th Quarter Investor Insight Newsletter

We are a little more than two weeks into the new year and 2010 seems to be quickly fading in investors' minds. The common theme this year, 2011, is the new year is looking similar to the last half of 2010. Our firm's 4th quarter investor letter summarizes 2010 and provides our insights into 2011. HORAN Capital Advisor's complete Investor Letter can be accessed at the following link: 4th Quarter Investor Letter.

Information on HORAN Capital Advisors can be found at

Monday, January 17, 2011

Sector Rotation And The Economic Cycle

Since the S&P 500 reached a low in March 2009, the market has enjoyed a strong recovery to the upside. Along with the stronger equity market, the economy has gained a firmer footing as well. Some of the economic support is a result of the Fed's and government's intervention. Some would say that in spite of this intervention the economy is experiencing growth, albeit slow growth. An important fact for investors is the market sectors perform differently depending on where the economy is as it relates to the economic cycle.

From The Blog of HORAN Capital Advisors

The chart below shows the performance of the various market sectors at various points along the economic cycle. A report prepared by Fidelity last year, A Tactical Handbook of Sector Rotations, details the four phases of the economy. The first two phases:
  • Early-cycle phase: Begins prior to the end of a recession as investors begin to anticipate an economic recovery, and extends through the initial economic acceleration. The stock market historically has registered exceptional gains, on average 32% during this period. [For the purposes of this article, this phase begins three months prior to the end of a recession and extends through the first nine months of recovery.]
  • Mid-cycle phase: Begins prior to the Fed’s initial rate increase, as the recovery broadens into expansion and the Fed moves to dampen inflation pressure. The market typically performs well during this phase (average return of 11%). [Begins three months prior to the initial rate hike, and extends nine months beyond.]

From The Blog of HORAN Capital Advisors

The early cycle phase tends to last through the first nine months of the recovery. The National Bureau of Economic Research (NBER) sets the beginning and ending dates of recessions. NBER has marked the end of the current recession as occurring June of 2009. If the economy follows its average cycle, the early cycle phase would have ended on March 2010. At HORAN we do not believe this is a typical recovery for a number of reasons, many of which have been debated in the media. Much debate occurred during the summer last year about a double dip recession. Consequently, the phases of this cycle seem to be lengthened. Having noted this, we believe the economy is in the later stages of the early-cycle. The mid-cycle phase begins prior to the Fed's initial rate increase.

From The Blog of HORAN Capital Advisors

Among many factors, one that investors need to look at are actions and statements by the Fed to gain clues that a rate increase may be forthcoming.


A Tactical Handbook of Sector Rotations
Market Analysis, Research & Education
A unit of Fidelity Management & Research Company
August 23, 2010

Saturday, January 08, 2011

Ed Hyman And Dennis Stattman Outlook

On this week's Consuelo Mack WealthTrack, she conducts an exclusive interview with Wall Street's long-time number one ranked economist, Ed Hyman of ISI Group, plus BlackRock's star Global Asset Allocation Fund manager, Dennis Stattman. Both discuss the outlook for the United States' economy and markets in the new world order.

Wednesday, January 05, 2011

Dividend Payers Outperform Non Payers In 2010

The average return of the dividend paying stocks in the S&P 500 Index outperformed the non dividend paying stocks in 2010. The dividend payers returned 18.75% versus 16.24% for the non payers in 2010. Given the attractive valuations and yields for many dividend paying stocks, especially compared to fixed income yields, outperformance of dividend paying equities has a high likely to continue in 2011.

From The Blog of HORAN Capital Advisors

Gold's Chart Pattern Indicates A Triple Top Has Formed

The market action in gold has created a triple top pattern in gold's stock chart. Additionally, it is common for the volume to continue to decline when triple top chart patterns are formed. This technical pattern development would indicate there is likely more downside weakness in the price of gold ahead.

From The Blog of HORAN Capital Advisors

Sunday, January 02, 2011

Returns For Various Market Segments In 2010

Several of the hard commodities such as Gold and Copper lead returns in 2010. Below are several graphics from Thomson Reuters that show segment returns in both Dollars and local currency. Readers can click the graphs for an interactive feature for other return periods.

Returns In Dollars
From The Blog of HORAN Capital Advisors

Returns In Local Currency
From The Blog of HORAN Capital Advisors

Significant Decline In Bullish Investor Sentiment

This past week saw a significant decline in bullish investor sentiment as reported by the American Association of Individual Investors. Bullish sentiment fell over 11 percentage points to 51.6% versus the prior week's reading of 63.3%. The bull/bear spread remained at a fairly wide 31 percentage points. As the market enters a new year, it does appear, from a sentiment perspective, investors are somewhat cautious about the future direction of the market.

From The Blog of HORAN Capital Advisors

Saturday, January 01, 2011

Review Of Dow Jones Industrial Constituents

Below is a list comprised of the 30 companies that make up the Dow Jones Industrial Index. Additionally, the companies highlighted in yellow are those firms that make up the 2011 Dogs of the Dow as discussed in a post earlier this week.

Top Article Posts From 2010

Below is a list of a few of the article posts from our blog that received the most clicks in 2010. Given the potential trend in interest rates and investor interest in dividend paying stocks, it is not surprising the list contains some of the articles it does.

Pre-Election Year Market Returns Tend To Be Strong

The average return for the Dow Jones Industrial Average in the pre-election year tends to be relatively strong. Most of the returns historically occur in the the first 6-7 months of the year. As Chart of the Day notes in their report,
"...One theory to support this behavior is that the party in power will make difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election."
From The Blog of HORAN Capital Advisors