Sunday, December 29, 2013

Retirement Crisis

Chip Castle, a managing Director at Blackrock, recently wrote an article about the the lack of savings by individuals looking to retire. The article, Retirement in 2014: It’s Your Number that Counts, highlights a number of facts that point to the savings shortfall of potential retirees. A few of the facts noted in the article:
  • $6.6 trillion: That’s what the Center for Retirement Research has estimated as the gap between what people will need in retirement and what they have saved.
  • 20 years: A generation ago, when most of the current retirement system was created, life expectancy at 65 was 5 to 7 years. Today, it’s closer to 20 years, meaning if you retire at age 65, retirements are three times as long.
  • 65%: Building on the last point, a couple at age 65 has a 65% chance of one of them reaching their 90th birthday.
The article is a worthwhile read for investors looking to to make a few financial resolutions in the coming year. HORAN's financial planning director also wrote an article, A Retirement Crisis: Sound the Alarm, earlier in the year that also cited the crisis for those seeking to retire. His article provides a link to a survey by Employee Benefit Research Institute noting the lack of confidence of workers in their ability to retire due to insufficient savings.

The Week Ahead Magazine: December 29, 2013

With less than two full trading days remaining in 2013, investors likely will be looking ahead to what the market has to offer in 2014. Just because the year changes from 2013 to 2014, a one day advance on the calendar should not result in major changes in ones investment approach. On the other hand, the new year is a good time for investors to evaluate their financial health. Several of the articles in this week's magazine provide links to articles containing a list of financial resolutions for investors to consider. Also included in the magazine are several links to articles containing a discussion on interest rates and their potential impact on bond values in 2014. With Fed tapering underway investors need to be aware of the impact a rising interest rate environment can have on their investment portfolio.With that, below is the link to the last magazine of 2013. All of us at HORAN wish our clients and readers a Healthy and Prosperous New Year!

Saturday, December 28, 2013

Very Few 'No Dividend/No BuyBack' Companies In The S&P 500 Index

Early this past week we wrote about the strong stock buyback activity by S&P 500 companies. For investors selecting their favored stock purchases from the list of companies that comprise the S&P 500 Index, they have not have difficulty finding a company that pays a dividend or has bought back their stock this past year.

In a recent report by Factset it is noted,
  • Just 16 companies in the S&P 500 (3.2%) did not pay a dividend or engage in a share buyback over the trailing twelve month period.
  • As recently as Q1 2010, more than three times as many companies (49, or 9.8%) did not make either form of distribution. 
  • Concurrently, the number of companies engaging in both forms of shareholder distribution reached the highest level since at least 2005 (369, or 73.8%).
    From The Blog of HORAN Capital Advisors
    Source: Factset

    The Factset report goes on to note that the no buyback/no dividend companis tend to be the smaller ones within the index; however, there are a few notable exceptions, Amazon (AMZN) and Google (GOOG).  In the case of Google, the report notes, "Google...had free cash flow just shy of $12 billion over the trailing four quarters. The company also has cash and short-term investments of $57 billion, which grew 23.6% year-over-year.

    Lastly, with this heightened level of buyback activity, investors need to be aware of the impact buybacks have on reported earnings per share for companies. In the case where the buyback reduces the share count, this can distort the actual earnings growth being achieved by the respective company. Additionally, as we noted in a post in early 2012, companies have a practice of buying back shares at elevated price levels as can be seen in the below chart.

    Disclosure: Long GOOG

    Friday, December 27, 2013

    Job Openings Continue To Increase

    Yesterday the U.S. Labor Department reported weekly jobless claims fell 42,000 to 338,000. According to to a Reuters article, Moody's Analytics' analyst Ryan Sweet said, "The underlying trend remains favorable. We will be able to muster stronger job growth in 2014." On the surface it does appear the job market is improving.

    Several weeks ago the bureau of labor statistics reported the unemployment rate fell to 7% from the previous months rate of 7.3%. Although the participation rate improved slightly to 63% the rate remains below the pre-recession rate of 66%. If the participation rate equaled the pre-recession level, the unemployment rate would total 11.4% as detailed in the below chart. This is a rate that is not much better than at the end of the recession. This higher unemployment rate is the result of including an additional 7 million individuals in the labor force at the higher participation rate.

    From The Blog of HORAN Capital Advisors

    On the other hand, the December Job Openings and Labor Survey (JOLTS) release shows there were nearly 4 million job openings at the end of October. This is nearly double the openings at the end of the recession. The JOLTS report shows job openings continue to increase at a steady rate. The individual groups having the most difficulty finding a job are teenagers (20.8% unemployment rate) and those individuals that have less than a high school diploma (10.8% unemployment rate).

    From The Blog of HORAN Capital Advisors

    With the increased number of job openings, further improvement in the level of employment may occur into 2014. This could serve as a positive in a number of ways, i.e., more consumers, less government outlays, etc.

    Thursday, December 26, 2013

    Individual Investors May Be Overly Bullish

    As reported by the American Association of Individual Investors today, bullish investor sentiment increased nearly eight percentage points to 55.1%. This increase pushes the bullish sentiment level above the +1 standard deviation level and is the highest reported bullish sentiment reading since reaching 63.3% during the week of December 23, 2010. The sentiment measure surveys AAII's individual investors about their view of the market for the next six months.

    From The Blog of HORAN Capital Advisors
    Data Source: AAII

    In addition to an elevated bullishness reading, the bull/bear spread has increased 37% and this spread is the highest since AAII reported the spread at 47% for the week of December 23, 2010.

    From The Blog of HORAN Capital Advisors
    Data Source: AAII

    As noted in the past, these sentiment readings can be volatile from week to week. Included in the first chart is the 8-week moving average of the bullish sentiment reading and although elevated it remains below the level reached in December 2010. Importantly though, these sentiment measures are most predictive at their extremes and it appears the individual investor is certainly viewing the market in a more favorable light.

    Wednesday, December 25, 2013

    Mid Term Election Year Market Return

    Historically, the average S&P 500 Index return in post election years has equaled just over 5% as we noted in a post at the beginning of 2013. For certain this year has been anything but an average one with the S&P 500 Index up over 28% on a price only basis at the time of this writing. As 2013 comes to an end and investors begin to look at 2014, mid term election years tend to be more volatile during the first half of the year. Chart of the Day provides insight into mid term election years noting,
    "Today's chart illustrates how the stock market has performed during the average mid-term election year. Since 1950, the first nine months of the average mid-term election year have tended to be subpar (see thick blue line). That subpar performance was then followed by a significant year-end rally. One theory to support this behavior is that investors abhor uncertainty. To that end, investors tend to pull back prior to an election when the outcome is unknown. Beginning in early October, however, the outcome of the election becomes increasingly apparent and investors respond by positioning their portfolios accordingly."
    From The Blog of HORAN Capital Advisors

    Tuesday, December 24, 2013

    Better Investing Members Favored Stocks

    From time to time I provide a list of the most favored stocks purchased by Better Investing Magazine's members. The recent top 10 stocks reported by its members as of December 24, 2013 are detailed below.

    Monday, December 23, 2013

    Stock Buybacks Continue At A Strong Pace Through The Third Quarter

    Today, S&P Dow Jones Indices reported preliminary buyback activity through the third quarter of 2013 continued at a strong pace. S&P noted in the report that buybacks are at their highest level since the fourth quarter of 2007. A couple of notable facts from the report,
    • "For the 12 month period (ending September 2013), S&P 500 issues increased their buyback expenditures by 15.0% to $445.3 billion from the $387.3 billion posted in the prior 12 month period. The high mark was reached in 2007, when companies spent $589.1 billion over the 12 month period. The recession low point for a quarter was $24.2 billion, recorded in the second quarter of 2009."
    • Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, notes, "...we are starting to see excess buying, where the repurchases outnumber the issuance, and therefore reduce the share count. The lower share count leads to higher EPS, and the market likes higher EPS (emphasis added)."
    From The Blog of HORAN Capital Advisors

    S&P 500 Stock Buybacks Increase In Third Quarter; Buybacks at
    Their Highest Level Since the Fourth Quarter of 2007
    S&P Dow Jones Indices
    By: Howard Silverblatt, Senior Index Analyst
    December 23, 2013

    The Week Ahead Magazine: December 22, 2013

    As we noted in last week's magazine, the stock market has a tendency to finish calendar years in strong fashion. To that end investors have not been disappointed so far. As the end of the year is fast approaching, some of the links in this week's magazine look at consumer sentiment, fund flows and, of course, a report on the Dogs of the Dow strategy for 2013. This week's magazine is a day late in posting as I was traveling over the weekend.

    Sunday, December 15, 2013

    The Week Ahead Magazine: December 15, 2013

    According to the Wall Street Journal (link in this week's magazine) "...over the past 100 years...stocks endure a mid-December dip most years. Stocks tend to rise at the start of the month, pull back in the middle and bounce at the end. Then they keep rising at the start of January. Charts show this happening on average over the past 100 years, 50 years, 20 years and 10 years. The late-December recovery is so common it has a Wall Street nickname: the Santa Claus rally." With two weeks of trading remaining in the year investors will witness whether a Santa Claus rally indeed develops. Several article links in this week's magazine highlight the Santa Claus rally phenomenon as well as links to a few strategists' 2014 forecast.

    Saturday, December 14, 2013

    Technically The Market May Be Nearing A Bottom?

    It is always difficult for investors to guess the bottom of a market correction (or pullback) or time the turning point with pin point accuracy. The difficulty is more clouded today given the Fed's quantitative easing activities and now the timing of the Fed's so called tapering. In the long run economic and company fundamentals are the driving force behind the market's performance and the performance of individual companies for sure. With the strong equity market performance so far in 2013 investors might be enticed to lock in their paper gains. The recent selling pressure experienced by the equity markets might be just that, locking in some gains or tax loss selling.

    It seems so long ago, but on the first page of our first quarter investor letter we discussed the calendar year returns for the S&P 500 Index going back to 1980 and included a graph with the maximum correction in each of those years. Interestingly, we believe we may be in a period today that resembles the mid 1990's where multiple expansion was a critical factor in the strong equity market returns achieved at that time. We discussed multiple expansion in our third quarter investor letter. The point in repeating this commentary is what is different today than at the beginning of 2013?
    The above are just a few favorable economic data points. At HORAN we continue to believe the economy is improving but at a slow "bounce off the bottom" pace. 

    Correction: 12/17/2013
    Now looking at a few equity market technicals, an interesting one is the equity put/call ratio. As the below chart shows, this ratio has spiked higher to a level not seen since June of 2012. At the market close today the ratio equaled .83. In late October, early November, of 2012 the equity put/call ratio was at near the same level as today. At that time the S&P 500 Index was trading just below 1,400.

    Following the posting of this article last week a reader noticed a difference in the put/call ratio reported above and a graph in the original post and that reported by the CBOE. Our original commentary and graph was CBOE data received from a third party and the reported p/c ratio was incorrect. The correct ratio at the close on Friday was .53. The below graph is an update with the corrected data. (Our practice is to strike through the original commentary and replace with the updated data if we make the change more than a 2 hours after the post.)

    From The Blog of HORAN Capital Advisors

    As we noted in our November 2012 article,
    "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 .64..."
    Additionally, the below chart shows a few more technical indicators that may indicate the market is approaching oversold levels. Specifically, the fast component of the stochastic oscillator has reached oversold levels. The slow calculation has not, however, as noted above, it is difficult to time the exact bottom of the market. Also, the money flow indicator (MFI) is nearing a level indicative of an oversold market as well. Key market support for the S&P 500 Index is the 1775 level and bullish investors have been able to hold this level.

    From The Blog of HORAN Capital Advisors

    At the end of the day, economic and company fundamentals are improving albeit at a slow pace. Recent selling activity may have more to do with tax loss selling and some investors locking in gains achieved so far this year. Technically, some indicators indicate the market is near an oversold level (and difficult to predict the bottom) with one wild card being the Fed's tapering impact and timing as the market is focused on the negative consequences of tapering. Lastly, the debt ceiling debt will be top of mind as we approach an early February 2014 deadline for that.

    Sunday, December 08, 2013

    The Week Ahead Magazine: December 8, 2013

    With year end fast approaching investors are focused on retaining the equity gains earned on paper during the first eleven months of this year. Market returns during the first week of December would have been worse had it not been for the strong recovery on Friday in positive reaction to the jobs report. Other headline economic news was favorable as GDP was revised higher to an annual rate of 3.6%. Much of this gain, however, was centered on an increase in private inventory investment. With one less week between Thanksgiving and Christmas this year, all eyes will be on news that provides insight into retail sales. With that, enjoy this week's magazine as the second week of December unfolds.

    Saturday, December 07, 2013

    Positive Investor Equity Sentiment Has Not Translated To Overly Positive Equity Flows

    One chart we have shared recently with our clients during our portfolio reviews with them is the chart of the S&P 500 Index overlayed with equity mutual fund flows. The strength of the market's advance since 2009 would seem to suggest investors have jumped head first into stocks. Additionally, a number of recent market reports have opined on the elevated sentiment levels (here and here). High bullish sentiment has tended to be one technical indicator suggesting a market top may be near. However, as the below chart shows, flows into equity funds have just recently turned positive.

    From The Blog of HORAN Capital Advisors

    Maybe more importantly, flows out of fixed income investments have only been occurring for the last five months as noted in the first chart below. In the second chart below cumulative flows are shown beginning in 2009. The cumulative flow chart shows investors continue to have a large amount of their investments in fixed income investments based on the flows contributed to fixed investments since 2009.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    One question that comes to mind is what event causes investors to reduce their fixed investments. One such event may begin to unfold as investors open their account statements at the end of the year and see the magnitude of the decline in the value of the fixed portion of their account. As the below chart shows, the 10 year Treasury yield has increased from 1.63% to 2.88% from May 2nd to December 6th. Although the absolute level of the 10 year Treasury yield does not seem high, the negative impact on the value of fixed income investments has been significant. The iShares 20+ Year Treasury Bond ETF (TLT) has declined 17% during this period of rising interest rates.

    From The Blog of HORAN Capital Advisors

    So, although some of the sentiment indicators may be elevated, based on the amount of flows into bonds since 2009, more reallocation from fixed to equity can occur in the foreseeable future and be supportive of higher equity prices. Certainly economic and company fundamentals will need to be favorable as well.

    Sunday, December 01, 2013

    The Week Ahead Magazine: December 1, 2013

    With the holiday shortened trading week occurring in the last week of November, the S&P 500 Index managed to generate a small 1.05 point gain for the week. This represented the eighth straight week the S&P 500 Index generated a positive weekly return. For investors the fourth quarter is looking like a winning one with both October and November resulting in positive market returns. The question is whether or not the month of December can carry on this favorable trend.

    Given the strength of the market this year, there is much discussion about the market trading in bubble territory. A few of the articles in this week's magazine provide links to posts that focus on this bubble discussion. Additionally, most S&P 500 companies, and all of the Dow companies, have reported earnings for the third quarter. Several article links discuss earnings results relative to stock valuations. Below is the link to this week's magazine that provides some thoughts on the first trading week in December.

    Thursday, November 28, 2013

    Market Advance Below Average In Return And Duration

    Investors and market pundits have been expressing cautiousness of late about the near uninterrupted advance of the U.S. equity market. This climb higher has been in place since the end of the financial crisis in 2009. I discussed this strong move higher in a post at the beginning of November that included the below chart.

    From The Blog of HORAN Capital Advisors

    In looking at the chart it seems rational to believe the advance is getting long in the tooth as they say. However, in a recent strategy article written by Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, she notes how this advance is really not that long in duration relative to prior bull markets. Additionally, her article notes from a return perspective, on a rolling ten year basis, the S&P 500 index return is just below average. And, the market return, on the upside or on the downside, generally overshoots the average as can be seen in the below chart.

    From The Blog of HORAN Capital Advisors

    In an effort to put this in perspective her article included the below chart comparing the length and magnitude of prior S&P 500 bull markets and this one has been just an average one.

    From The Blog of HORAN Capital Advisors

    Another chart by the Chart of the Day charting services notes prior bull market advances and duration for the Dow Jones Industrial Average. Included with their recent chart is the following commentary.
    "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 113 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 113 years which equates to an average of one rally every 8.7 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. However, the magnitude of the current post-financial crisis rally has now reached median status -- its magnitude is greater than six and less than six Dow rallies since 1900."
    From The Blog of HORAN Capital Advisors
    The Schwab article contains several interesting tables noting criteria that historically have been present that would signify a market top. Many of these criteria are not present today. She also notes a 5-10% correction would not be out of the norm and in fact writes,
    "My bottom line is that I continue to hope for a pullback here in the near-term to alleviate some of the frothiness that's crept in and keep the bull market going. But I continue to fear a melt-up. Why "fear?" As good as they feel while they're happening, they don't end well."

    Tuesday, November 26, 2013

    Active Stock Selection Outperforming

    Year to date, the S&P 500 Index is up over 26%. Investors have enjoyed a strong rally with this calendar year nearing an end. If an investor has been invested in the equity market from the beginning of the year, in total, losing money would have been difficult. How does one beat a market that has run so much? Pick the right stocks.

    In today's market, it has increasingly paid to be a stock picker as opposed to indexing ones portfolio. Beating the market is certainly not an easy task in today’s technologically driven market. However, 57% of actively managed funds are beating their respective benchmarks in 2013. This is a strong performance versus the historical norm of 37% of managed funds outperforming their benchmark. Typically, a stock picker's market begins to unfold in an extended bullish environment where the market starts to distinguish between stocks within sectors that will continue to drive the market higher and those that will lag. This has begun to occur with the close of the third quarter earnings season.

    An additional form of evidence for a stock picker's market comes from looking at the percentage of S&P 500 stocks trading above their 200 day moving average. This indicator is one of many measures providing an indication of the overall health of the market. The higher the percentage, the healthier the market. A stock is said to be in an uptrend once it begins to trade above its 200 day. The chart below illustrates the percentage of stocks in the S&P 500 trading above their 200 day moving average year to date.

    11 26 2013 200 day

    As the chart shows, since mid-May, this measure has dropped from 94% to 82.40%. While it is easy to make the case of weakening in the “broader” market, one can also view this as a healthy re-balancing or rotation into other stocks. Stocks remain in uptrends as noted in our article posted Saturday and there seems to be plenty of opportunities for longs. An interesting observation is the S&P 500 has still managed to deliver new highs although the percentage of stocks trading above their 200-day moving average has decreased. From a cautionary perspective, this decrease in the number of stocks trading above their 200 day M.A. can be a signal the market is losing some momentum. So far this year though, active investors have broadly generated better returns than their passive ones.

    Sunday, November 24, 2013

    QE's Influence On Equity Prices

    One debatable issue with the Fed's quantitative easing (QE) program is whether or not the QE activity has an impact on equity prices. In a recent McKinsey & Company study, QE and ultra-low interest rates: Distributional effects and risks, McKinsey concludes,
    "We found little evidence that ultra-low interest rates have boosted equity markets. We cannot discern a large-scale shift into equities as part of a search for yield by investors, and price-earnings ratios and price-book ratios in stock markets are no higher than long-term averages. Although stock prices do react to announcements by central banks, these are transitory effects that do not persist."
    If a picture is worth a thousand words, then the below chart seems to suggest QE has positively influenced equity prices.
    From The Blog of HORAN Capital Advisors

    If QE has had a positive impact on equity prices, the next question becomes what happens when the QE program comes to an end. The recent focus has been on the timing of the Fed "tapering" its purchases. Tapering is still QE but simply in a lesser amount; hence, supportive of equity prices if one believes a positive correlation exists.

    The Week Ahead Magazine: November 24, 2013

    The equity market has been on a steady advance since after the election last year. And actually this market recovery has been in place since the end of the financial crisis in 2009. As noted in our blog article on Saturday, a market correction of 10+% has not occurred for more than 500+ trading days. A number of the articles contained in this week's magazine highlight the strength of the equity market as well as highlight the potential rotation out of bonds into equities that is taking place. Slowly rising market interest rates are serving as one tailwind that may be pushing equity prices higher.

    Saturday, November 23, 2013

    Waiting For A Correction?

    One interesting aspect of this bull market run for the S&P 500 Index has been the absence of a 10+% correction.

    From The Blog of HORAN Capital Advisors

    It seems on a daily basis the talking pundits on business news channels and in print are certain an equity market correction is just around the corner. For those investors under invested in equities, a correction would certainly be a welcomed event. Market corrections, however, are hard (if not impossible) to predict and when they do occur, they tend to surprise investors. As the below chart of market advances without a 10% correction shows, it is not uncommon for the market to move higher without significant pullbacks.

    From The Blog of HORAN Capital Advisors

    As noted in the Bramesh article,
    • from March 2003 to October 2007 (the entire length of the last bull market), the index went 1,153 trading days without experiencing a 10% correction.
    • the longest streak on record without a 10% correction was from October 1990 to October 1997, and that lasted 1,767 trading days.
    • if the current streak matched the 1990 to 1997 streak, this bull market would run to October 1, 2018, nearly five years from now.
    The other factor that seems to be preventing a so called market "melt up" is investor sentiment has not become overly bullish. In the sentiment survey release by the American Association of Individual Investors earlier this week, bullish sentiment actually feel 4.8 points after falling 4.3 points in the prior week. Investors should keep in mind though, sentiment indicators are most predictive at their extremes.

    From The Blog of HORAN Capital Advisors
    Source: AAII

    Sunday, November 17, 2013

    The Week Ahead Magazine: November 17, 2013

    The S&P 500 Index closed higher for the sixth consecutive week. Investors seem concerned about the market entering into bubble like territory. In this week's magazine several of the article links comment on the current state of this market advance. As we referenced in last week's magazine, one technical factor favoring higher equity prices is the market is in a favorable seasonal period. This, however, does not guarantee higher prices ahead.

    Saturday, November 16, 2013

    Benchmarking Investment Performance

    An important task for investment managers and clients is to develop an investment policy statement (IPS) for the investment portfolios that are being managed. The IPS details guidelines specific to the client that outlines the client's goals and objectives. Some of the criteria of the IPS will detail the goals and objectives of the client along with liquidity needs. In the end the IPS will serve as a road-map for the investment manager in managing the client's portfolio as well as detail the specific asset allocation for the client's account(s). For the client then, the next step is evaluating the manager's investment results, not only against the criteria in the IPS, but also compared to relevant performance benchmarks. The question then becomes what are appropriate performance benchmarks.

    Selection of an appropriate benchmark is not as clear cut as it may seem. In selecting a benchmark should the market benchmark be a capitalization weighted one or a price weighted one? Or should the benchmark really be tied to achieving specific return parameters that might be outlined in one's financial plan? Below I will discuss the difference between these various benchmarks with thoughts on the most appropriate one to use for evaluating an investment manager's performance.

    Capitalization Weighted Benchmark: Probably the most common capitalization weighted benchmark is the S&P 500 Index. The holdings that comprise the index are weighted based on capitalization. This is determined by multiplying a company's stock price by the number of shares outstanding. As a consequence larger companies command a higher weighting within capitalization indexes.

    Price Weighted Benchmark: In a  price weighted benchmark the index companies are weighted based on a company's respective stock price. For example, a company with a stock price of $100 would have twice the weighting as a company with a stock price of $50. The disadvantage of price weighted indexes is a company's actual stock price does not have much to do with why a company with a larger share price has a larger weighting. Also, a company's stock price is influenced by the number of shares outstanding; thus shares outstanding heavily influence the stock's price and weighting. The Dow Jones Industrial Average is an example of a price weighted index.

    Equal Weighted Benchmark: As the description indicates the company weightings in an equal weighted benchmark are equal. Smaller size companies will have the same weighting as larger companies. One negative of an equal weighted benchmark is the benchmark requires frequent rebalancing in order to maintain the equal weighting. If one's portfolio is attempting to mimic the equal weighted benchmark transaction cost and capital gain taxes will likely be higher. Also, the smaller companies in the index may actually be difficult to replicate in an actual portfolio due to liquidity constraints. Equal weighted benchmarks and ETFs have gained in popularity. One reason may be the fact smaller capitalization companies have outperformed larger cap companies over the last four and a half years.

    Goals Based Benchmarks:  The key component of a goals based benchmark is the direct relationship to an investor's future goals and objectives. In constructing this type of benchmark the investor will need to define his or her future needs as it relates to asset levels and spending needs. Often times this is best accomplished by the investor developing a financial plan. Institutions, such as not for profit organizations, can benefit from goals based benchmarks as well. Equivalent to the financial plan is a longer term financial projection, say a 1, 3 and 5 year budget. The performance of one's investments will most likely deviate from the financial goals established in the plan. What is critically important is to attempt quantify these deviations or construct a portfolio that minimizes the downside deviations. It is becoming more wide spread that performance reporting incorporates some type of downside measurement. Morningstar reports include upside and downside data in the reports they prepare on mutual funds and ETFs.

    The benefit of goals based benchmarks seems clear, that is, one's portfolio construction is tied to achieving the targets laid out in the financial plan. Investors will likely not be happy if their manager says they beat the benchmark return by generating a negative 28% return when the benchmark is down 30% and now the client needs to adjust their lifestyle.

    I believe goals based benchmarking is important. I do not believe it should be relied upon in a vacuum. If the equity market is up 30% and the investor's portfolio is up 10%, although this might achieve the goal targets in the financial plan, a discussion between the client and investment manager needs to center around why the large return difference. Is the difference the result of poor investment selections or a too conservative asset mix? In the end there needs to be a balance between the risk being taken in the investment portfolio as well as achieving the goals based returns. For clients that are withdrawing funds from their investment portfolio on a regular basis, downside risk management can be very important, vis-à-vis the percentage withdrawal rate.

    Sunday, November 10, 2013

    Declining Labor Force Participation Rate And Baby Boomers

    One aspect of the slow growing recovery following the recent recession has been anemic job growth. A consequence of the weak job growth has been a steady decline in the labor force participation rate. Some economist and strategist attribute the declining participation rate to the retirement of baby boomers. However, as noted by the orange line in the below chart, the participation rate of baby boomers (55 years and over) remains at near the same level equal to that at the end of the recession. Consequently, data does not support that a declining participation rate is the result of these boomer retirements.

    From The Blog of HORAN Capital Advisors

    Interestingly, total job openings (JOLTS Survey) indicates companies desire to hire. Job openings are approaching the level prior to the recession. The question becomes why are these positions going unfilled. Is the government making it too easy for the unemployed by providing extended benefits through the various government assistance programs? Or are the benefits not the correct ones, for example, is job retraining made available to the unemployed? The second chart below shows the dramatic and continued increase in the SNAP or food stamp program. These government assistance programs are certainly necessary during recessionary times; however, it is possible the extended availability of these programs can discourage the unemployed from looking for employment.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    The Week Ahead Magazine: November 10, 2013

    Much of the discussion in recent weeks has centered around the equity market potentially going through a "melt up" phase in a run to year end. One factor that gives this thought some validity is the favorable seasonal period that occurs in the fourth quarter of calendar years. A number of article links in our Week Ahead magazine provide insight into this favorable seasonal period.

    Saturday, November 09, 2013

    Investors Express More Cautiousness Since The Financial Crisis

    Since the bottom of the market at the depth of the financial crisis in early 2009, investors seem to be taking a more cautious view of the markets based on reported investor sentiment. It really hasn't been until this year that the S&P 500 Index has been able to make a sustained push above the market highs of early 2000. In mid to late 2007 the S&P was able to briefly surpass the 2000 highs; however, this was short lived as the financial crisis began to unfold.

    From The Blog of HORAN Capital Advisors

    An apparent result of the bursting of the technology bubble in early 2000 and the financial crisis in late 2007/2008, is the increased skepticism in which investors view the market. Some of this skepticism can be attributable to "recency bias" given the magnitude of the market's decline during the bursting of the tech bubble and the decline during the financial crisis. For an investor recency bias is when an investor uses recent past experience as the basis for what will happen in the future. The lost decade of the 2000s seems to have extended an investor's look back period to as far as 2000. Investors seem to express this cautious market view in reported sentiment surveys.

    One popular sentiment measure is provided by the American Association of Individual Investors (AAII). AAII reports individual investor sentiment in a weekly sentiment survey. Below is a table that displays the maximum and minimum sentiment readings by year going back to the year 2000. The average of the bullish maximum percentage from 2000 through 2008 is 63%. The average of the bullish maximum percentage from 2009 through 2013 has declined to 55%. Does the individual investor view their portfolio as under invested in equities, i.e., waiting for a market pullback? This 2009 through 2013 period is also displayed separately in the table below the full spreadsheet.

    From The Blog of HORAN Capital Advisors
    A significant outcome resulting from the heightened investor skepticism is the fact the market continues to move higher, i.e., a long "climb the wall of worry" market. The below chart shows the S&P 500 Index price chart since the bottom of the financial crisis in 2009 through the market's close on November 8, 2013. As easily seen on this chart, the S&P has trended higher within a well defend uptrend channel. This move has not been in a straight line; however, it is higher nonetheless. This uptrend has been in place for four and a half years.

    From The Blog of HORAN Capital Advisors

    Given the lack of euphoria shown by investors, is it possible this market continues to deliver new highs? In the market's favor is the number of strategist and commentators stating the market is due for a correction. I could site a number of other potentially negative factors like, the elevated cyclically adjusted P/E ratio, single digit earnings growth and the presumed low levels of investor cash, just to name a few. Another positive is the fact the market is in a favorable seasonal period. And let's not forget the accommodative Fed. In other words, there seems to be quite a number of reasons the market should correct. The market, however, generally does not correct when the majority thinks it will. More discussion on this can be found in our most recent Investor Letter.

    Yes, the market "could" be long in the tooth as they say. At HORAN Capital Advisors, we recently eliminated our small cap exposure in client accounts. For several years, we have allocated a portion (10%-15%) of client investments to alternative investments like absolute return and long short funds. We have not introduced alternative investments into our investment approach as a replacement for equity though. These alternatives are mainly exposure in lieu of some classes of fixed income in an effort to generate returns better than bonds, yet not take the same level of risk as if we had increased our equity allocation. This strategy has worked well for our clients.

    In conclusion, sentiment figures tend to be most accurate at their extremes. Is it likely the individual investor has such a cautious view of the equity market because of their investment experience following the tech bubble and financial crisis that they now are viewing the slightest market pullback as a buying opportunity? Because of this, and assuming fundamental data continues to come in "okay", might the market continue to trend higher? We will certainly know in hindsight at some point in the future.

    Friday, November 08, 2013

    Retail Investor Cash Hits Low Along With Fear

    Rydex Cash Levels have fallen to extreme lows recently (See chart below).  The Rydex Cash Level measures the cash held in Rydex money markets.  Historically, pullbacks or corrections occur when these levels reach the .4 marker, but the past three times the index has hit the .4 level, the pullbacks have been short-lived.  This is a sign that that those investors sitting on cash are eager to invest in equities in fear of missing out on this strong equity market rally. Alternatively, ICI data shows money market cash in mutual funds has been trended higher since April of this year.

    Rydex Cash

    At the same time, the CBOE Volatility S&P 500 Index (.VIX), also known as the “Fear” Index, is near 2007 lows (Chart Below).  The VIX displays 30-day forward volatility for the markets.  The index is used as a measure of market risk.


    Investor sentiment appears to be worry-free by these two measures.  Some believe these indicators are projecting a market correction ahead, but not so fast.  Fed driven liquidity is providing a favorable environment for equities in a seasonal period where, historically, equity markets have been strong.  Investors have been and continue to be rewarded for taking a “risk-on” approach in terms of investing in risk asset classes.  As for how long this will continue, no one knows for sure.  The equity markets have enjoyed larger gains in the past during this generally positive seasonal period and saying “this time it will be different” can be a dangerous position to take.

    Thursday, November 07, 2013

    Are Small Cap Valuations Getting Extended?

    Since the beginning of November, small cap stocks have been underperforming large caps. This recent underperformance has strategist questioning whether the small cap outperformance, since the end of the financial crisis in 2009, is coming to an end. As the below chart shows, since February 2009, small caps have significantly outperformed large capitalization equities.

    From The Blog of HORAN Capital Advisors

    This outperformance has caused the valuation of small caps to reach a premium relative to large caps. T. Rowe Price recently highlighted this valuation premium in their Fall 2013 T. Rowe Price Report newsletter. The below chart that accompanied the article, Leading Market Recovery, Small-Caps Face New Challenges, notes small caps are selling at a 14% premium to large caps.

    From The Blog of HORAN Capital Advisors

    Preston Athey, manager of T. Rowe Price's Small Cap Value Fund, states, "It’s harder finding attractive opportunities today than two to three years ago, so a value investor tends to be cautious. We’re paying 15 times earnings today for companies that were selling at 11 times earnings three years ago."

    I believe investors should take to heart Athey's cautionary comment of, "But if we get a major correction or a mild recession, the market will go down and small-caps will do worse because this sector is more volatile. After a long period of good performance and outperformance, the caution light should be on now rather than flashing green."

    Monday, November 04, 2013

    Fund Flow Trends

    As seen in the interactive fund flow graph below, the last three months equity fund flows, as prepared by Lipper for Reuters, have seen investors allocate more of their investment dollars to Europe, emerging markets and Japan. Some of the countries with the largest outflows are Asia Pacific ex Japan, the U.S. and Germany. For the month ending September 2013, fixed income flows indicate investors are favoring high yield bond investments. This fixed income flow data may be more an indication that investors are reaching for yield and less of an indication they are becoming less risk averse.

    (click graphic for interactive version)

    Germany Equity Fund Flows Tank as Bets Put on Big Europe
    By: Joel Dimmock
    October 18, 2013

    The Week Ahead Magazine (Belated): November 3, 2013

    The posting of this week's Week Ahead Magazine is a day late. I was traveling in Chicago with my wife visiting our son recently transferred there with his company. As an aside we had a fantastic Italian meal at Riccardo Trattoria in Lincoln Park. I would say the focus of this week's article links center around the market's valuation and investor sentiment. Coinciding with some elevated sentiment measures is the level of margin debt. An interesting Bloomberg article is linked to in the magazine comparing margin debt as a percentage of GDP.

    Friday, November 01, 2013

    Structural Unemployment

    It has been nearly two years since I posted an article on structural unemployment, specifically, looking at the Beveridge Curve. As noted in that prior post, the Bureau of Labor Statistics notes the relationship between the unemployment rate and the vacancy rate, also known as the Beveridge Curve, named after the British economist William Henry Beveridge (1879-1963). The economy’s position on the downward sloping Beveridge Curve reflects the state of the business cycle. For example, a greater mismatch between available jobs and the unemployed in terms of skills or location would cause the curve to shift outward, up and toward the right (emphasis added). Certainly the unemployment rate shows improvement, yet the curve has maintained its outward and upward shift during this recovery.

    From The Blog of HORAN Capital Advisors

    Thursday, October 31, 2013

    70% Health Care Cost Increase

    I just had a conversation with an individual that has an individual family health insurance policy. His current policy comes due in February 2014 and he is evaluating his health care insurance options for next year. With his current plan, his total cost is $11,616 including deductible. According to his insurance contact, the Obamacare policy he qualifies for on the health care exchange through the state of Ohio that matches his current policy comes in at a total cost of $19,800. This represents a 70% increase in his cost for health insurance next year. The individual does not qualify for any subsidies so this will have a direct impact on funds his family has available for discretionary spending. The impact on the broader consumer economy as a result of these premium increases is likely not going to be positive.

    Sunday, October 27, 2013

    The Week Ahead Magazine: October 27, 2013

    Investors seemed to have put events in Washington into the rear view mirror as fund flows have turned positive this past week. Below is the link to this week's magazine covering a few articles investors might enjoy in the coming week.

    HORAN Celebrates 65 Year Anniversary

    Last week HORAN held an open house and client appreciation event at our firm's headquarters to celebrate our 65th year of keeping promises made to our clients and staying committed to our value of corporate social responsibility. The firm has grown from one employee in 1948 to over 90 today. The foundation on which the firm was build remains in place today. This has allowed HORAN to prepare clients for their future and overcome the obstacles many individuals are faced with today. HORAN is also deeply committed to improving the quality of life in the communities where our employees live and work. As the firm's CEO, Terry Horan, often notes, “What matters most, each and every day, is helping our clients address two of life’s greatest challenges: obtaining access to quality, affordable health care and securing professional counsel to build wealth and transfer it on to future generations.” We thank our clients for allowing us to serve them.

    More on our anniversary can be found by reading our recent press release.

    Investor Letter: Multiple Expansion Contributing To Market Returns

    Our most recent Investor Letter looks at the market's recent return and the positive influence of multiple expansion on the indexes' performance. In spite of issues surrounding the budget and debt ceiling in Washington, DC, the market seems to shrug off these headline events and continue its move higher. Our newsletter looks at these recent events and the fact similar ones will grab the headlines as 2014 begins.

    From The Blog of HORAN Capital Advisors

    The complete Investor Letter can be accessed at our website at this link: 3rd Quarter 2013 Investor Letter.

    Sunday, October 20, 2013

    The Week Ahead: October 20, 2013

    The debt ceiling and budget stalemate was resolved in Washington, DC last week. If only a temporary resolution to the crisis, the market certainly cheered the short term agreement. This week's magazine includes some article links focusing on what might lie ahead for the markets.

    Thursday, October 17, 2013

    Housing Issues A Continuing Drag On Consumer Spending

    A recent report by the Federal Reserve Bank of New York shows residential non performing loans (NPLs) at bank holding companies remain highly elevated. This is in contrast to the improvement seen in commercial NPLs have declined significantly.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    At issue is the impact higher residential NPLs are having on the individual consumer. Economists indicate the wealth effect that results from rising stock and real estate prices has a positive impact on consumer spending. Mark Zandi of Moody's Analytics recently stated, "an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'"

    It appears the elevated level of residential NPLs may be showing up in the continually declining  rate of growth in personal consumption expenditures (PCE). The first chart below shows the year over year change in personal consumption expenditures and the second shows the same information, but using real PCE.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    On top of a potentially struggling consumer sector that is not benefiting from the "wealth effect". The sticker shock associated with the health insurance premiums being realized on the health care exchanges is another headwind for growth in consumer spending. Since consumers account for 70% of GDP, the lack of wealth creation from real estate and fewer dollars to spend as a result of the increased cost of health care via the exchanges, it appears a slow growing economy is likely with us for the foreseeable future.

    Sunday, October 13, 2013

    The Week Ahead Magazine: October 13, 2013

    Much of the focus in the coming week will most certainly be on events surrounding the debt ceiling debate and budget stalemate in Washington, DC. In that regard a number of the articles in this week's magazine focus on the Washington issues.

    Saturday, October 12, 2013

    Funding Entitlements With An Ever Increasing Government Debt Burden

    In an attempt to add some perspective to the issues influencing the stalemate in Washington, DC, one overriding issues is the rate of growth of the federal government's debt; hence, the fast approaching debt limit. Driving the government's seemingly ever increasing debt level is entitlement spending. Charles Hugh Smith recently wrote an article that focused on the growth of entitlement spending in the U.S. titled, Have We Reached Peak Entitlements?. His article is a worthwhile read. The result of continued growth in this expenditure category is the growth in the government's debt level. The consequences of not gaining some control over this spending will likely be a lower quality of life for the younger generation.

    To put this in perspective, they say a picture is worth a 1,000 words so the below charts provide a snapshot of the government's debt along with current government receipts and expenditures. The first chart shows the absolute dollar level of receipts and expenditures for the federal government. In spite of the much maligned, by some, sequestration cuts, the actual dollar level of expenditures has really not declined by much. On the other hand, government receipts now surpass the level where they stood prior to the financial crisis.

    From The Blog of HORAN Capital Advisors

    Some will say this is not a fair representation of how one should look at the revenue/expenditures of the government. A fairer way should compare this to the level of economic activity or GDP level. In that regard, the gap remains quite large.

    From The Blog of HORAN Capital Advisors

    The last two charts display the absolute debt levels for the government. This is the significant issue that has driven a wedge between the two parties in Congress and the debt limit being reached on October 17th. The first chart is the actual level of debt, while the second chart shows the debt as a percentage of GDP. Readers/voters should note the increasing rate of growth of the debt reflected by the increasing steepness of the curve's slope. Just as the law of compound interest favors long term savers, this same law will make it increasingly difficult to repay/reduce this debt as long as the can continues to be kicked down the road.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    As Charles Smith's article shows, we may have reached peak entitlements. Maybe it isn't the fact the Affordable Care Act (ACA) isn't well intentioned. It is more the question of what is the best way to provide healthcare to the uninsured and how is this new entitlement funded. Is this a program better run by the government or the private sector? Smith's article shows the high hurdle facing continued growth in entitlements of which the ACA is another add on and yet to be reflected in the balance between the government's revenues and expenditures. In my view opponents of the ACA have not clearly drawn this connection. And proponents of the ACA have not clearly addressed the funding side of this new entitlement as well as existing ones.

    Tuesday, October 08, 2013

    Market Looking Oversold But What Is The Catalyst

    Afters today's late market sell off, the S&P 500 Index is looking oversold based on a couple of technical measures.
    • The percentage of stocks trading above their 50 day moving average is now 38%. This measure got as low as 28% in the run up to the election in November of last year.
    • The percentage of stocks trading above their 150 day moving average reached 65% today. This measure reached 46% in November of last year.
    One technical indicator we highlighted in our early September post, S&P 500 Index Less Overbought This September Versus Last September, was the Money Flow Index (MFI). The MFI works best at extreme levels and this indicator has reached near the same level as early September when it was indicating an oversold market.

    From The Blog of HORAN Capital Advisors

    From The Blog of HORAN Capital Advisors

    Of course the wild card in determining the future direction of the market is the stalemate in Washington over the budget and more importantly the debt ceiling. The outcome on these two events will weigh heavily on the market's future direction though.

    Monday, October 07, 2013

    The Congressional Impact On Equity Prices

    In a study by Michael F. Ferguson of the University of Cincinnati and H. Douglas Witte of The University of Missouri (Missouri State University) titled Congress and the Stock Market, they show a relationship between the return for the Dow Jones Industrial Average based on whether Congress is in or out of session. They call this the "Congressional Effect. They study notes,
    "We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior."
    The below chart contained in the Ferguson and Witte study displays the return history of the Dow Jones Industrial Average going back to 1897,
    From The Blog of HORAN Capital Advisors
    "The 'Out-of-Session' strategy is the cumulative return to a strategy that invests $1 in the DJIA on days Congress is not in session and in cash (earning 1 basis point per day) when Congress is in session. Conversely, the 'In-Session' strategy invests in the market index on days Congress is in session and in cash on days Congress is out of session."
    H/T: 361 Capital