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.