Francois Trahan Interview: Fed No Longer Effective

In Francois Trahan's recent interview with WealthTrack's Consuelo Mack, Francois explains why he believes the Fed has run out of bullets in managing the economy via the Fed Funds rate. In short, he believes the old economic rules do not work and new market drivers should be considered by investors. Francois believes the new Fed Funds rate is actually the consumer price index or CPI.

Francois has been rated the #1 portfolio strategist for the last three years by Institutional Investor. The interview includes Francois' view on the market for Q4 and 2012.

Dividends As An Alternative To Low Bond Interest Rates

The low level of interest rates on fixed income investments is forcing investors to consider alternative income sources in their investment portfolio. One income source investors have considered as an alternative is dividend paying stocks. A caveat is stocks have historically been more volatile (standard deviation) than bonds as noted in the below table.

From The Blog of HORAN Capital Advisors

However, given the low level of bond interest rates, the yield on dividend paying stocks is now at its highest level relative to bond interest rates in nearly 50 years.

From The Blog of HORAN Capital Advisors

From a return standpoint, dividends have been a stable portion of equity returns. Dividend paying stocks have also been less volatile than the broader equity market as noted in the first table above.

From The Blog of HORAN Capital Advisors

Lastly, given where bonds rates are today, it is hard to envision rates moving lower over the next three to five years given the state of the U.S. federal budget. Printing currency (higher potential inflation) and devaluing the dollar seems to be a likely path that will be pursued in Washington, D.C. Not if, but when rates turn higher, bond investors are likely to get hurt as bond values contract.

For the dividend stock investor, corporate balance sheets are in pretty good shape with high levels of cash. A portion of these cash balances is likely to be used in increasing dividend payments to the company's equity holders. I suspect these low corporate payout ratios are likely to increase over the next three to five years; thus, providing some income growth for investors.

From The Blog of HORAN Capital Advisors

Source:

Generating Income From Stocks
Fidelity Viewpoints
By: Dirk Hofschire, CFA, VP, Asset Allocation Research, and James Morrow, Portfolio Manager, Fidelity Viewpoints
September 21, 2011
https://guidance.fidelity.com/viewpoints/non-bond-income

Checking In On The Dogs Of The Dow

As I have noted in the past, one investment strategy that seems to garner press attention from time to time is the "Dogs of the Dow" investment strategy. The strategy consists of selecting the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor would invest an equal dollar amount in each of the ten stocks and hold them for a year.

The strategy has generated mixed results over the years; in 2010 and year to date this year, the strategy has been fairly effective. Last year the Dow Dogs returned 20.5% versus the Dow Jones Industrial Index return of 14.1%. Year to date through 9/21/2011 the Dogs of the Dow have returned .8% versus the DJIA return of -3.9%.

From The Blog of HORAN Capital Advisors

Source: Dogs of the Dow

Where Is The Cash?

With the recent sell off in the equity markets that began in mid July, one would suspect cash balances would be elevated. As the below chart notes, cash balances as a percentage of all mutual fund assets is near record lows though. Historically, low levels of money market cash have been associated with equity market tops.

From The Blog of HORAN Capital Advisors

On the other hand given the meager interest rates paid on deposits investors might be going elsewhere with their cash. From a strategy perspective, some investors and money managers have moved cash investments to shorter term bond funds in an effort to earn a higher yield. When looking at fund flows into bond funds, this does not seem to be too much of the case though.

From The Blog of HORAN Capital Advisors

Alternatively, maybe investors have moved cash to bank deposits. One reason for doing this would be an effort to at least receive FDIC insurance on their deposits. Also, some investors may be exhibiting cautious behavior due to potential sovereign debt exposure in money market funds. The below chart though doesn't seem to indicate significant deposits have been moved to banks outside of what we would normally expect.

From The Blog of HORAN Capital Advisors

Even margin debt is elevated and stands at pre-Lehman levels.

From The Blog of HORAN Capital Advisors

At the end of the day, it appears the market may be stuck in a trading range. This slow economic growth environment and global deleveraging cycle could be contributing to the lower cash levels. Possibly excess investor cash has been used to paydown debt. Positive technicals do include the MACD and RSI indices as noted below; however, recent market strength has been occurring on lower volume.

From The Blog of HORAN Capital Advisors

HORAN Launches A Blog Focusing On Health.Wealth.Life Issues

Today HORAN Associates, HORAN Capital Advisors' business partner, launched a blog focusing on industry trends and data related to health care and wealth management. The blog, HORAN Health.Wealth.Life, will focus on articles written by HORAN Associates' CEO, Terry Horan, CLU, ChFC, and will focus on two of the greatest challenges Americans are facing today:

• access to quality, affordable health care; and
• securing professional counsel to build and sustain wealth for a lifetime

As Terry notes, readers will want to visit the new blog often "to stay informed on the two biggest challenges facing America today? One would certainly be access to great health care for the balance of what will in most cases be a very long life. Two would be making sure individuals and families will have enough accumulated wealth to live out this life with value and meaning. Because life without health is no great life and life without the means to enjoy it, actualize dreams, fulfill wishes and provide for coming generations is no great life either."

Unemployment Rate and U-6: Not Much In This Release Is Positive

In today's release of the unemployment rate, there really isn't much positive data contained in the report. The unemployment rate remains at 9.1% with the non-farm payroll report showing no increase versus expectations of +75,000 increase. The broader measure of labor force utilization is known as the U-6. This measure shows the unemployment/underemployment rate increased to 16.2%. The U-6 measure is one that captures marginally attached workers which are individuals not looking for work although they would like a job and those that are employed in part time positions although they prefer full time employment.

From The Blog of HORAN Capital Advisors