Sunday, September 23, 2012

Food Stamp Participation Versus Labor Force Participation

Central banks around the world are doing all they can to pump liquidity into their respective economies. To date though, their actions are having limited effectiveness when it comes to improving economic growth. One consequence of the slow growth in the U.S. is the dramatic increase in food stamp usage. The increased food stamp usage also seems to translate into a lower labor force participation rate as well.

From The Blog of HORAN Capital Advisors


Boxing Match: Central Banks vs. the Economy
Fidelity Viewpoints
By: Jurrien Timmer, Portfolio Manager
September 16, 2012

Saturday, September 22, 2012

Private Fixed Investment Signaling A Recession?

An article from three months ago on the SentimentCharts website noted the slowing YOY change in Private Fixed Investment (FPI) had signaled all seven U.S. recession over the last 45 years. The data used in the SentimentCharts' article was through the first quarter of the year and an increase in the growth of FPI was seen. One quarter later though, through the second quarter, the YOY growth in FPI is slowing.

From The Blog of HORAN Capital Advisors

Private Fixed Investment is an element that goes into the calculation of GDP. In the BEA's second release of second quarter GDP, they noted weakness in fixed investment as a cause for the deceleration of Q2 GDP.
"The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by a smaller decrease in federal government spending, an acceleration in exports, and a smaller decrease in private inventory investment."
The slowing growth in fixed investment along with a significant increase in the number of companies lowering Q3 earnings guidance are just a couple of factors that should be a cause for concern for investors.

Strong Stock Buyback Activity in Q2

Standard & Poor's recently reported the buyback data for the S&P 500 Index for the second quarter. Noted in their release is buybacks increased 32.5% in Q2 versus Q1. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices noted,
"The last time we have seen this level of activity was during the pre-recession heydays of 2005-2007. While the second quarter produced a broad decline in the equity markets, companies used the quarter to increase holdings, reduce share counts, and add a tail-wind to their eps during a quarter which set an operating record for profits."
From The Blog of HORAN Capital Advisors
Notable buyback amounts in the quarter were:
  • Johnson & Johnson (JNJ): $12.9 billion
  • AT&T (T): $2.6 billion
  • American International Group (AIG): $2 billion
Investors need to analyze 3Q earnings reports carefully in order to determine the reasons behind potentially higher EPS that may be reported. S&P also noted they are seeing over 80 companies increase buyback activity in Q3. This lower share count will artificially inflate reported EPS. Reviewing a companies absolute earnings should be a focus of investors. Factset recently noted,
"So far, 103 companies in the index have provided guidance for the third quarter. Of those, 80% have guided  below Wall Street consensus estimates, according to John Butters, senior earnings analyst at FactSet. That’s the most negative outlook since FactSet began tracking the figures in the first quarter of 2006."

Disclosure: Long JNJ

Wednesday, September 19, 2012

Transport Company Warnings Not Positive Sign For Global Economic Growth

Over the course of the last two days, both FedEx (FDX) and Norfolk Southern (NSC) have issued significantly lower earnings guidance. In the case of FDX, the warning may be more of a concern given the global nature of their business. Additionally, the link between FedEx package shipments and YOY GDP growth suggests the global economy is experiencing a significant slowdown.

From The Blog of HORAN Capital Advisors

In the case of Norfolk Southern, after today's market close, the company lowered their 3Q earnings guidance to a range of $1.18 - $1.25. This compares to original 3Q guidance of $1.62 and 3q 2011 earnings of $1.59. Not surprisingly, the stock initially fell over 6% in after hours trading to $68 share before recovering to $69 per share. The Wednesday closing price for NSC was $72.69.

From The Blog of HORAN Capital Advisors

A recent Wall Street Journal report tht discussed the FDX earnings revision noted, "It isn't just FedEx. Data gathered by the CPB Netherlands Bureau for Economic Policy Analysis show that global trade volumes grew an unusually low 2.6% in the second quarter compared with a year earlier; the average pace over the past 20 years has been 6.1%. The two major West Coast ports, the ports of Los Angeles and of Long Beach, Calif., reported that outbound container volumes fell by 4.1% in August from a year earlier. That was the steepest drop since September 2009."

The lower earnings guidance by both of these companies and the West Coast port data are indications of slower economic growth, if not growth that is more indicative of a recessionary environment.

Disclosure: Long NSC

Jason Trennert: Short Term Bearish

Jason Trennert, chief investment strategist at Strategas Research Partners, recently discussed his views on the economy and believes the recent economic data is typically associated with an economy that is in a recession. In his Barron's article this week, Long-Term Bull, Short-Term Bear ($), Trennert noted,
"Profit margins are two standard deviations above the mean, and nominal GDP growth of 3.1% in this year's first half was at a level normally associated with a recession."
As he discusses in the below video, much of the earnings strength seen by companies has come from expense reduction (margin expansion) and not top line revenue growth. He believes current policies coming out of Washington are not growth oriented, the impending fiscal cliff being one such example.

Federal Reserve Dominant Buyer Of Treasuries

An end result of the Federal Reserve's quantitative easing programs, including operation twist, is the Fed's balance sheet has swelled with the growth in U.S. treasury holdings. In 2011, the Fed purchased over 60% of all the treasuries issued by the government. A recent Bloomberg comment notes the Fed now owns over 37% of all treasuries with maturities greater than 5-years.

From The Blog of HORAN Capital Advisors

This is certainly a path that is unsustainable before reaching a tipping point. In order to continue down this path, the dollar printing press will need to run at full speed with an end result a further weakening of the U.S Dollar and consequent higher inflation.

Sunday, September 16, 2012

Dow's Recent Advance Below Average In Duration And Magnitude

Even with all the Fed's intervention and their attempt to force investors into risk assets, The Chart of the Day's recent market chart notes the current rally is both below average in duration and magnitude.

"The Dow made another post-financial crisis rally high Thursday on the news that the Fed will embark on a third round of quantitative easing (a.k.a. QE3). To provide some perspective on the current Dow rally, all major market rallies of the last 112 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow -- with a rally being defined as an advance that followed a 15% correction (i.e. a major correction). As today's chart illustrates, the Dow has begun a major rally 28 times over the past 112 years which equates to an average of one rally every four years. Also, most major rallies (78%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow red dot labeled you are here) which began in October 2011 (since it followed a 16.8% correction), would be classified as well below average in both duration and magnitude."
From The Blog of HORAN Capital Advisors

Saturday, September 15, 2012

Jeffrey Gundlach: I Doubt You're Going To See Lost Decade In Equities

Fixed income manager, Jeffry Gundlach, sat down for an interview on Bloomberg recently. In the interview he discusses the risk that has developed in the bond market, specifically in treasuries. His firm DoubleLine, is considering expanding into equity fund management as well.

h/t: Abnormal Returns

Wednesday, September 12, 2012

Revenue And Earnings Growth Continue To Slow

One of the services provided by Thomson Reuters (TRI) is they aggregate financial data from analyst. TRI recently updated/aggregated all the analyst data as it relates to earnings and revenues for the S&P 500 Index companies for the third quarter. TRI notes:
"...companies in the S&P 500 are likely to post the slowest annual revenue growth rate [for Q3] in the last decade (barring the 2008/2009 financial crisis) and the trend seems to be getting worse, with more disappointments in store."
From The Blog of HORAN Capital Advisors

In order for companies to continue achieving earnings growth, they have focused on the cost side of their business. Unfortunately, companies can only cut costs for so long before this avenue to increase earnings comes to an end. Well, this reality may be setting in for Q3 2012 earnings. As the below chart details, Q3 earnings are expected to decline by 2.0%. It is likely, Q4 earnings are revised lower as well. The second chart shows the trend in fourth quarter earnings growth.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

TRI discusses the potential consequences of this slowdown in the below video.


Idea of the Week: Analysts Cutting Their Q3 Revenue Forecasts
Thomson Reuters: Alpha Now
By: John Kozey
September 12, 2012

Disclosure: our firm is long TRI

Saturday, September 08, 2012

As of August Year To Date Dividend Payers' Return Trails Non Payers

On a year to date basis ending August 31, 2012, the return of the dividend payers in the S&P 500 Index trails the return of the non payers. The average return of the payers equals 10.37% versus 12.70% for the non payers. For the 12-month period the payers average return totals 14.70% versus 10.01% for the non payers. On a weighted basis though, the S&P 500 Index return equals 18.00% versus the 14.70% for the payers. Apple's (AAPL) return for the eight and twelve month periods has contributed 2.11% and 2.32% respectively, to the indexes overall return for those time periods.

From The Blog of HORAN Capital Advisors
Data Source: Standard & Poor's

Friday, September 07, 2012

Unemployment Rate Down Due To Participation Rate Decline

The employment situation report released this morning indicated non-farm payrolls increased by 96,000 versus an estimated increase of 125,000. The unemployment rate declined to 8.1% versus 8.3% in the prior month. The total number of unemployed remained at 12.5 million people so one would not expect the unemployment rate to decline. However, the decline in the rate is due entirely to the fact 368,000 individuals dropped out of the labor force. The participation rate fell to 6.5%, the lowest level since 1981.

From The Blog of HORAN Capital Advisors

The employment to population ratio of 58.3% declined slightly from the July level. This ratio has remained relatively flat since the end of the recession as little job growth has been seen in the economy.

From The Blog of HORAN Capital Advisors

Monday, September 03, 2012

Recession Risk In U.S. Rising But Still Low

From a business cycle perspective, Fidelity recently released a report that indicated the risk of a recession in the U.S. was rising. Although the rising recession risk is low, the report cited weak "external" factors as the cause. Also, these weak external factors may be impacting company earnings expectations as noted in yesterday's post: Companies Lowering Earnings Guidance For Third Quarter.
From The Blog of HORAN Capital Advisors

In spite of this higher risk, the U.S. and Japan remain in the mid-cycle expansion phase, while China is contracting.
From The Blog of HORAN Capital Advisors

Importantly for investors, one question being ask is where should investment dollars be allocated if the economy is nearing a slowdown.  Our post, Sector Rotation and The Economic Cycle, will provide some insight. Clearly, the U.S. economy is slowing. The Bureau of Economic Analysis released the second revision of GDP last Wednesday and it estimates GDP growth in the second quarter came in at 1.7%. This compares to 2.0% real GDP growth in the first quarter.


Business cycle update: recession risks rose
Fidelity Viewpoints
By: Dirk Hofschire, CFA, SVP, Asset Allocation Research, and Lisa Emsbo-Mattingly, Director of Asset Allocation Research
August 24, 2012

Saturday, September 01, 2012

Companies Lowering Earnings Guidance For Third Quarter

In spite of the high level of negative earnings guidance issued by companies for the third quarter, the market is shaking of this news and moving higher. Factset reports,
"For Q3 2012, 80 S&P 500 companies have issued negative EPS guidance while 21 companies have issued positive EPS guidance. If 80 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the second highest number for a quarter during the past three years, only trailing the number recorded in Q4 2011 (84). If 21 is the final number of companies issuing positive guidance for the quarter, it will mark the lowest number of companies for a quarter since FactSet began tracking guidance in Q1 2006.

"At the sector level (with a minimum of five companies issuing quarterly EPS guidance), the Health Care (100%) and Materials (100%) sectors have the highest percentages of companies that have issued negative EPS preannouncements, while the Industrials (50%) and Consumer Staples (50%) sectors have the highest percentage of companies that have issued positive EPS preannouncements."
From The Blog of HORAN Capital Advisors

Factset goes on to note,
"Although the percentage of negative preannouncements is running at an all-time high, the market is not punishing the price performance of these stocks in the short term. For the 80 companies that have issued negative EPS guidance for Q3 2012 to date, the average price change (2 days before the guidance was issued through 2 days after the guidance was issued) has been +0.2%. This percentage is well above the average over the past five years of -1.8%. Just under half of the companies (38) that have issued negative guidance have recorded an increase in price during this time frame. Ten of these companies witnessed a double-digit increase in price.

"For companies that have issued positive guidance, the story has been even better. Of the 21 companies that have issued positive EPS guidance for Q3 2012, the average price increase has been +6.5%. This percentage is also well above the average over the past five years of +2.6%."
From The Blog of HORAN Capital Advisors

Eventually, companies will need to generate top and bottom line growth in order to support a continued advance in the market.


Guidance (EPS)
By: John Butters, Senior Earnings Analyst
August 31, 2012

Where Hedge Funds Are Allocating Their Investments

Broadly, hedge funds have mostly trailed their market benchmarks; however, investors may find interest in tracking changes in positions and sectors for the hedge fund group. Investors should keep in mind that hedge fund positions are reported once a quarter and the report can be as late as 45 days following a quarter. Consequently, a fund's report may not be reflective of the fund's current allocations.

A recent Factset report notes changes in hedge fund positions and sector allocations in the second quarter. Highlights from the report:
  • The fifty largest hedge funds increased their equity exposure by 3% and forty-five of the fifty managers showed an increase in equity assets in Q2 2012.
  • Apple (AAPL) was present in the majority of fund portfolios and was the top holding of 24% of the 50 hedge fund companies.
  • Hedge fund companies were most active in increasing their allocations to Procter & Gamble (PG) and BP PLC (BP) in Q2 2012.
  • Citigroup (C) experienced the largest equity outflows, but, relative to starting portfolio values, Cisco (CSCO) and Crown Castle International (CCI) experienced larger declines (-29.5% and -24.3%, respectively).
  • Facebook (FB) marked the largest new position over the quarter, but its ending weight in the aggregate portfolio amounted to less than 0.1%.
From a country and sector perspective, the U.S. market attracted the most interest. Energy, technology and staples were the favored sectors.

From The Blog of HORAN Capital Advisors


Hedge Fund Ownership: Quarterly Highlights, Q2 2012
By: Michael Amenta, Research Analyst
August 22, 2012

Disclosure: Our firm is long PG