Archive for September 5th, 2012
Wednesday, September 5th, 2012
by David Templeton, HORAN Capital Advisors
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.
In spite of this higher risk, the U.S. and Japan remain in the mid-cycle expansion phase, while China is contracting.
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.
By: Dirk Hofschire, CFA, SVP, Asset Allocation Research, and Lisa Emsbo-Mattingly, Director of Asset Allocation Research
August 24, 2012
Copyright © HORAN Capital Advisors
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Wednesday, September 5th, 2012
by William Smead, Smead Capital Management
How did the job of an asset allocator move from seeking out undervalued asset classes and securities to one of seeking to mitigate risk? Is risk mitigation a worthy goal or even possible without abandoning real return goals? When and why did wealth creation become wealth management? What opportunities exist today for those who seek wealth creation through intelligent risk taking?
In the last four years, we at Smead Capital Management have been fortunate to sit down with numerous top-notch institutional investors and financial advisors. We repeatedly hear about the approaches which are being used to mitigate risk. We believe that the asset allocation being practiced by the largest and most successful institutions is no longer dissimilar to that of the smallest financial advisory practice! This came about the same way all concentration develops in the investment business; it worked well for awhile and was spawned by the prior concentration.
By the late 1990′s, the institutional and individual investors had crowded into the technology and telecom stocks and most of them were US-based. US large-cap growth became the darling sector of the favored asset class (US large-cap equity) among allocators. Things got way out of balance. We remember seeing the capitalization of tech and telecom grow to as much as 48 percent of the S&P 500 Index by the end of 1999. The popularity of the category was exposed by large ownership of non-dividend paying tech stocks in funds dedicated to rising dividends. Avoiding the tech sector shoved Robert Sanborn out at Oakmark, George Vanderheiden out at Fidelity, caused Julian Robertson to give up on Tiger Management and nearly got Don Yacktman fired by the board of his own mutual fund.
This hyper-concentration left almost every other asset class starved for capital. Some very smart institutional investors (think Harvard and Yale Endowment) recognized the imbalance and spread money across multiple asset classes and under-weighted US large-cap equities. Warren Buffett expressed in 1999 how doomed forward returns would be in US large equity in his Allen and Company talk in July of that year. The proverb Warren likes to quote remains quit germane, “what the wise man does in the beginning the fool does at the end”. Harvard and Yale did very well and their approach has been mimicked for about the last five to ten years by nearly all asset allocators and Markowitz ideologues.
Two bear market declines between March of 2000 and March of 2009 in US large-cap indexes pretty much sealed the distrust and disdain for the asset class among allocators. The University of Washington Endowment proudly told us in 2009 that they had 12 percent of their assets in US equity and 5 of the 12 percent in US large-cap. Institutional investor studies like NACUBA show that they are not alone. Since US Equity has been a leading asset class for long-term investors over the decades, these circumstances contributed to a “rational despair” about returns and led to an intense urge to reduce risk and mitigate it if possible.
We believe that mitigating risk is neither useful nor ultimately possible. In our opinion, drastically reducing risk reduces long-term returns and creates the risk which Buffett is occupied with-the loss of purchasing power. Today’s asset allocators define risk as the possibility of loss in the next year. We have argued during these last four years that long-duration common stock investing incorporates the risk of early year losses. The short-term risk becomes rewarded with above average long-term returns. A look at the Ibbotson charts proves that there is a reward in common stocks for those early year risks.
Why did wealth creation become wealth management? The advent of 401k and IRA accounts put the average American into the securities markets. Lower interest rates and the 1990′s bull market in stocks brought them flocking to risk. Lastly, the aforementioned 40-plus percent bear markets of the 2000′s eliminated any hope investors had of creating wealth in the US large-cap stock market. Consultants and advisors want to get compensated by institutional and individual investors for a long time and the way to keep the money the last ten years has been to play defense or mitigate risk. In effect, the wealth manager is a custodian of wide-asset allocation.
Therefore, we’ve gone from asset allocation “Nirvana” in the ten years ended last summer to the asset allocation “Nightmare” of today (see our missive of this title July 2011). Everyone is crammed into a very similar asset allocation template and over-valuing most asset classes in the process. Watching investors get food poisoning from gorging on emerging market and bond investments could cause Anna Faris to make another “Scary Movie”. One sector of the US stock market asset class (US Large-Cap Equity) is as under-owned today as it was over-owned in 1999. The other asset classes, which were incredibly starved for capital in late 1999, are stuffed with capital like a Thanksgiving Turkey. We believe they offer a great deal of risk and little reward.
What is today’s opportunity? In our opinion, heavily over-weighting US large cap equity should be a winning trade until there is a massive and sustained net inflow into the category. Lipper reported last week that US large-cap equity funds have seen 38 consecutive months of net liquidation. We believe the long-term rewards in this category could continue for five to ten years, because it will take that long for the category to gain popularity among asset allocators.
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities we recommend will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.
Copyright © Smead Capital Management
Wednesday, September 5th, 2012
by Don Vialoux, EquityClock.com
Upcoming US Events for Today:
- Second Quarter Productivity will be released at 8:30am. The market expects a quarter-over-quarter increase of 1.9% versus an increase of 1.6% previous.
Upcoming International Events for Today:
- German Services PMI for August will be released at 3:55am EST. The market expects 48.3 versus 50.3 previous.
- Euro-Zone Services PMI for August will be released at 4:00am EST. The market expects 47.5 versus 47.9 previous.
- Euro-Zone Retail Sales for July will be released at 5:00am EST. The market expects a year-over-year decline of 1.8% versus a decline of 1.2% previous.
- The Bank of Canada Rate Decision will be released at 9:00am EST. The market expects no change at 1.00%.
Recap of Yesterday’s Economic Events:
|AUD Current Account Balance (Australian Dollar)||-11801M||-12200M||-12997M|
|AUD Reserve Bank of Australia Rate Decision||3.50%||3.50%||3.50%|
|CHF Gross Domestic Product (QoQ)||-0.10%||0.20%||0.50%|
|CHF Gross Domestic Product (YoY)||0.50%||1.60%||1.20%|
|GBP Purchasing Manager Index Construction||49||50||50.9|
|EUR Euro-Zone Producer Price Index (MoM)||0.40%||0.20%||-0.50%|
|EUR Euro-Zone Producer Price Index (YoY)||1.80%||1.60%||1.80%|
|USD Markit US PMI Final||51.5||51.9||51.4|
|USD ISM Manufacturing||49.6||50||49.8|
|USD ISM Prices Paid||54||46||39.5|
|USD Construction Spending (MoM)||-0.90%||0.40%||0.40%|
|GBP Purchasing Manager Index Services||53.7||51.1||51|
|USD Total Vehicle Sales||14.5M||14.17M||14.05M|
|USD Domestic Vehicle Sales||11.6M||11.00M||11.00M|
|AUD AiG Performance of Service Index||42.4||46.5|
Markets ended flat on Tuesday following diverging data points that profiled an economy moving in two different directions. The ISM Manufacturing Index issued another contractionary number at 49.6, due to slowing production as a result of a lack of new orders. The Index has been declining since the highs set back in 2010, reiterating the prolonged weakness in this area of the economy. An unexpected decline in Construction Spending for the month of July topped off the negative dataset on the day. Offsetting the negative was an surprising increase in automobile sales for the month of August, climbing 2.8% over the month previous. Bespoke Investment points out that “sales of Ford F-Series trucks rose by 19.3% to 58,201” putting the company on pace to record the highest annual total since 2007. Bespoke notes that sales of small trucks, such as Ford’s F-series, is a “good glimpse into the health of the overall economy” as small business owners account for a significant portion of the sales of these automobiles. So one set of data points to a contracting economy, while another points to an expanding one. No wonder equities traded on either side of the flat-line.
Perhaps providing more of a leading indication of the direction of the economy was FedEx’s earnings warning on Tuesday after the closing bell. According to CNBC “the shipping giant now expects earnings for the quarter ended Aug. 31 to range between $1.37 to $1.43 a share, compared to $1.46 a share last year.” FedEx earnings have a strong correlation to GDP, suggesting that expectations for the economy have to be lowered. The transportation industry is particularly weak on a seasonal basis during the month of September, acting as a leading indicator to broad market weakness during the same period. This news from this economic bellwether is only expected to exacerbate current weakness in the industry. The Dow Jones Transportation Index has been underperforming the market for the majority of summer as climbing oil prices and slowing industrial activity place negative pressures on stocks in this space. The underperformance in transportation stocks is obvious on the chart of FedEx, which also finds itself within a descending triangle pattern. This bearish setup points to downside targets of $81 upon a break of support at $87. Weakness in transports could be foretelling negative things to come for the broad market.
Another descending triangle is presently obvious on the 30-minute chart of S&P 500 Index. The pattern dates back to the significant reversal day realized on August 21st when markets opened sharply higher only to close negative, exceeding the previous day’s range. Support for the bearish setup sits at 1396 with a break below suggesting downside potential all the way to 1366, a mere 2.8% below present levels. The negative technical setup coincides with negative seasonal tendencies during the month of September and uncertain fundamentals that are failing to provide further upside momentum through areas of resistance. Investors are increasingly becoming risk averse, as was clearly evident on Tuesday with defensive sectors (health care, utilities, and consumer staples) the only market segments to produce gains on the session, typically a precursor to broad market declines.
Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.89.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
- Closing Market Value: $12.49 (down 0.08%)
- Closing NAV/Unit: $12.51(up 0.13%)
|2012 Year-to-Date||Since Inception (Nov 19, 2009)|
* performance calculated on Closing NAV/Unit as provided by custodian
Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.
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