Investor Sentiment Not As Bad As I Expected

Given all the negative news one is hearing and reading about, I expected investor bullish sentiment to be much worse than actually reported by AAII. Much of the European news is negative and today, at the close of trading, the Dow Jones Industrial Average reported its worst Thanksgiving week performance (-4.8%) since the markets began observing the Thanksgiving holiday in 1942¹.

As the below chart details, the bullish sentiment declined to 32.7% this week versus last week's reading of 41.9%. Bearish sentiment rose to 38.3% versus the prior week's level of 31.0%. This results in a bull/bear spread of -5.6%. Market bottoms have generally occurred when the bullish sentiment reading falls into the 20%+ range and the bull/bear spread widens to a negative 20+%.

From The Blog of HORAN Capital Advisors

Additionally, the CBOE Equity Put/Call Ratio, although elevated, was reported at .72 on Wednesday. In the case of the equity/put call ratio, a level above 1.0 is a pretty good sentiment level suggesting the market may be oversold.

From The Blog of HORAN Capital Advisors

Lastly, the percent of S&P 500 stocks trading above their 50 day moving average has declined from over 90% at the beginning of November to 21% on Wednesday. The market appears oversold by this measure, however, not significantly.

From The Blog of HORAN Capital Advisors

¹The Wall Street Journal

The Euro Crisis: Revisiting Pitfalls Of The Gold Standard

The current issues impacting the Eurozone countries harkens back to the problems with the gold standard in the 1930s. Many believe the U.S. depression in the 1930s was worsened by the fact the U.S. and many other countries were on the gold standard. With the gold standard exchange rates were fixed i.e., depreciating ones currency was not an option. The gold standard did not create the depression; however, it most likely pushed the country into a depression. For more on this, one can read, "The Gold Standard and the Great Depression" in Contemporary European History by Barry Eichengreen and Peter Temin.

With the Euro, currency depreciation is not available to countries like Greece. As a recent Bloomberg BusinessWeek article noted, the option available to these stressed countries is cutting wages and government benefits. Now I am not saying this is a bad idea; however, significant economic contraction occurs. BusinessWeek notes,

"The most unfortunate difference between then and now is that the euro, unlike the gold standard, is a raccoon trap: Its designers deliberately left out an exit procedure. That means you can get in, but you can’t get out without leaving a part of yourself behind. Eichengreen points out that Britain was growing again by the end of 1932, just over a year after abandoning gold under duress. Today a country—say, Greece—that quit the euro would take far longer to right itself. That’s because unlike Britain, to get relief Greece would have to default on its euro-denominated debts and damage its credit rating. "The Greek government," Eichengreen says, 'will be hard-pressed to find funds to recapitalize the banking system. Greek companies won’t be able to get credit lines. The new Greek government is going to have to print money hand over fist. At some point they would be able to push down the drachma and become more competitive. But the balance is different now.'"

In the end, the worst part of the Euro union was the fact it was/is a monetary union and not a fiscal union. The decisions in Europe will be difficult; however, in order to prevent a contagion, the ECB will likely need to structure a facility not too dissimilar than the unpopular TARP program in the U.S. For the ECB though, they would be making loans to countries like Greece and Italy. The alternative is kicking out profligate countries and this would be economically difficult for Europe.

Source:

The Euro: As Good (and Bad) as Gold
Bloomberg BusinessWeek
By: Peter Coy
November 17, 2011
http://www.businessweek.com/magazine/the-euro-as-good-and-bad-as-gold-11172011.html

Tom Gallagher Interview: Fiscal Policy Currently Has More Influence Than Monetary Policy

Consuelo Mack interviews Tom Gallagher on this week's WealthTrack. Tom was formally with ISI Group until retiring recently and is now a principal at The Scowcroft Group. While at the ISI Group, Tom was voted the #1 analyst on Washington matters by Institutional Investor from 2001-2010. In the interview, Tom notes government policies have rarely been this important or influential in the economy and markets. He discusses what to expect from the White House, Congress and the Federal Reserve and what it means for your investments in this deleveraging environment. He notes where investors focus in the run up to the technology bubble was on capital gains, in this environment, income return from ones investments is where ones focus should be at this point in time.

Fearful Investors

One index measure investors review to gauge the level of fear in the market is the VIX Index. Currently, the VIX is trading at 31.78, down a little over 1 point today. High levels in the VIX translate into a fearful market and can be indicative of a short term market bottoms. In the early part of 2010, the market's first encounter with the Euro crisis, the VIX hit 48. The S&P 500 Index bottomed shortly after this. In other words, the VIX can be viewed as a contrarian indicator.

Another variation of the VIX is to look at the VIX Index divided by the 10-year Treasury Index. Again, high levels in the VIX show investor fear in the equity markets. A low level in the 10-year Treasury indicates bond investors generally have an anemic growth and inflation outlook over the longer term. Consequently, a high ratio number is a contrarian investment measure. The below chart contains a graph (blue line) of this ratio along with a graph of the S&P 500 Index (red line).

From The Blog of HORAN Capital Advisors

h/t: Calafia Beach Pundit

Job Openings Continue To Rise (JOLTS)

At the end of September, the Bureau of Labor Statistics reported (PDF) there were 3.4 million job openings. This compares to 2.2 million job openings at the end of the most recent recession or a 54% increase.

From The Blog of HORAN Capital Advisors

This improvement in job openings is certainly a positive sign economically; however, companies indicate they are having a difficult time finding qualified employees as noted in this Cincinnati Enquirer article: Wanted: Anyone who can qualify.

Dividend Growth Equities Attractive At This Point In The Market Cycle

For dividend investors, one of the keys is to invest in those companies that have a sufficiently high dividend yield that is sustainable and that have high dividend growth rates. Investors focusing only on high yielding stocks run the risk of investing in a company that can not sustain its dividend and then face a dividend cut. Dividend cuts most often have a negative impact on a company's stock price.

As noted by Sudhir Nanda, head of quantitative equity research at T. Rowe Price, "This makes intuitive sense. Companies with growing dividends are signaling confidence about their future earnings. They tend to be stable businesses, well positioned in their markets, and able to perform throughout market cycles, which make them good candidates for long-term growth." The below table details the extra performance gained by those companies that have these dividend characteristics.

From The Blog of HORAN Capital Advisors

Over the long run, dividend growth stocks have outperformed non-growth payers, non-dividend payers and dividend cutters as I have noted in several past posts. Below is a chart separating the stocks by dividend policy for equities in the Russell 1000 Index.

From The Blog of HORAN Capital Advisors

For investors, one factor to keep in mind is dividend paying stocks tend to underperform the overall market in volatile upward market spikes. However, in volatile down market periods, the higher quality dividend growers generally hold up better; and thus tend to outperform over a complete market cycle.

There are many reasons why dividend growth stocks appear attractive in this market environment, not the least of which is they tend to be less volatile. Companies are sitting on record levels of cash and are likely to use some of this cash for increased dividend payments.

The obvious is stocks are not bonds; however, investors looking to increase their allocation to equities should consider dividend paying stocks. On a year over year basis through September 30th, S&P 500 dividend payments are up over 14%. Year to date through November 8th, for companies that have increased their dividend, S&P reports the median increase is 14.55% and the average increase is 27.82%; 27 companies have at least doubled their dividend. This is an attractive growth rate of income investors aren't likely to find in bonds. More on this strategy can be found in my article, Dividends As An Alternative To Low Bond Interest Rates.

Source:

Dividend Growth Stocks May Be Timely As Economy Sputters (PDF)
T. Rowe Price Report
Fall 2011
http://individual.troweprice.com/public/Retail/xStaticFiles/Fall2011PriceReport.pdf

Third Quarter Earnings Strong, But Q4 Growth Revised Lower

For the third quarter of 2011, 454 companies in the S&P 500 have reported results with 70% reporting earnings above expectations. The estimated earnings growth rate for Q3 is 17.7% according to Thomson Reuters.

From The Blog of HORAN Capital Advisors

 Source: Thomson Reuters

Companies are expressing less optimism about fourth quarter earnings though. Thomson Reuters reports there have been 70 negative EPS announcements for Q4 compared to 22 positive announcements. This equates to a 3.2 negative to positive ratio. This is the highest level of N/P since Q4 2008 when the ratio stood at 3.4. The long term average N/P for the S&P 500 Index is 2.3. Below is a breakdown of the  revised earnings growth rates for Q4 by S&P 500 sector.

From The Blog of HORAN Capital Advisors

Could The Debt Crisis Come To The U.S.?

Much of the volatility impacting global markets of late is the result of the European sovereign debt issues. Italy is the latest country to see its bond rates soar.

According to a recent article in the Wall Street Journal, Italy has €1.9 trillion ($2.6 trillion) in government debt or nearly one-quarter of all euro-zone public debt. Over the course of the next year, Italy must refinance over 15% of its outstanding debt obligations. Given the magnitude of Italy's budget deficit and the recent rise in Italian bond yields, suggests investors are not confident of Italy's ability to deal with these maturities. The size of these debt obligations could be overwhelming for the EU on top of dealing with the debt issues in Greece. This is the type of contagion the EU is trying to prevent.

If history is any guide, past debt defaults by countries have occurred at levels where country debt to revenue levels were much lower. In a November report by Absolute Return Partners they highlighted the debt to revenue ratios of countries today versus these prior country defaults.

From The Blog of HORAN Capital Advisors

One might ask why Japan is not experiencing a crisis. For one, it has a more diverse economy and more importantly, its interest rates remain at very low levels. However, if Greece and Italy are an example, rates can rise very quickly. As noted in Absolute Return Partners' November report, "'A country is bust when the markets decide,'" as stated by Albert Edwards, Societe Generale Cross Asset Research.

So how does the U.S. debt structure compare with countries in Europe that are encountering refinancing risk. If one looks at the country debt level, both on and off balance sheet debt, the U.S. is only behind France in terms of liabilities.

From The Blog of HORAN Capital Advisors

Of potential concern for the U.S. is the level of debt maturing over the course of the next five years.

From The Blog of HORAN Capital Advisors

Source: Center For Financial Stability (PDF)

Compared to many other countries, the percentage of short term debt maturing in less than five years is largest for the U.S.

From The Blog of HORAN Capital Advisors

Source: Center For Financial Stability (PDF)

Of particular concern for the U.S. is the level of its budget deficit in spite of the fact revenues into the treasury continue to grow. The U.S. currently borrows nearly 39 cents for every dollar it spends. Additionally, interest expense is $241 billion or 6% of the government's budget. Given the low level of interest rates on the Treasury's debt, the 10-year Bond is just over 2%, it would not take much of an interest rate spike in the U.S. to negatively impact the government's budget.

Absolute Return Partners highlighted comments from the Fed's summer Jackson Hole Wyoming meeting where the Bank for International Settlements concluded,

"...the debt problems facing advanced economies are even worse than we thought. Given the benefits that governments have promised to their populations, ageing will sharply raise public debt to much higher levels in the next few decades. At the same time, ageing may reduce future growth and may also raise interest rates, further undermining debt sustainability. So, as public debt rises and populations age, growth will fall. As growth falls, debt rises even more, reinforcing the downward impact on an already low growth rate. The only possible conclusion is that advanced countries with high debt must act quickly and decisively to address their looming fiscal problems. The longer they wait, the bigger the negative impact will be on growth, and the harder it will be to adjust."

For the U.S. then, they must address their deficit issues sooner versus later. One significant component will be to create an environment that has a positive influence on economic growth. Additionally, the growth rate in entitlement expenditures must be curtailed. The solutions offered by the ill conceived deficit committee in Washington will certainly be important.

High Unemployment Is Becoming A Long Term Structural Issue

It appears the high level of unemployment and the underemployment level (U-6) are becoming a long term structural issue. The U-6 has trended somewhat lower; however, seems stubbornly stuck above 16%. Additionally, the unemployment rate seems stuck above 9%.

From The Blog of HORAN Capital Advisors

The mismatch between skills and job openings seems to be more structural as time goes on. As noted by the BLS, the relationship between the unemployment rate and the vacancy rate is 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. The BLS goes on to note that during an expansion, the unemployment rate is low and the vacancy rate is high. During a contraction, the unemployment rate is high and the vacancy rate is low. The position of the curve is determined by the efficiency of the labor market. 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).

From The Blog of HORAN Capital Advisors

Source: Bureau of Labor Statistics (PDF)

The potential upward shift that may be occurring can be seen in the below chart from July.

From The Blog of HORAN Capital Advisors

Source: Fidelity

This structural change in employment is likely a trend that won't be reversed in a short period of time. Many of the unemployed have been displaced from construction related fields where the unemployment rate is over 20%. Little improvement is seen in construction, both commercial and residential, near term.

Will This Be A Buy The Dip Type Market For Stocks?

October was certainly a good one for the U.S. equity markets in spite of the 276 point decline today. The Dow Jones Industrial Average increased more than 1,000 points in the month returning 9.5%. The S&P 500 Index increased 10.8% in the month and was the best return since December 1991. A 3-5% pullback certainly would not be surprising given the strength of the advance in October. Will investor then buy into this pullback? I believe they will. One key will likely be the ability of the market to find support around the 200 day moving average of 1,274.

From The Blog of HORAN Capital Advisors

From a fundamental perspective, valuations and earnings for companies in the S&P 500 Index in Q3 are coming in at a respectable level. Of the 315 companies that have reported results for Q3, 71% have reported earnings above analyst expectations and this is higher than the long term average. Importantly to, revenue growth has growth has exceeded expectations as well.

Almost two years ago, I wrote a post that focused on indicators investors might evaluate to determine the future direction of the economy. Following is an update on several of those indicators and they do suggest the economy is not going to dip into another recession.

Durable Goods Orders

• a positive trend continues in durable goods orders since the recession end in 2009.
  

From The Blog of HORAN Capital Advisors

Jobless Claims

• jobless claims remain stuck above 400,000; however, they are trending lower. This is indicative of of a slow growth economy. The initial report for Q3 GDP was growth at 2.5%.
  

From The Blog of HORAN Capital Advisors

Retail Sales

• strength in retail sales continues to surprise on the upside.
  

From The Blog of HORAN Capital Advisors

Chicago PMI

• the Chicago ISM-Purchasing Managers Index came in below expectations today; however, the reading remains above 50 indicating an expansionary environment.
  

From The Blog of HORAN Capital Advisors

Consumer Confidence

• an area of concern is the confidence level of consumers and businesses. The lack of business confidence was highlighted in the Chicago Purchasing Managers release today. Businesses have concerns above the strength of the economy going into 2012. As the below chart shows, consumer confidence (blue line) is trending lower as well. This lack of confidence on the part of both businesses and consumers will likely constrain economic growth and result in a slow growth environment through the election in 2012.
  

From The Blog of HORAN Capital Advisors

Looking to the end of the year, volatility will likely be the norm. Washington, D.C.'s so-called Gang of 12 needs to come up with a "credible" deficit reduction plan. With the U.S. dealing with its debt issues along with the EU's sovereign debt issues, the cure for dealing with over leverage will likely be slower economic growth, but growth nonetheless. These issues alone will influence market action in the short term. Company fundamentals though look to be good and fundamentals tend to drive long term investment returns.

Is The Steep Contraction In The China 25 Stock Index A Red Flag?

For some perspective on one of the more important global stock markets, today's chart focuses on Chinese stocks and presents the current trend of the iShares FTSE/Xinhua China 25 Index (FXI). As today's chart illustrates, Chinese stocks have endured what amounts to an extremely wild ride since 2005. The FXI trended upward at an ever accelerating rate (i.e. parabolic) from 2005 to Q4 2007. As the credit bubble began to unravel, so too did Chinese stocks with the FXI trending downward at an ever accelerating rate from Q4 2007 to Q4 2008. Beginning in Q4 2008, the FXI surged -- gaining over 155% trough to peak. Since that post-financial crisis peak back in Q4 2010, Chinese stocks initially treaded water but more recently have entered in to a steep downward trend channel. Considering China's increasingly significant contribution to the global economy, this recent stock market action is most definitely a red flag.

From The Blog of HORAN Capital Advisors

Source: Chart of the Day

Third Quarter 2011 Investor Letter

Correlations were high in the strongly negative performing third quarter for most equity markets. So far in October though, the market has rallied strongly off the lows resulting in one of the best performing Octobers since 2000 with one week remaining. Europe's efforts to come up with a solution to their sovereign debt issues and Washington's Deficit Panel or Gang of 12 outcome could create headwinds for the market. Our 3rd Quarter Investor Letter contains our prospective views on the market for the balance of the year and into 2012.

HORAN Capital Advisors' complete Investor Letter can be accessed at the following link: 3rd Quarter Investor Letter

Deficit, Debt And Law Of Large Numbers

This evening I had a conversation with an individual whose career is working as an economist. The discussion topic focused on taxes and the deficit. He was adamant that the risk for the U.S. was centered around the "law of large numbers" as it relates to this countries debt level.

This brought to mind the article post written by Terry Horan, the CEO of our business partner firm HORAN Associates, on his blog today, Parties in the Park and Dancing in the Dark. In his post he discusses the 99 Percenters argument that they believe the system is rigged, they are not getting a fair shake and it is time for change.

In Terry's post he shows the below table of federal tax receipts, spending and the government deficit, which was detailed in a recent Wall Street Journal article. In the table the deficit is also shown as a percentage of GDP. What stands out is the growth in the deficit due mostly to an increase in spending. Tax receipts for 2011 are higher than 2010 and 2010 is higher than 2009. For 2011 personal income tax collections were higher by 21%!

Also reported by the Wall Street Journal, "revenue rose 6.5% billion to $2.3 trillion, the equivalent of 15.4% of gross domestic product, largely due to higher income-tax receipts in fiscal 2011, the Treasury said. Spending climbed 4.2% to $3.6 trillion, or 24.1% of GDP, largely due to higher spending on interest, Medicare and Social Security. Thirty six cents of every dollar spent by the federal government in fiscal 2011 was borrowed (emphasis added).

The fallacy of showing the deficit as a percentage of GDP is, at some point, the debt grows to a level where it can't be repaid within any reasonable time if at all. Or, in looking at Greece, there are no buyers of the debt. For the U.S., it's buyer is China.

What makes the discussion about our $14 trillion debt difficult for the average person to comprehend is the absolute size of the number where billions and trillions simply do not seem like real numbers--the "law of large numbers". A recent article at the American Thinker website, The National Debt is Beyond Our Comprehension, attempts to put the amount into perspective.

"We can probably get our minds around a million dollars, but beyond that the numbers become mere abstractions. They simply cease to be real. They are not real, because we really cannot visualize them in a meaningful way. We may have gotten used to hearing about billions, but trillions are really beyond our mental grasp. How many of us, for example, can state the number of zeros in a trillion without having to count them? There are twelve. Now try to mentally visualize the number one trillion. Can you do it? Can you really see a "1" followed by twelve zeros in your mind? I can visualize a billion, but that is only nine zeros: three groups of three. It takes some effort to mentally see four groups of three zeros.

Suppose someone was going to give you $1 every second of every minute, of every hour, of every day without stopping. How long would it take them to give you $1 trillion? Well, let's see. There are 60 seconds in a minute, so that is $60 every minute. Then there are 60 minutes in every hour, so that means we would receive $3,600 every hour. Wow! Even my plumber doesn't charge that much. In a single day, therefore, you would receive $86,400. Most people don't get that much in a year.

Since there are 365¼ days in a year, at the rate of $1 per second the pile of dollar bills would amount to only $31,557,600. Now we are talking real money. That is a lottery jackpot most of us would love to win. But that is still just a number in the low millions.

So, at a dollar a second how long would we have to wait before we could see the pile grow to $1 trillion? Are you ready for the answer? Drum roll, please. It would take over 31,688 years. Even at $10 per second they would still have to have started handing you the money more than a thousand years before the birth of Christ! And even at $100 per second none of us could live long enough to get it all.

At $100 per second we are still only talking about $8,640,000 a day. So in a year you would have accumulated only a little over $3 billion. It will take more than 316 years to reach $1 trillion.

A trillion dollars is so much money that you and I would probably not be able to spend that much for ourselves unless we bought a small country somewhere. Most of us would have trouble trying to spend a billion dollars, and a trillion is a thousand billion. So, if the government wants to reduce the deficit by a trillion dollars, it would have to do the equivalent of cutting a billion dollars from each of one thousand government programs...

The frightening truth is that Congress cannot easily cut $1 trillion from the deficit. The reality is that if you gave a new congressman on his first day on the job a copy of the budget, and told him to cut $10,000 from the budget every second of every day nonstop, his term in Congress would be up before he had cut out $1 trillion."

As much as the government would like taxpayers to pay more into the treasury, the real answer is spending cuts need to be the primary focus immediately. This is something the Deficit Panel or so-called Gang of 12 committee in Washington is having difficulty agreeing on.

S&P 500 Buybacks Over $100 Billion in 2nd Quarter

Preliminary buyback data released by Standard and Poor's indicates S&P 500 companies bought back $109 billion of their stock in the second quarter. This is the first time buybacks have exceeded $100 billion since the first quarter of 2008 when buybacks totaled $113 billion. On a year over year basis, the Q2 buyback amount was 41% higher than the buyback total in Q2 2010.

Howard Silverblatt of S&P notes,

"At this point, companies are continuing to use buybacks to prevent earnings dilution from employee options, as well as shares used for dividend reinvestment programs. Few companies are venturing outside of the box to purchase additional shares, as was the common practice from late 2005 through mid-2007."

Silverblatt goes on to note,

"Exxon Mobil's buybacks have reduced its share count by 18.5% over the past five years ($129 billion), which may cost it its position as the largest company in the world."

From The Blog of HORAN Capital Advisors

Data source: Standard & Poor's

Interestingly, as the box in the chart details, the cumulative earnings generated by the companies in the S&P 500 Index since 2001 have been returned to shareholders either in the form of a dividend or stock buybacks.

Companies Buying Back Shares Are Outperforming

It has been some time since I last reported on the performance of companies that buyback their own equity shares. With a number of companies sitting on large amounts of cash and announcing share buybacks, including Berkshire Hathaway (BRK.A), one way to track the performance of companies buying back shares is to review the performance of the PowerShares Buyback Achievers Portfolio (PKW). The PowerShares Buyback Achievers Portfolio will normally invest at least 90% of its total assets in common stocks that comprise the Share BuyBack Achievers™ Index.

The PowerShares Buyback Achievers Portfolio is based on the Share BuyBack Achievers™ Index. To become eligible for inclusion in the Index, a company must be incorporated in the U.S., trade on a U.S. exchange and must have repurchased at least 5% or more of its outstanding shares for the trailing 12 months.The Share Buyback Achievers™ Index is a trademark of Mergent® and currently consists of 142 companies.

As the below chart and table detail, the Buyback Portfolio (PKW) has a recent history of outperforming the broader market S&P 500 Index. Over the last two years ending 9/30/2011, PKW has generated a return of 21.87% versus the broader market S&P 500 Index return of 7.03%.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Investors should be aware of the fact that the Buyback Achievers Portfolio does contain sector concentrations. Additionally, the Portfolio does not contain any energy stocks at this time.

From The Blog of HORAN Capital Advisors

The top 10 holdings in the Index are:

From The Blog of HORAN Capital Advisors

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."