Tuesday, February 26, 2013

States That Rely The Most/Least On Corporate Income Tax Revenue

One factor a business will consider when locating/relocating to a particular state is whether or not a state's tax policies are favorable for business growth. One aspect of this evaluation is the share of revenue a state derives from corporations. The Tax Foundation recently prepared a summary by state on the importance a state places on various revenue sources. Below is a map of corporate tax revenue as a percentage of all state/local tax revenue. Also included in the Tax Foundation report is a similar breakdown on property tax revenue, sales tax revenue and personal income tax revenue.

From The Blog of HORAN Capital Advisors

With all the discussion about the need for more revenues by government entities, companies are likely to pay a great deal more attention to individual state tax policies.


Saturday, February 23, 2013

Most Investors Remain Cautious On Stocks

In a recent survey by the Investment Company Institute (ICI) it was noted fund investors are less likely to assume "above average" or "substantial risks" within their investment portfolios. The survey noted,
  • "Since 2000, the share of baby boomers investing more than 80 percent in stocks in their retirement plans has dropped in half, to about 25 percent for 50-somethings and 21 percent for 60-somethings in 2011, the most recent data available."
  • "But boomers nearing retirement and current retirees burned in the 2008 market collapse keep paring back their risk profiles. Older investors are moving “from capital appreciation to capital preservation,” said Shelly Antoniewicz, an ICI senior economist. Even 35-49 year olds, who still have two to three decades of investing ahead of them, are not quite back to where they were earlier in the decade when they were more willing to take risks in the stock market."
  • "The exception is the under-35 crowd: 26 percent identified themselves as being in these higher-risk categories, slightly more than the 24 percent who did back in 2007."
From The Blog of HORAN Capital Advisors

Antoniewicz attributes the strong January flows to individuals investing year end bonuses as well as reinvestment of year end gains taken by investors to get ahead of potentially higher tax rates associated with the fiscal cliff.

In mid January investor sentiment as reported by the American Association of Individual Investors did spike above the average level plus one standard deviation, i.e., 52. Since this elevated bullish sentiment level in January sentiment has declined to 41.8 for the week of February 21, 2013. Investors do not seem to be overly bullish on equities at this point in time and sentiment is a contrary indicator.

From The Blog of HORAN Capital Advisors

Source:

Boomers Still Cautious About Stocks
By: Financial Security Project at Boston College
February 19, 2013
http://fsp.bc.edu/boomers-still-cautious-about-stocks/


Sunday, February 10, 2013

Google Maintains Smartphone Market Share Lead Over Apple

Late last week comScore reported data on smartphone market share. Google's (GOOG) market share at December 31, 2012 grew to 53.4% from September 30, 2012 share of 52.5%. Apple's (AAPL) market share also increased to 36.3% versus 34.3% in September. The biggest share loser was Blackberry (BBRY) with its share falling two percentage points to 6.4%.

From The Blog of HORAN Capital Advisors

Source:

Apple Commands 36 Percent of Smartphone OEM Market
comScore
By: Stephanie Flosi, Senior Marketing Communications Analyst
February 6, 2012
http://www.comscore.com/Insights/Press_Releases/2013/2/comScore_Reports_December_2012_U.S._Smartphone_Subscriber_Market_Share

Disclosure: Long GOOG


Apple And U.S. Public Debt

There really isn't a good reason why I pulled together the below chart showing Apple's (AAPL) stock price and the amount of U.S. public debt outstanding. Curiosity got the better of me and simply wanted to see how the two series stacked up. The graph scale is semi-log in order to graph the percentage movement in each series. Could it be that the explosive growth in entitlement spending has seen some of those dollars find their way into Apple products? With sequestration nearing at the beginning of March, further federal budget cuts may not be a benefit to Apple's stock price. In all seriousness, for chart readers though, just because two series have a high correlation, it does not mean there is causation...or maybe there is in this case!

From The Blog of HORAN Capital Advisors


Dangers Lurking In The Bond Market

The secular decline in interest rates since 1981 has resulted in bond investors enjoying a thirty year bull market run in most fixed income investments. Since the price of a bond moves inversely to the move in interest rates, the declining rate (and rising bond price) environment is the only investment environment experienced by many baby boomers during their peak investing years. This declining rate period can best be shown by the long term chart of the yield on the 10-year treasury bond.

From The Blog of HORAN Capital Advisors

Conversely, the retiring baby boom generation has enjoyed a less than smooth ride in the equity markets, punctuated by the technology bubble, the financial crisis in 2008/2009 and the bursting of the housing bubble. The risk in equities seem to have far out weighed the return or lack thereof.

In a few recent posts on this blog, we note investors continued to pour investment dollars into bond funds over the last four years in spite of the strong returns generated by the equity market. In fact, over this four year period, the annualized rate of return for equities far outpaced bond returns.

From The Blog of HORAN Capital Advisors

Since the beginning of the year, much has been made about the increased flow of funds into equity mutual funds and ETFs. It is true increased flows have gone into equity investments; however, investors are also allocating funds to fixed income/bonds as well. I believe many investors became cautious prior to the election and the fiscal cliff and with that uncertainty behind them are now reentering the market--investing in both stocks and bonds.

From The Blog of HORAN Capital Advisors
Source: ICI

From The Blog of HORAN Capital Advisors
Source: IndexUniverse

The danger for bond investors is the decline in principal value that results from a rise in interest rates. Bonds are expected to be the stable value of ones investment portfolio; however, with rates as low as they are today, there isn't much room for them to go too much lower. The magnitude of the change in principal value with changes in interest rates is shown below.

From The Blog of HORAN Capital Advisors

Since mid November rates have increased with the 10-year Treasury rate rising almost .50% (or 50 basis points) to around 2%. This does not seem like much of a rate increase; however, the decline in principal value can be significant. The bottom line in the below chart shows the magnitude of the decline in the value of iShares Barclay's 20-year Treasury Bond ETF (TLT) since mid November. A near 8% loss in two and a half months is what an investor might expect from stocks, but not bonds.

From The Blog of HORAN Capital Advisors

Jim Paulsen, Ph.D., of Wells Capital Management, writes on this topic in his February 6th market update newsletter, ‘Facing’ the Portfolio Allocation Decision? His entire newsletter is a worthwhile read and concludes with:
"The post-war investment climate has been heavily dependent on the “faces of the bond market.” And, the bond market is about to change face again. The secular declining bond yield era is over. At best, bond yields will trend sideways in the years ahead. More likely, bond yields will again rise some in the next few years. Overall, investors should prepare for an investment environment whose character lies somewhere between the last two bond eras."

"Compared to the last 30 years, the next investment era may produce similar equity returns but far lower bond returns. Expect the added diversification provided by bonds to diminish substantially relative to the smoothing impact bonds have provided in the last 15 years. Finally, investors should prepare for a much steeper tradeoff between risk and reward. In the years ahead, additional risk will likely be more handsomely rewarded than has been the case in the last 30 years. Perhaps, most importantly, if the risk-return frontier is about to take on more of its pre-1981 character, investors need to question whether current conventional asset allocation parameters, born out of the culture of the last 30 years, are still appropriate?"


Monday, February 04, 2013

A Look At Our Firm's Fixed Income Exposure

Since mid November interest rates have made a fairly strong move to the upside. Since the principal value of fixed investments moves inversely to rates, longer term fixed income investments have experienced principal declines. Recent treasury rate moves are noted as follows:
  • 10-year treasury has increased to 2.01% (2/1) from 1.57 (11/16)
  • 5-year treasury has increased to .87% (2/1) from .61 (11/16)
In many of our client accounts we have attempted to get in front of this rise in rates by structuring our fixed income portfolio in a barbell type approach by focusing on shorter maturity investments on the one hand and focusing on lower quality credit on the other. It should be noted that late last year we did trim our high yield exposure in client accounts overweighted in this segment of the fixed income market.

A couple of the short term investments we have utilized are Vanguard’s short term investment grade fund (VFSTX) and the iShares 1-3 year Credit Bond ETF (CSJ). We continue to like floating rate exposure and recently added to Fidelity's Floating Rate Fund (FFRHX). In a rising interest rate environment, floating rate investments should hold up better as the rates on the underlying fund investments adjust higher as rates rise. In the very short term, in a rapid spike higher in rates, the floating rate note principal can decline. In a gradual rise in rates that has occurred since late last year, the investments noted above, CSJ, VFSTX and FFRHX, have held up well and in fact have increased in value. Conversely, investments that have longer maturities, for example, Barclay’s Aggregate Bond Index (AGG) and 20-year Treasury Index (TLT) have both experienced principal declines from 2% to over 8% since mid November.

The other area we maintain exposure is to credit via a high yield bond fund: Principal High Yield Fund (PHYTX) and the floating rate fund, both credit sensitive. Both of these have done well on a relative basis since November. We are sensitive to the fact treasury rates are rising and this is forcing the spreads on high yield bonds to narrow to low levels. The last area of fixed income we have allocated fixed dollars is in global bonds which we continue to be cautiously optimistic about. The global bond investment we utilize for clients is the Templeton Global Total Return Fund (TTRZX).

From The Blog of HORAN Capital Advisors

The top three lines on the above chart are fixed investments held in our client accounts. These three investment have held up well in this increasing rate environment. The treasury investment (TLT) and aggregate bond investment (AGG) have performed decidedly worse in the short run. The lines display the performance since 11/16/2012. As we noted in our recent Investor Letter, as a firm, we favor equity over fixed income tactically and would look to increase equity allocations with an equity market pullback.