Thursday, May 31, 2012

Individual Investor Bullish Sentiment Remains Low

In today's sentiment survey released by the American Association of Individual Investors, bullish investor sentiment declined to 28.02% versus last week's reading of 30.47%. The bull/bear spread was also more negative at -14% versus -8% in the prior week. Additionally, the 8-period moving average of bullish sentiment is at its lowest level, 28.7%, since March of 2009 when this average was reported at 27.5%.

From The Blog of HORAN Capital Advisors

The AAII sentiment survey is a contrarian indicator and this low bullishness level is only one indicator that might suggest the market is at a low point; however, Barry Ritholtz of The Big Picture website points to an analysis by Jim Bianco at Bianco Research noting the confused sentiment of the market based on newsletter writers. Certainly, a number of issues like the euro zone crisis seem to be driving sentiment at the moment, along with recently reported weaker economic data in the U.S.

Monday, May 28, 2012

Jason Trennert: The Bill Has Come Due

Jason Trennert is interviewed by Consuelo Mack on this week's WealthTrack. Jason discusses where investors should consider allocating their investments given the uncertainty surrounding the upcoming elections and the so called $537 billion "fiscal cliff" looming large at the end of the year.

The fiscal cliff is in reference to the expiration of the so-called Bush tax cuts, expiration of the payroll tax cut, the implementation of automatic spending cuts and the initiation of additional taxes to support the new healthcare law all beginning in 2013. This fiscal cliff is 3.5% of GDP and would likely have a negative impact on economic growth in the U.S. Additionally, Jason believes high quality dividend paying stocks are like "new sovereigns" given the low level of interest rates on U.S. government debt.

Sunday, May 20, 2012

Equity Put/Call Ratio Approaching 1.0

In the third week of August last year we noted the equity put/call ratio had climbed above 1.0 as noted in the post, Equity Put/Call Above 1.0 Again. As we wrote in that post,
"The equity P/C ratio tends to measure the sentiment of the individual investor by dividing put volume by call volume. At the extremes, this particular measure is a contrarian one; hence, P/C ratios above 1.0 signal overly bearish sentiment from the individual investor. This indicator's average over the last 5-years is approximately .7, indicating the individual investor has been generally mostly bullish and more active on the call volume side"
The S&P 500 Index closed at 1,123 on 8/19/2011 and traded sideways to down before reaching a low of 1,099 on 10/3. So from August 19 to October 3 of last year, the S&P fell an additional 2.1% after the equity put/call ratio rose above 1.0.

Well, here we are today with the P/C ratio approaching 1.0 again and bearish sentiment at elevated levels.

From The Blog of HORAN Capital Advisors

The news that triggered the decline last year is not too different from the news impacting the market currently. Following is what we wrote in August last year.
"At HORAN, we believe business fundamentals are contrasting with equity market actions. This divergence is being driven in large part by the lack of confidence in Europe in dealing with its sovereign debt issues and in Washington's inability to deal with its budget deficit. Additionally, the amount of regulatory uncertainty that includes health care reform and potential income tax reform is a factor in business' ability to commit to longer term expansion plans."
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, notes,
But there is a long list of positive offsets this year relative to the past two years:
  • Inflation is coming down, especially among commodity prices.
  • Credit growth is quite strong, especially for consumers.
  • Housing has improved markedly.
  • The US manufacturing sector is humming.
  • NFIB's small business survey made recent upside breakout.
  • Job growth is much better.
  • Consumer confidence is improving.
  • Private-sector leverage ratios are much improved (debt servicing costs are extremely low).
  • Recovery in state/local government spending.
  • The US economy somewhat decoupling from rest of world; at least Europe.
  • US bank capital/health is much better than Europe's.
  • The European Central Bank's Long-Term Refinancing Operations have reduced likelihood of global financial contagion.
  • Germany appears more willing to accept higher inflation, opening the door to easier monetary policy for the eurozone.
  • Valuations are quite cheap, especially on forward earnings.
  • Investor sentiment has improved sharply with the correction to-date (meaning pessimism has kicked back in).
It is difficult to predict a market bottom and certainly the S&P 500 index could trade lower in the very near term; however, business fundamentals look positive and sentiment is approaching levels indicating pessimism may be overdone. 

Thursday, May 10, 2012

Significant Drop In Investor Bullish Sentiment

The American Association of Individual Investors reported a significant drop in bullish investor sentiment this morning. The bullish sentiment fell ten percentage points to 25.40% versus 35.40% last week. This week's reading is the lowest level for bullish sentiment since September 22nd last year when bullish sentiment was reported at 25.33%. The bull/bear spread is now -16.66% versus last week's spread of 6.93%.

From The Blog of HORAN Capital Advisors

Wednesday, May 09, 2012

Earned Success Or Learned Helplessness: Choosing A College Degree

This post is a little bit off the path of a direct investment market or economic topic that I generally write. However, the observations do have implications for the employment market and how future college graduates might improve their employment prospects.

We are entering that time of year where students are celebrating their graduation from high school and college. Having recently attended Indiana University's graduation and talking with some of the graduates, it was evident that not all seniors were successful in securing a job. Prior to the IU graduation, I attended the academic signing day at the high school in our community. The academic signing is where the top graduating seniors, i.e., those achieving a 4.0 or higher grade point average during their 4-years of high school, announce their college choice and intended major. The common thread for both functions I attended is the selection of ones major is an important decision and can significantly impact one's marketability upon graduating from college.

For the high school seniors going on to college, the end of their college days are a long way off, at least 4-years, and a lot can change economically that affects the job market. However, I was surprised at some of the intended majors announced by some of these top high school seniors. Several of the majors announced by the graduating seniors fell into an area of study that currently has one of the highest rates of unemployment.

Several recent articles in the Wall Street Journal touch on some of the issues facing college graduates. It may seem obvious, but one important factor is the major pursued by college graduates. In many emerging economies, students in those markets select majors in either a hard science or engineering. Degrees in these fields provide one with an education that qualifies them for a number of job disciplines, even jobs that are not directly tied to the area of study. The WSJ article, "To the Class of 2012," notes a number of today's graduates lack factual knowledge due to the education community's focus on teaching "thinking" skills at the expense of having students learn facts. As noted in the article,
"Many of you [college graduates] have been reared on the cliché that the purpose of education isn't to stuff your head with facts but to teach you how to think. Wrong. I routinely interview college students, mostly from top schools, and I notice that their brains are like old maps, with lots of blank spaces for the uncharted terrain. It's not that they lack for motivation or IQ. It's that they can't connect the dots when they don't know where the dots are in the first place."
The article went on to note,
"In every generation there's a strong tendency for everyone to think like everyone else. But your generation has an especially bad case, because your mass conformism is masked by the appearance of mass nonconformism. It's a point I learned from my West Point intern, when I asked her what it was like to lead such a uniformed existence.

Her answer stayed with me: Wearing a uniform, she said, helped her figure out what it was that really distinguished her as an individual."
The other Wall Street Journal article, America and the Value of 'Earned Success', highlighted the author's path after he left Spain a number of years ago. In Spain this was unheard of since many job functions were guaranteed for life. If the job did not pan out, they found ways to qualify for lifetime disability paying the same salary as their job. When the author and his wife arrived in the U.S., they both ultimately landed jobs. The individual notes, "In the end, I concluded, what set the United States apart from Spain was the difference between earned success and learned helplessness (emphasis added)." The author goes on to note,
"The link between earned success and life satisfaction is well established by researchers. The University of Chicago's General Social Survey, for example, reveals that people who say they feel "very successful" or 'completely successful' in their work lives are twice as likely to say they are very happy than people who feel 'somewhat successful.' It doesn't matter if they earn more or less income; the differences persist.

The opposite of earned success is 'learned helplessness,' a term coined by Martin Seligman, the eminent psychologist at the University of Pennsylvania. It refers to what happens if rewards and punishments are not tied to merit: People simply give up and stop trying to succeed.

Learned helplessness was what my wife and I observed then, and still do today, in social-democratic Spain. The recession, rigid labor markets, and excessive welfare spending have pushed unemployment to 24.4%, with youth joblessness over 50%. Nearly half of adults under 35 live with their parents. Unable to earn their success, Spaniards fight to keep unearned government benefits.

Meanwhile, their collective happiness—already relatively low—has withered. According to the nonprofit World Values Survey, 20% of Spaniards said they were "very happy" about their lives in 1981. This fell to 14% by 2007, even before the economic downturn.

That trajectory should be a cautionary tale to Americans who are watching the U.S. government careen toward a system that is every bit as socially democratic as Spain's.

Government spending as a percentage of GDP in America is about 36%—roughly the same as in Spain. The Congressional Budget Office tells us it will reach 50% by 2038. The Tax Foundation reports that almost 70% of Americans take more out of the tax system than they pay into it. Meanwhile, politicians foment social division on the basis of income inequality, instead of attempting to improve mobility and opportunity through education reform, pro-growth policies, and an entrepreneur-friendly economy.

These trends do not mean we are doomed to repeat Spain's unhappy fate. But our system of earned success will not defend itself." 
For the graduating high school seniors and college seniors continuing their education, certainly pursue a field of study that you are passionate about, while at the same time making the education pursuit a rigorous one. Don't simply focus on classes that inflate your GPA if the course truly does not increase your factual knowledge. A rigorous course of study could mean the difference between "earned success" and "learned helplessness."

Monday, May 07, 2012

Dividend Payers Outperform In April

Standard & Poor's April performance update for the dividend payers versus non-payers in the S&P 500 Index shows the payers outperformed in April. The outperformance was almost 200 basis points or two percentage points, 1.72% versus -.12%, respectively. In spite of the strong April performance for the payers, the payers trail the non-payers on a year to date basis, 13.35% versus 16.40%, respectively. For the twelve month period, the payers have outperformed by more than 700 basis points though.

From The Blog of HORAN Capital Advisors

Data source: S&P