Saturday, April 28, 2012

Why Economic Growth Has Been So Low

As many of our clients and prospective clients know, we frequently discuss the strength of the corporate sector of the economy. As the below chart shows, corporate profit growth has continued to strengthen.

From The Blog of HORAN Capital Advisors

With this level of corporate profit strength, one has to ask why economic growth (GDP) has not been stronger. The first report on first quarter GDP Friday indicated growth was running at 2.2% versus expectations of 2.5%. A recent post at the blog, Calafia Beach Pundit and written by Scott Grannis, the former Chief Economist at Western Asset Management, notes the drag the government sector is having on economic growth:
"Here's another way of appreciating what has happened in recent years. The private sector has been working very hard to increase its efficiency and its output, and that shows up in the record level of corporate profits, both in nominal terms and relative to GDP. But instead of allowing or encouraging the private sector to plow those profits back into the economy in the form of new plant and equipment, new jobs, and new technologies, the federal government has effectively borrowed all the corporate profits generated since 2009 and distributed the money to the unemployed, to the poor, to favored "green" industries, to unions, to state and local governments, and to "make-work projects," among other things. There's been a lot of money thrown around, but lots of it has been wasted in the process that could have been put to better use; we simply don't have much to show for the $1.25 trillion of after-tax profits generated per year on average by U.S. businesses since 2009. (I'm referring here to the fact that federal deficits in recent years have been roughly equivalent to after-tax corporate profits—actually a bit higher. So on a "sources and uses of funds" basis, the government has effectively used all corporate profits to fund its spending.)"
GDP is commonly defined as:

GDP = C + I + G + (X - M)

  • C = private consumption
  • I = gross investment
  • G = government spending
  • (X - M) = exports - imports
Government expenditures on final goods and services includes salaries of public employees, purchases of military equipment and any investment expenditure by the government. It does not include transfer payments, such as social security or unemployment benefits.

As Scott Grannis notes in his article, there are many aspects of government expenditures that have not been additive to U.S. economic growth in spite of the strength in the corporate sector of the economy.

Better Investing's Most Active Stocks For The Period Ending April 28, 2012

Better Investing Magazine publishes the most active stocks reported by its membership. The list is based on an informal sampling of Better Investing members. Below is the list of the most active stocks for the period ending April 28, 2012

Full View

Thursday, April 26, 2012

Low Investor Bullish Sentiment Positive For Stock Returns?

Today's investor sentiment release by the American Association of Individual Investors shows investor bullish sentiment is at the lowest level since September 22, 2011. The bullish sentiment reading was reported at 27.64% or a 3.5% decline from the prior week. This is the lowest reading since the bullish sentiment reading on 9/22/2011 when bullish sentiment was reported at 25.33%. The bull/bear spread is at -9.8% while it was reported at -22.7 on September 22nd of last year. The investor sentiment reading records investor expectations for the equity markets in the upcoming six months and is considered a contrarian indicator.

From The Blog of HORAN Capital Advisors
Data Source: American Association of Individual Investors.

Wednesday, April 25, 2012

First Quarter 2012 Investor Letter

The first quarter of 2012 ended a period where the equity markets generated two consecutive quarters of strong market returns. Most investors would find the returns generated in the first quarter acceptable for returns in an entire year. The S&P 500 Index was up 12.5%, the MSCI Developed Equities Index was up 11.7% and the MSCI Emerging Markets Index was higher by 14.1%. Recent earnings reports for Q1 continue to exceed analyst expectations. Our newsletter covers Q1 events as well as recent events impacting the the investment markets.

The Letter can be accessed directly from our website at the following link: 1st Quarter 2012 Investor Letter

We hope you find the content of our letter insightful as 2012 continues to unfold.

Sunday, April 22, 2012

Apple's Stock Trading Far Above Its Trend Line

Apple (AAPL) stock continues to dominate headlines from day to day. Of particular importance will be the company's earnings report on Tuesday after the market's close. Over the last nine trading days, the price of Apple's stock has declined from an all time high of $644/share to close on Friday at $572/share, just above its 50 day moving average of $569/share.

From The Blog of HORAN Capital Advisors

The below chart shows AAPL's stock price relative to its longer term trend line. The trend line support is around $449/share which is near its 200-day moving average price of $438/share. Interestingly, the year to date advance in the company's stock price has occurred during a period of declining trading volume for the stock. For investors, does this gap above its longer term trend warrant caution?

From The Blog of HORAN Capital Advisors

Saturday, April 21, 2012

Game Theory Strategy Displayed

An interesting display of game theory in the below video.

Saturday, April 14, 2012

Procter & Gamble Increases Dividend 7% And Payout Ratio Continues To Increase

On Friday, Procter & Gamble (PG) announced a 7.05% increase in the company's quarterly dividend. The dividend increases to 56.2 cents per quarter versus 52.5 cents in the same quarter last year. The 7% increase is one of the lowest rate of increases in recent years. The payout ratio increases to 56.8% based on fiscal year 2012 estimated earnings of $3.96. Earnings for FY 2013 are estimated at $4.30 or growth of a little over 8%.

From The Blog of HORAN Capital Advisors

On a one year basis the stock return of P&G has essentially matched the return of the S&P 500 Index; however, on a year to date basis, P&G's return has lagged the market by almost 10 percentage points. P&G's stock does tend to hold up well during market corrections as noted by the performance of the stock late last year. On a technical note, the trading volume has spiked over the last few trading days on down days for the stock.

From The Blog of HORAN Capital Advisors

Disclosure: Our firm is long PG

Tuesday, April 10, 2012

Dividend Payers Experience Multiple Expansion At Low Nominal Interest Rates

A recent report from Fidelity Investments shows that multiples expand for dividend paying stocks with high payout ratios when nominal interest rates are at extremely low levels as rates are today.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Essentially, the report indicates investors view high dividend payout equities as bond substitutes. The report states:
In a market with extraordinarily low nominal yields, the relationship supporting the
risk premium between equity and fixed income is challenged, and stable high quality dividends can be viewed similarly to a bond coupon. Thus it would be logical for the market to value dividends within the prevailing yield structure of the fixed income market:

Price/Dividend = f (Interest Rates)
Undistributed earnings are still subject to economic uncertainties with investors expressing concern about a company's ability to effectively allocate capital. Consequently, we see a higher equity risk premium in the non dividend payers at low nominal rates.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

The Fidelity report details the performance of of dividend payers in the Nikkei Index during the 2002-2012 time period. For Japan this period has been characterized by persistent deflationary pressures and the higher dividend payers have outperformed with lower volatility.

Investors need to keep in mind these higher yielding stocks are still equities. As such, equities are subject to the vagaries of the movements in the stock market.


What if the Market is Revaluing Dividends? (PDF)
Fidelity Asset Management
By: James Morrow, CFA and Neil Nabar, CFA
March 2012

Sunday, April 08, 2012

Low Expectations For Earnings In Q1 2012

A low bar has been set for year over year earnings exceptions for the first quarter. According to ThomsonReuters, "the earnings growth rate for the S&P 500 for Q1 2012 is 3.2%. Excluding Apple (AAPL), the overall growth rate declines to 1.8%. The Industrials (10.6%) and Consumer Discretionary (6.6%) sectors have the highest growth rates for the quarter, while Materials (-14.7%) has the weakest growth rate." Factset has a slightly lower earnings outlook for Q1 noting, "the estimated earnings growth rate for Q1 2012 is -0.1%. Seven of the ten sectors are predicted to see a decline in earnings in Q1 2012, led by the Materials (-14.5%) and Telecom Services (-10.1%) sectors."

From The Blog of HORAN Capital Advisors