Thursday, October 31, 2013

70% Health Care Cost Increase

I just had a conversation with an individual that has an individual family health insurance policy. His current policy comes due in February 2014 and he is evaluating his health care insurance options for next year. With his current plan, his total cost is $11,616 including deductible. According to his insurance contact, the Obamacare policy he qualifies for on the health care exchange through the state of Ohio that matches his current policy comes in at a total cost of $19,800. This represents a 70% increase in his cost for health insurance next year. The individual does not qualify for any subsidies so this will have a direct impact on funds his family has available for discretionary spending. The impact on the broader consumer economy as a result of these premium increases is likely not going to be positive.

Sunday, October 27, 2013

The Week Ahead Magazine: October 27, 2013

Investors seemed to have put events in Washington into the rear view mirror as fund flows have turned positive this past week. Below is the link to this week's magazine covering a few articles investors might enjoy in the coming week.

HORAN Celebrates 65 Year Anniversary

Last week HORAN held an open house and client appreciation event at our firm's headquarters to celebrate our 65th year of keeping promises made to our clients and staying committed to our value of corporate social responsibility. The firm has grown from one employee in 1948 to over 90 today. The foundation on which the firm was build remains in place today. This has allowed HORAN to prepare clients for their future and overcome the obstacles many individuals are faced with today. HORAN is also deeply committed to improving the quality of life in the communities where our employees live and work. As the firm's CEO, Terry Horan, often notes, “What matters most, each and every day, is helping our clients address two of life’s greatest challenges: obtaining access to quality, affordable health care and securing professional counsel to build wealth and transfer it on to future generations.” We thank our clients for allowing us to serve them.

More on our anniversary can be found by reading our recent press release.

Investor Letter: Multiple Expansion Contributing To Market Returns

Our most recent Investor Letter looks at the market's recent return and the positive influence of multiple expansion on the indexes' performance. In spite of issues surrounding the budget and debt ceiling in Washington, DC, the market seems to shrug off these headline events and continue its move higher. Our newsletter looks at these recent events and the fact similar ones will grab the headlines as 2014 begins.

From The Blog of HORAN Capital Advisors

The complete Investor Letter can be accessed at our website at this link: 3rd Quarter 2013 Investor Letter.

Sunday, October 20, 2013

The Week Ahead: October 20, 2013

The debt ceiling and budget stalemate was resolved in Washington, DC last week. If only a temporary resolution to the crisis, the market certainly cheered the short term agreement. This week's magazine includes some article links focusing on what might lie ahead for the markets.

Thursday, October 17, 2013

Housing Issues A Continuing Drag On Consumer Spending

A recent report by the Federal Reserve Bank of New York shows residential non performing loans (NPLs) at bank holding companies remain highly elevated. This is in contrast to the improvement seen in commercial NPLs have declined significantly.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

At issue is the impact higher residential NPLs are having on the individual consumer. Economists indicate the wealth effect that results from rising stock and real estate prices has a positive impact on consumer spending. Mark Zandi of Moody's Analytics recently stated, "an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'"

It appears the elevated level of residential NPLs may be showing up in the continually declining  rate of growth in personal consumption expenditures (PCE). The first chart below shows the year over year change in personal consumption expenditures and the second shows the same information, but using real PCE.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

On top of a potentially struggling consumer sector that is not benefiting from the "wealth effect". The sticker shock associated with the health insurance premiums being realized on the health care exchanges is another headwind for growth in consumer spending. Since consumers account for 70% of GDP, the lack of wealth creation from real estate and fewer dollars to spend as a result of the increased cost of health care via the exchanges, it appears a slow growing economy is likely with us for the foreseeable future.

Sunday, October 13, 2013

The Week Ahead Magazine: October 13, 2013

Much of the focus in the coming week will most certainly be on events surrounding the debt ceiling debate and budget stalemate in Washington, DC. In that regard a number of the articles in this week's magazine focus on the Washington issues.

Saturday, October 12, 2013

Funding Entitlements With An Ever Increasing Government Debt Burden

In an attempt to add some perspective to the issues influencing the stalemate in Washington, DC, one overriding issues is the rate of growth of the federal government's debt; hence, the fast approaching debt limit. Driving the government's seemingly ever increasing debt level is entitlement spending. Charles Hugh Smith recently wrote an article that focused on the growth of entitlement spending in the U.S. titled, Have We Reached Peak Entitlements?. His article is a worthwhile read. The result of continued growth in this expenditure category is the growth in the government's debt level. The consequences of not gaining some control over this spending will likely be a lower quality of life for the younger generation.

To put this in perspective, they say a picture is worth a 1,000 words so the below charts provide a snapshot of the government's debt along with current government receipts and expenditures. The first chart shows the absolute dollar level of receipts and expenditures for the federal government. In spite of the much maligned, by some, sequestration cuts, the actual dollar level of expenditures has really not declined by much. On the other hand, government receipts now surpass the level where they stood prior to the financial crisis.

From The Blog of HORAN Capital Advisors

Some will say this is not a fair representation of how one should look at the revenue/expenditures of the government. A fairer way should compare this to the level of economic activity or GDP level. In that regard, the gap remains quite large.

From The Blog of HORAN Capital Advisors

The last two charts display the absolute debt levels for the government. This is the significant issue that has driven a wedge between the two parties in Congress and the debt limit being reached on October 17th. The first chart is the actual level of debt, while the second chart shows the debt as a percentage of GDP. Readers/voters should note the increasing rate of growth of the debt reflected by the increasing steepness of the curve's slope. Just as the law of compound interest favors long term savers, this same law will make it increasingly difficult to repay/reduce this debt as long as the can continues to be kicked down the road.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

As Charles Smith's article shows, we may have reached peak entitlements. Maybe it isn't the fact the Affordable Care Act (ACA) isn't well intentioned. It is more the question of what is the best way to provide healthcare to the uninsured and how is this new entitlement funded. Is this a program better run by the government or the private sector? Smith's article shows the high hurdle facing continued growth in entitlements of which the ACA is another add on and yet to be reflected in the balance between the government's revenues and expenditures. In my view opponents of the ACA have not clearly drawn this connection. And proponents of the ACA have not clearly addressed the funding side of this new entitlement as well as existing ones.

Tuesday, October 08, 2013

Market Looking Oversold But What Is The Catalyst

Afters today's late market sell off, the S&P 500 Index is looking oversold based on a couple of technical measures.
  • The percentage of stocks trading above their 50 day moving average is now 38%. This measure got as low as 28% in the run up to the election in November of last year.
  • The percentage of stocks trading above their 150 day moving average reached 65% today. This measure reached 46% in November of last year.
One technical indicator we highlighted in our early September post, S&P 500 Index Less Overbought This September Versus Last September, was the Money Flow Index (MFI). The MFI works best at extreme levels and this indicator has reached near the same level as early September when it was indicating an oversold market.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Of course the wild card in determining the future direction of the market is the stalemate in Washington over the budget and more importantly the debt ceiling. The outcome on these two events will weigh heavily on the market's future direction though.

Monday, October 07, 2013

The Congressional Impact On Equity Prices

In a study by Michael F. Ferguson of the University of Cincinnati and H. Douglas Witte of The University of Missouri (Missouri State University) titled Congress and the Stock Market, they show a relationship between the return for the Dow Jones Industrial Average based on whether Congress is in or out of session. They call this the "Congressional Effect. They study notes,
"We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public's opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior."
The below chart contained in the Ferguson and Witte study displays the return history of the Dow Jones Industrial Average going back to 1897,
From The Blog of HORAN Capital Advisors
"The 'Out-of-Session' strategy is the cumulative return to a strategy that invests $1 in the DJIA on days Congress is not in session and in cash (earning 1 basis point per day) when Congress is in session. Conversely, the 'In-Session' strategy invests in the market index on days Congress is in session and in cash on days Congress is out of session."
H/T: 361 Capital

Sunday, October 06, 2013

The Week Ahead Magazine: October 6, 2013

Third quarter earnings season begins this week and FactSet notes,

"For Q3 2013, 89 companies have issued negative EPS guidance while 19 companies have issued positive EPS guidance. If 89 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006. The current record is 88, which was recorded in Q2 2013. If 19 is the final number of companies issuing positive EPS guidance, it will mark the lowest number of companies issuing positive EPS guidance for a quarter. The current record is 22, which was also recorded in Q2 2013."
This week's magazine contains links to articles with thoughts on upcoming earnings reports. Also, Washington continues to operate in a dysfunctional way and several articles contain commentary on the fast approaching debate on raising the debt ceiling.

Thursday, October 03, 2013

Government Shutdown: Time To Buy Or Sell Stocks?

With the government shutdown completing its third day, investors are certainly asking themselves whether they should reduce their equity exposure as this media fueled crisis drags on. We wrote a post several days ago, Prior Government Shutdowns And S&P 500 Performance, outlining the market's performance in the prior 17 government shutdowns. Several other firms have written commentary about the market's performance around prior shutdowns as well. The first is from the Chart of the Day charting service and they note the following along with a performance graph,
"Monday marked the beginning of the 18th government shutdown in US history. For some perspective, today's chart plots the average S&P 500 performance for the 20 trading days (approximately one calendar month) before and 60 trading days (approximately 3 calendar months) after a government shutdown began. As today's chart illustrates, the stock market has tended to struggle prior to and during the initial three days following a government shutdown. Following this, the stock market has (on average) trended higher over the ensuing three months. One explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function coupled with the fact that the shutdown may be short-lived ultimately encourages a stock market rally as investors worst fears are not realized. It should be noted that today's chart is an average performance chart and that following the last 17 shutdowns, the stock market traded up 60 trading days after a shutdown on 10 out of 17 occasions (i.e. 58.8%) with the average shutdown lasting 6.4 calendar days."
From The Blog of HORAN Capital Advisors

The other firm, Guggenheim Partners, prepared the below chart showing the performance of differing asset classes during the shutdown period and the 10-day period following the shutdown's end.

From The Blog of HORAN Capital Advisors

In large part the market's short term reaction to this event is more of an emotional one than fundamental one. However, if the crisis drags on for weeks, the government will bump up against the debt ceiling limit and further market disruption could be the fallout. From a positive standpoint though, the government is taking in sufficient tax revenue to continue paying the interest due on the outstanding debt. A debt default would only occur if a conscious decision is made by the executive branch to skip the interest payments due on the government's outstanding debt.

At the end of the day, the market does not like uncertainty and this shutdown is creating just that. However, not if, but when a resolution is finally agreed upon, the equity market will again trade on fundamentals. At the moment, company fundamentals and the economy have not been negatively impacted, but if the shutdown drags on into weeks like the shutdown in 1998, a differing story could unfold.

Tuesday, October 01, 2013

Non Dividend Payers Outperforming Payers Through September

As we noted in our post yesterday, Low Quality Equities Outperforming High Quality Equities, the lower quality companies in the S&P 500 Index are outperforming the higher quality ones. One characteristic of lower quality stocks is many of them do not pay a dividend. True to form, through the end of the third quarter, the non dividend paying stocks in the S&P 500 Index are outperforming the payers by a wide margin. The return comparison is detailed in the below table.

From The Blog of HORAN Capital Advisors