Stock Returns By Year.

Couldn't resist throwing this out after seeing it yesterday while recovering from my food coma.

Source: Value Square Asset Management, Yale University

Posted @ The Big Picture. Here's its link. http://www.ritholtz.com/blog/2008/11/major-index-return-1825-2008/

This was as of 11/23/08 I believe.

One thing to note is that the rebound that came from mid 1932-34 was pretty darn good.

Why So Few Got This Economic Crisis Right.

Article in Tuesday's Financial Times about why so few saw this financial crisis coming. I've linked to it here:
http://www.ft.com/cms/s/0/1c1d5a9e-bb29-11dd-bc6c-0000779fd18c.html?nclick_check=1

Three excerpts. The first deals with rationalization of events.

".....The natural tendency {is} to seek rationales for events as they unfold, rather than question whether they are sustainable. Kenneth Rogoff, a Harvard professor who is also a former IMF chief economist, thinks the tendency to look on the bright side is particularly prevalent on Wall Street, where “it is difficult to make a living as a mega-bear”. "

The 2nd deals with those few Cassadras who manage to get the gist of a crisis right.

"Still, you might think there would be large rewards for those who succeed in anticipating these events. You would be wrong. People who worried before 2000 that the “new economy” was a bubble, or warned of the terrorist threat before September 11 2001, or saw that credit expansion was out of control in 2006, were not popular. They were killjoys.
Nor were they popular after these events. If these people had been right, then others had been blind or negligent, and the latter preferred to represent themselves as victims of unforeseeable events. As John Maynard Keynes observed, it is usually better to be conventionally wrong than unconventionally right."

The 3rd deals with the thought process of mean reversion & extrapolation in forcasting events.

"{E}conomic crystal ball-gazing remains unscientific. The trend is the forecaster’s friend. Extrapolation assumes that the future will be like the past, only more so. We project current preoccupations – the rise of China and India, global terror, climate change – with exaggerated speed and to an exaggerated degree. We forget that our preoccupations change. The people who worry about these issues today would 20 years ago have worried about the coming economic hegemony of Japan and the cold war. These issues were resolved in ways that few predicted......


...If extrapolation is the forecaster’s friend, mean reversion is the forecaster’s crutch. Much of the time, you can predict that next year’s figure will be somewhere between this year’s level and the long-run average. But mean reversion never anticipates anything out of the ordinary. Every few years, out-of-the-ordinary things happen."

Happy Thanksgiving

We at Lumen Capital Management, LLC want to wish all of you a very Happy Thanksgiving. Drive safe, eat all you want and play some football. Perhaps some of you can root on the Irish with me when they play vs. USC. I know my friend the Captain will be in attendance at the game. Fág an Bealach!

There will be few or no posts until Monday of next week due to the holiday.
P.S. Dad if they let you read this upstairs go ahead and have the extra potatoes this year when you break bread with your folks for the first time in ages. You deserve it!

Big Investors Brought To Their Knees!

Doug Kass over at Realmoney.com {Subscription Required} highlights how some of the brightest on Wall Street have been beaten with Mr. Market's ugly stick. Below is an excerpt from his post.
Green Highlights are mine.


"The Smart Guys Continue to Lose 11/26/2008 8:01 AM EST
By Doug Kass. http://www.thestreet.com/b/dps/te/theedge1.html (as I said subcription required so this link might not work.)

Learn from their mistakes.

I am particularly struck by the recent series of high-profile investor blunders by the "smart guys" -- namely, large corporations, entrepreneurs (especially of a real estate kind) and savvy investment and hedge fund managers -- which are proof positive how difficult 2008 to 2009 might end up being for investors. -- Doug Kass, The Edge (Jan. 7, 2008) Back in January, I wrote that smart guys were losing their shirts, a sign for us mere mortals that the going was getting tough this year and next.

Below are some examples that I cited 10 months ago of large investment boners made by some smartypants, even before the credit market disaster spilled over and doomed equities (with updates in parentheses):
~In August 2007, Bank of America (BAC) acquired a $2 billion minority stake in Countrywide Financial at $18 per share. (Countrywide no longer trades as Bank of America acquired the company at less than $5 a share.)
~In late November 2007, the Abu Dhabi Investment Authority acquired $7.5 billion of Citigroup (C) stock convertible at $37 and higher. (Citigroup's shares now trade at $6.)
~During the course of the past six months, entrepreneur Joe Lewis has acquired nearly 10% of Bear Stearns. It is not clear what his average cost is -- around $100 is a reasonable guess -- but he is believed to have a paper loss of at least $250 million. (Bear Stearns has since filed for bankruptcy.)
~Real estate developer Harry Macklowe acquired a number of trophy midtown Manhattan office properties from Equity Office Properties at the height of the market's values and before the seizure in the credit markets. An inability of rolling over the debt could crush the Macklowe real estate empire. (It almost did bankrupt him.)
~In May 2007, ESL's Ed Lampert announced that it acquired an initial stake worth about $800 million in Citigroup. At that time, the shares traded about $53. He is generally believed to have substantially added to his holdings in Citigroup since then. (Again, Citigroup's shares now trade at $6.)
~Pershing Square's William Ackman acquired 10% of Target (TGT). Ackman first disclosed his position in July 2007, when the shares traded at about $65. (Target's shares now are priced at $32.)
~Former SEC commissioner and now hedge fund activist Richard Breeden has raised his stake in Zale (ZLC) to almost 6 million shares -- he first filed with about 4 million shares in September 2007 -- or over 13% of outstanding common stock. SAC's Steve Cohen, the very best hedgie extant, also made a 13D filing back in September 2007. Back then, Zale shares traded in the mid-$20s. (Zale's shares closed at $5 yesterday, and more on that below.)
~Less than one month ago, Warburg Pincus acquired $1 billion of MBIA (MBI) at $31 per share. (MBIA's shares now trade at $5.) For those reasons and others, in late November 2007, I suggested that we had entered "The Hardest Stock Market to Navigate Ever."

Since my column on the smart guys losing appeared on these pages in January, many more previously well-regarded hedge funds and acquisitive smart guys in the chase for superior investment performance and concentrated ownership positions, with the most conspicuous example perhaps being Ed Lampert in his ownership of Sears Holdings (SHLD), have lost a boatload of money.

Yesterday, I was especially struck by the news that the shares of Zale dropped by 40%, to a multidecade low.
My long held view has been that the jewelry market's competitive landscape had changed with the emergence of formidable online competitors, such as Blue Nile (NILE) and others, and that Zale's business model would be challenged and its secular profit growth diminished.

Former SEC Commissioner Richard Breeden apparently didn't agree with me. As mentioned previously, his Breeden Capital Management established an 8-million-share position (25% of the outstanding) in Zale. Since the initial 6-million-share stake was established in 2007, Breeden Capital acquired another 3.45 million shares in late December/early January between $13.42 and $16.21 per share. Zale's shares closed at $5.38 a share yesterday.

The smart guys are continuing to lose big.

Berkshire Hathaway's (BRK.A) Warren Buffett might be one of the only exceptions to the rule whereby an investment manager prospered by taking concentrated invested positions; most just don't.
Indeed, the bear market of 2008 has brought many of them to their knees, uncovering some naked emperors in their faulty company analyses and far too aggressive acquisition of shares at overvalued price levels.
Learn from their mistakes.
Stay diversified, keep investing/trading positions small, and be opportunistic."

A Case For ETFs vs. Mutual Funds

Somebody besides me making a case that investing in Exchange Traded Funds is a better investment discipline than investing for the most part in common stocks or mutual funds.

ETFs: Clearly Better Than Mutual Funds
November 25, 2008
by Alexander Green

With the stock market’s historic drop this year, some investors have fled to cash. Others are cautiously buying. Most, however, are sitting on their hands - but they shouldn’t be.
Even if you lack the cash - or the willpower - to buy into this market, there is still a very smart move you can make: switch.
Switch from your poor-performing, high-cost, tax-inefficient stock and bond mutual funds to index funds or exchange-traded funds [ETFs].
Why Choose Exchange Traded Funds Over Mutual Funds?
Compared to exchange traded funds, most mutual funds are a lousy deal, here’s why:
Each year more than three-quarters of them fail to match the performance of their benchmarks.
Many are loaded with front-end or back-end loads, 12b-1 fees, high management costs and other expenses.
Moreover, even when these actively managed funds fall sharply, they still often distribute annual capital gains to shareholders, in effect handing shareholders a paper loss and a tax bill at the same time.
Don’t stand for it. Now is your chance to fight back.
Switching to Exchange Traded Funds Will Save On Taxes
Switch from your underperforming mutual funds to index funds and exchange-traded funds - and save yourself thousands of dollars in taxes in the process.
The IRS allows you to take losses each year to fully offset any realized capital gains, and also allows you to take capital losses to offset up to $3,000 in earned income.

Source: http://seekingalpha.com/article/107857-etfs-clearly-better-than-mutual-funds?source=article_lb_articles

Mutual Fund Performance 2008.

From Business Week on line.

Every Stock Mutual Fund Has Lost Money in 2008, Except One
Posted by: Lauren Young on November 21

Out of the 11,585 U.S. and international stock mutual funds tracked by Morningstar Inc., 11,584 have lost money in 2008, according to fund data through Nov. 20.
In other words, just one fund hasn’t lost money this year—and that is the APX Mid Cap Growth Fund, which was flat through Thursday’s close. That’s right, folks, its return—or lack thereof—is a mere zero thus far in 2008.
Annette Larson, who is Morningstar’s chief data cruncher, has worked at the Chicago firm since 1994. “I’ve never seen it this bad before,” she says. In fact, she was certain she made a mistake when she analyzed the most recent mutual fund data. “I thought to myself: ‘This cannot be right,’ so I did it again, and again, and then I realized all but one fund is negative. I’m in awe,” Larson says.
Not every fund company provides closing data to Morningstar on a daily basis, so there is a chance other funds are in positive territory for the year. But given the overall dismal return of stock funds in 2008, there is an even bigger chance those funds are down, too.

Source: http://www.businessweek.com/investing/insights/blog/archives/2008/11/every_stock_mut.html

Market Valuation: Back Of The Envelope

Some quick thoughts on the S&P 500 based on Friday's trading close of roughly 800 and using differing levels of combined earnings.

EPS of 50........E.Yield of 6.25%......PE of 16.00..........Possible Valuation Range: 500---800
EPS of 55....... E.Yield of 6.88%......PE of 14.55..........Possible Valuation Range: 550---880
EPS of 60.......E.Yield of 7.50%....PE of 13.34........Possible Valuation Range: 600---960
EPS of 65.......E.Yield of 8.12%....PE of 12.30........Possible Valuation Range: 650-1,040
EPS of 70.......E.Yield of 8.75%....PE of 11.40........Possible Valuation Range: 700-1,120
EPS of 75........E.Yield of 9.38%......PE of 10.67..........Possible Valuation Range: 750-1,200
EPS of 80........E.Yield of 10.0%......PE of 10.00..........Possible Valuation Range: 800-1,280

Shaded areas indicated the most likely earnings range where I think S&P 500 companies will report in 2009.
Earnings range is based on a low of 10 was the indicated number and 16x the indicated number.
EPS=Earnings Per Share.
E.Yield= Earnings Yield-a bond yield substitute and the inverse of a company's PE ratio.
PE=Price to Earnings ratio.

*Long various ETFs related to the S&P 500 for client accounts.

Flashback: Why You Liked the 90's Better.

This morning we revisit this post from early 2006.

http://lumencapital.blogspot.com/2006/03/why-you-liked-90s.html

Since we've given back almost everything from the last Bull Market I thought this was a timely revisit. In this Decade per the S&P stocks have lost money in 2000-2002 and unless a miracle occurs also in 2008. Years where the return exceeded or approached stock's historic norms between 8-10% have been 2003-2004 and 2006. Only 2003, as stocks rebounded from the Bear Market decline, saw returns that approached what we experienced in the 1982-1999 Bull Market run. 2005 & 2007 saw low single digit returns for equities. Right now we are trading close to the 2002-2003 Bear Market lows.

Autumn's Chill Breeze.

November's returns have sent a chill down the spines of most investors. What is historically a decent investment month has been anything but in 2008. So far the major market indices are down between 11 & 19% for the month even after Friday's late afternoon rally!

Meanwhile Down On The Farm

One of my contentions is that the next major problem is going to be down on the farm. Simply stated an acre of soybeans or corn can only produce a certain amount of its given crop. Lately the cost of that crop has been going up. Fortunately for farmers so has the price of what they can sell their product on the market. If that changes then things in rural America could go bad rather fast. Somebody else apparently agrees with me. 24/7 published this article yesterday.

Farmers Face Down Deflation As Tractors Get Rusty

"Farmers are supposed to be frugal and that characteristic may serve them well. After getting fat and happy off high agricultural goods prices, they get to be on the poor end of commodities deflation.
It is just their luck that as they are bringing in record crops, buying extra seed, planting more land, and getting new tractors, that the need for their corn and wheat has fallen.
All those people on the bread lines and poor citizens who need a break on food and gas prices are getting some relief now. Farmers may have to take out more loans, but,on balance, the economy is better off if an ear of corn does not cost $10.
The first knee-jerk reaction from economists is that low food prices are a recipe for deflation. The argument has some benefit, but not as much as keeping people who don't have any money from going hungry.
Deflation may cut corporate sales and earnings down the road. In theory, that will cause more job losses. No one can be sure. Time will tell. But, in a very bad economy, the distance people are willing to look into the future is not much further than the end of their noses. Anything beyond is simply too bleak.
From that perspective, cheap food looks good."

Source: Douglas A. McIntyre http://www.247wallst.com/2008/11/farmers-face-do.html
http://www.247wallst.com/

an tSionna 11/21/08:

Double click on image to open. Long various ETFs related to the S&P 500 for client accounts.

Stock Market Corrections.

From the folks at Chart of the Day

The stock market continues in its highly volatile ways with the Dow trading down 5.5% on thursday. For some perspective on the current correction, today's chart illustrates all major stock market corrections (15% loss or greater) of the last 108 years. Each dot represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined 45%. Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years. As it stands right now, the current stock market correction (October 2007 peak to most recent low which occurred today) would measure slightly below average in duration but above average in magnitude. In fact, of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.Notes:-

You can check them out at Chart of the Day Plus.

Source - Dow Jones & Chart of the Day.

Bring Back The Uptick Rule!

The "Uptick Rule" or SEC rule 10a-1 is a securities trading rule used to regulate short selling in financial markets. With certain exceptions, the rule mandates that a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price. The rule was adopted by the SEC during the Great Depression in response to syndicated "Bear Raids" on individual securities.

The SEC eliminated the uptick rule on July 6, 2007. When the SEC concluded that the uptick rule modestly reduced liquidity and did not appear necessary to prevent manipulation. What in my opinion the SEC missed was that in market panics there are no buyers and stocks can be endlessly pushed down by programed selling. The chart above shows when the "UpTick Rule" was phased out. Since then stocks are down about 50% and volume on the S&P 500 ETF (SPY) has exploded.

Now given everything that has occurred since then, it's likely that stocks would still have declined. Also, I'm not against the process of short selling. But I doubt that we would have experienced some of the volatility or late day program trades that do nothing but relentlessly sell securities into a market where there are clearly no buyers. What is missing from this equation is that for every buyer there needs to be a seller and when there are lots of sellers the buyers run away. Nobody steps in front of these late day train wrecks which we have repeatedly chronicled with our charts. See our latest on this here: http://lumencapital.blogspot.com/2008/11/tsionna-at-dimming-of-day.html Better proof is to just look at the explosion late in the day when these sell programs kick in.

But let's find out. Why not have the SEC bring it back on a trial basis for six months and let's see what happens. After all the SEC got rid of the rule. They can surely bring it back.

*Long S&P related ETFs in various client accounts.

an tSionna 11/20/08: Erasure

Today the market erased all of its 2002/3-2007 bull market gains {Pink Line}. I have to guess that we are in the climax phase of this bear market. That is where the selling begets more selling and there are no natural buyers of stock. Certainly it seems by most indicators that stocks are over sold. In many cases we are exceeding fear indicators seen in the 1987 market crash. For example the S&P 500 currently trades almost 40% below its 200 day moving average. The last time it traded this low? Never. I think stocks are as cheap as I've ever seen in all my years. But I also said that two weeks ago. I think that we will look back on this period and think how cheap everything looked back in the nasty fall of 2008. But I also can't say that we don't have another 10% to the downside. We are looking for yield and for ways to invest in major market indices at this time.

One thing that would be great would be to hear something about the economy from the Obama people soon.

PS the blue line is my guestimation of where we could go if these current levels don't hold. About 10-15% further down.

Even Buffett Sings The Blues.

Berkshire Hathaway, Warren Buffett's holding company, down over 45% year to date as of this post. Even he's lost his touch in this market. Symbol {BRK.A}

3 month Bills.

Treasury market back to crisis levels. Current yield of a 3 month treasury is 3/100's of 1% or .015%. Incredible people damn near paying the Government to take their money!

Hedging Gas-Just For Fun.

Let's have a little fun with gas prices shall we. Currently the price of oil and by extension gasoline has collapsed. If you think this is a permanent event read no further......

......Now for the rest of us. Let's assume that you think gas prices could be a buck or two higher next summer. Then today you could do what Southwest Airlines {LUV} does and hedge your risk. Here's how it could be done.

Say you think the price of gasoline will be 1-2 dollars higher next summer during the peak driving season then guess or figure out how much you'll drive your vehicle(s) during that time. You could do this by using a miles per gallon figure and then estimate how many miles you'll put on cars between say May 1 and September 30. So for example 10,000 total miles at an average of 15 miles per gallon means that you'll use approximately 667 gallons of gas. At today's prices of $2.29 this would cost you $1,527.53. (this is what I currently pay in Chicago so it will vary with location)

But say you think gas will be between $3-4 by then. Hedge it with options on the USO. At $4 a Chicago area driver would spend an additional $1,141 on gas. You today could buy 1 option on the USO and hedge most of this risk away. Currently for example if my Chicago driver purchased one of the January 16, 2010 $40 USO contract you would as of this writing pay $11.80 for the privilege. That before any commission would be a cash outlay of $1,180 to you. Your break even on this transaction is likely around 62 a barrel oil and as a guess between 52 & 55 based on how the USO trades. Based on your 667 gallons of gas that contract costs you $1.76 per gallon. Here are some but not all of the possible outcomes:

The price of oil collapses say going to $25 by next summer. Then this contract is likely worthless. You have locked in a higher cost basis for your summer driving. However, any loss taken is a capital loss which does at the end of the day have tax consequences.

The price of oil stays more or less the same. In that case the time value associated with this contract will likely decline and you'll have some of the tax consequences associated with above.

The price of oil heads back towards that $3-4 dollar level. This equates to oil prices at least above $70 per barrel or again between 52 & 55 on our USO. $52 on the USO is our break even given the price of the option. After that we should make one dollar of profit for every one dollar of the USO's advance. $3-4 per gallon gasoline I estimate translates to 80-85 on the USO. Our profit then would be the 80-85 less our total cost of 52. Our profit using a midpoint of 82 as an example would be 30 points or roughly $3,000. Divided by our 667 gallons this works out to a per gallon profit of $4.49. $4.49-our 1.76 per gallon cost=$2.73 gain. Since you are currently hedging versus a 2.29 price that means anything over 1.71 (again using $4.00 gas) is a profit. Thus if it works out then you're going to have a profit of $680 which can be used anyway you want.

Now remember you could lose all of this if gas prices don't go back up next year and I'm not actually putting this trade on at this time. Also options carry certain other risks that we are not discussing here but you should know this risks exist. But it's fun to think about and it is a real world exercise on how ETFs are changing the way we can think about investments. Also its doubtful that any other investment manager is bringing this type of idea to you.

And Another Thing.

Cumulative world wide stock losses from last year's peak is in excess of 9 trillion dollars as of last night's close. {Source CNBC 11/20/08}.

Mutual Fund Performance.

Morningstar, a firm that tracks mutual fund performance is reportedly saying today that the average year to date return for over 10,000 mutual funds is -44%. It further says that no funds are in the black for the year. I haven't verified if this is all correct. I will try to find it out. But that's just a stunning indictment of the mutual fund industry if true.

New Web Site {Beta}

We are working on a new web site for the company. It's in its first phases {ie beta} but you can access it here. http://www.lumencapitalmgmt.com.

an tSionna: 11/19/08

Market violated the resistance levels set from its Mid-October lows. This forces us to bring out and review the more defensive pages of the game plan. The only thing markets have going for it in terms of the very short term is the extreme bearishness among investors and the fact that the 840 resistance level on the S&P 500 is is a well known "line in the sand".

*Long SPY and other S&P 500 index related ETFs for various clients.

The Origninal Meaning of Stocks.

Lot's of people/institutions that deserve some time in these things right now!

SEC 30 Day Yield Explained

I was asked what is the SEC 30 day yield. Here is the abridged definition from Wikipedia.

30-day yield is a standardized yield calculation for bond funds. It's formula is specified by the U.S. Securities and Exchange Commission (SEC). The formula translates the bond fund's current portfolio income into a standardized yield for reporting and comparison purposes.

Because the 30-day yield is a standardized mandatory calculation for all United States bond funds, it serves as a common ground comparison of yield performance. Its weakness lies in the fact that funds tend to trade actively and do not hold bonds until maturity. In addition, funds do not mature. For this reason, analysts often consider a distribution yield to be a better measure of a fund's income-generating potential.

United States money market funds report a 7 Day SEC Yield. The rate expresses how much the fund would yield if it paid income at the same level as it did in the prior month for a whole year. It is calculated by taking the sum of the income paid out over the period divided by 7, and multiplying that quantity by 36500 (365 days x 100).

The SEC yield calculation for a bond fund is essentially a yield to maturity for the bond portfolio. Because bond funds trade actively and prices fluctuate, the rate may not be a good indicator of future results. However, because the calculation is standardized, it provides a good comparison measure for funds.

For you formula wonks Wikipedia says the calculation for SEC 30-day yield is:
Yield = 2[{(a-b)/cd+1}^6-1] Where:
a = dividends and interest
b = accrued expenses
c = average daily number of outstanding shares that were entitled to distributions
d = the maximum public offering price per share on the last day of the period

So there you have it.

Game plan: Yield

Here for a comparison basis is a selected list of securities and their current investment or SEC yields in the case of ETFs. For the record clients of Lumen Capital Management, LLC currently own some or all of these securities in their accounts, although positions can change at any time. We'll look at other examples of this at some other time.

S&P 500 Trust {SPY} 3.54%
Dow Jones Select Dividend Index Fund {DVY} 5.31%
Power Shares Preferred Portfolio {PGX} 10.32%
General Electric {GE} 7.70%
Wisdom Tree Dividend Top 100 {DTN} 5.74%
I Shares S&P 100 Index Fund {OEF} 3.54%
I-Boxx Investment Grade Corporate Bond Fund {LQD} 7.57%

And for comparison:
10 Year US Government Treasury 3.57%.

Hedge Fund 13-F filings.

Some selected hedge funds and how much they've sold in this quarter or how hard they've been hit by stock's decline. Fuel for the fire if & when the big boys decide to jump back in the pool?

Atticus Capital reduced its holdings from $8.1 billion to $510 million.
Tudor Investment from $5.7 billion to $453 million.
SAC Capital Advisors holdings of U.S.-based stocks (and options and converts) were $7.7 billion vs. $14.4 billion last quarter.

Emerging From The Rubble.

Day after tomorrow photo. Probably how most investors feel right now!

PPI: Addendum.

One of the things that contributed to the decline in PPI prices was an almost 25% decline in gasoline prices!

PPI Numbers Signal Deflation.

PPI prices declined 2.8% today and signals a current and deep deflationary spiral. According to Tony Crescenzi, chief bond market strategist at Miller Tabak + Co., LLC, this drop beats the previous record drop of 1.6% set in October 2001 and is the largest since record-keeping began in 1947.

The deflation picture is most glaring in the prices of goods in earlier stages of the production process. Intermediate goods prices, which reflect the prices of goods at the middle stage of the production process also fell 3.9% overall, a record drop that beat the previous record of -2.3% set in April 2003.

The massive declines in prices at earlier stages of production underscore the deflationary tendency that exists in the economy at the moment and which will exist for many months to come.

Source: Huge Deflation Seen in the PPI Details, Tony Crescenzi, RealMoney.com contributor, 11/18/2008 9:21 AM EST

50 & 200 Day Moving Averages.

The S&P 500 trades significantly lower than it's 50 and 200 day moving averages. A moving average {hereafter MA} is simply the plotted sum of all prices divided by the period of time studied. In this case we are using 50 & 200 days of trading. As chronicled by Bespoke Investment Group both of these indices rarely trade at such significant discounts to either of these respective averages. With regard to the 50 day MA, four of its most oversold readings took place during the Great Depression. One occured soon after the 1987 crash and we are currently in the most current period. As of last night's close the S&P traded approximately 16% below it's 50 day MA and is 30% below it's 200 day MA. Traditionally trading at such discounts to these levels has led to a rally. Bespoke has calculated for instance that the average rally in the 50 day period after at least a 25% decline in the 50 day moving average has been approximately 25% and the mean has been 17%.

Source: Bespoke Investments, LLC, 10.24.08 & 10.27.08. http://www.bespokepremium.com/ (Subscription service)

Time Magazine Covers.

Barry Ritholz over at "The Big Picture" has a great interactive piece on news magazine covers {His graphics use Time Magazine, I've concentrated on others besides Time}. It illustrates my same point which is that the press is often a great contrary indicator of longer term investing. Anyway here's its link:

http://www.ritholtz.com/blog/2008/11/30-years-of-time-magazine-covers-the-stock-market/

Buffett Revisited

We promised to revisit Warren Buffett's equity purchases 30 days after last month's New York Times editorial. We used an S&P 500 average price of 928. Since that deadline fell over the weekend, we averaged Friday's close & Monday's open. So far Warren's bet hasn't paid off. Based on this mornings open price Warren is about 8% underwater from the editorial's starting point. Off course we have now way of knowing what he purchased then or where he actually bought stocks. We did this as a general way of monitering how he's done. Buffett is of course the consumate long term buyer so it's likely he isn't even bothered by this decline. We'll next check back on Mr. Buffett and his purchases at the end of the year.

Oh India!

http://www.bloomberg.com/apps/news?pid=20601091&sid=aGnhfqtiHogU&refer=india

Click on the link for an article on how the decline in India's markets have hit its wealthiest citizens. I don't mean to pick on India, other foreign markets have had equally similar disastrous years. But Newsweek never put them on their cover.

an tSionna: So What Did Stocks Return Anyway?

I saw an analyst on TV the other night talk about the fact that stocks had returned a bit over 100% during the last Bull Market. That Bull started either in the summer of 02 or spring of 03. We took a look at this once before here: http://lumencapital.blogspot.com/2008/10/magnitude-of-current-decline.html But this got me to thinking a little more about the nature of the markets 2003-2007 advance. Our interpretation of how it actually played out might be a bit different.

One simple truth we would agree with is that the most explosive moves come after stocks have either left a bear market or after a long period of dormancy. Most of the gains in 2003-2007 came either at the beginning or at the end of the move. So people who were in cash missed most of the money making times.

Anyway, you can click on the chart to further see what we think.

*Long SPY and related ETFs in various client accounts.

an tSionna: At The Dimming Of The Day.

Sellers just hit this market everyday in the last hour or so. Hard to get much traction to the upside when this same pattern is repeated virtually every day! Bad for business!

*Long SPY ETF and related ETFs for client accounts.

More Proof Of Recession: Labor Stats.

NO WORK FOR MANY - There were 7.7 million unemployed workers in the USA in December 2007. That total grew to 10.1 million idled workers in October 2008 (source: Department of Labor & Direxion Funds-"By The Numbers").

an tSionna: 11/13/08

You can click on this chart of SPY to expand it. The market has now retested its October lows three times. Each time it has managed to rebound although technically today on an intraday basis the market breached its Oct. 10th low. Each time it has rebounded on greater than average volume. {See Red Arrows}. The market's next big test will be to see if it can penetrate through these trendlines to the upside. It was repelled in its first two attempts {Red Circles}. Either way it looks like some resolution to our current range could be ending soon.

*Long SPY in certain client accounts.

More Tax Statistics

TAX STATISTICS - In 1980, the top 1% of US taxpayers earned at least $81,000 in adjusted gross income (AGI), accounted for 8% of all AGI nationwide and paid 19% of all federal income tax. In 2006 (the most recent year for which data is available), the top 1% of US taxpayers earned at least $389,000 in AGI, accounted for 22% of all AGI nationwide and paid 40% of all federal income tax (source: Internal Revenue Service & Dirixion Funds-By The Numbers).

Scenarios. Mr. Positive.

Time now to be Mr. Positive. I mean I can't have readers wanting to jump off a building someplace. Since we put out what could be the worst case scenario yesterday, today we'll describe the exact opposite and from our point of view a more probable likelihood. In other words what if everything goes right. Consider this possibility.

The U.S. & world economies prove to be more resilient than most investors assume. The new Obama Administration hits the ground running with a "100 day" economic plan that is embraced by both Democrats & Republicans. It's chief components are some sort of mortgage relief & government infusion of capital for what are considered key industries such as autos and the airline industry. Instead of a monetary stimulus package large amount of capital is spent on infrastructure and alternative energy. There is no tax increase but there is no tax decrease for individuals in 2009. Obama is lucky where President Bush never was in the fact that he manages to have a first two years free of large foreign or political crises. It is apparent by late spring 2009 that the economy has bottomed and housing prices have stabilized. Unemployment which shot up to almost 8% in the first quarter of 2009 levels off. By early summer evidence of this starts to show up in the Government's statistical data. The 1st quarter of 2009 proves to be the the trough in corporate earnings. 2nd quarter numbers while still negative show a sequential improvement in results. By mid summer optimism that the economy has weathered the worst of it starts to seep into the investment community. Stocks which have spent about nine months trading between 850 and 1100 on the S&P 500 start to trade up as investors start to discount the possibility of a recovery by the end of the year. The S&P 500 ends the year trading around 1275. An approximate 35% increase from where are currently trading.

Now I'm not saying this is going to happen either. I do think it is a more likely scenario than a further economic disaster. I also think that when stocks start to recover investors will be shocked at how violently and rapidly they start to advance.

The Way Most Investors Probably Feel Right Now.

Buffett & Goldman Sachs

Even Warren Buffett is having a hard time in this environment. The veteran value investor has seen his stake in Goldman Sachs crash by 38% since October 23, when he announced the purchase of $5 billion worth of preferred shares when the common was trading around $130. At the time, just two weeks ago, many believed Buffett was getting a screaming deal for a company whose value had already fallen by half in the prior year, especially when you added in his 10% dividend and warrants giving him the right to buy warrants for $115. Yet shares are now trading at $71, making those warrants irrelevant. -- Jon Markman 11/10/08

Regarding Valuation. What Could Go Wrong?

A synopsis of questions from yesterday. Regarding equity valuation who says stocks can't trade lower? Have they ever traded lower historically?

First there is no law that says stocks can't go lower. I repeat. There is no law that says stock prices cannot go lower.

They most certainly will decline if the recession is deeper than most of us think right now. There is also nothing that says that stocks have to trade at multiples close to their historic standards-perhaps we will be in an era that owing to the higher levels of volatility stocks multiples will contract. Our numbers are our baseline scenario that we review all the time and change when needed.

You want a nightmare scenario here it is: Earnings collapse and S&P 500 earnings don't trough out until sometime in 2010. The economy enters a low to no growth era. Unemployment remains stubbornly high. Throw in an unexpected political crisis, a foreign policy crisis or an unforeseen natural disaster-seems we haven't had a Katrina or an earthquake recently. Then look out! The S&P could in that instance trade down to its historic trough multiples which would likely equate to S&P 500 stocks at some point trading down to between 600-700. That is the potential for stocks to fall another 35% from here. Stocks have seen valuation levels that low before in both 1974 and in 1982. One difference though was back then government bonds yielded substantially more than they do now and inflation was a significant problem. In 1974 bonds yielded 8.4% and in 1982 they yielded 14.6% on the 10 year. Today that less than 4% yield ought to give us some floor higher than where we are now. Again I don't think this is the likely scenario but it is out there and it is one we can't completely dismiss, particularly as we draw up the game plan for 2009.

Remember our Vets!

Most of the world has never heard of John McCrae. A Canadian of Scottish descendent whose family had a history of military service, John Alexander McCrae was both a physician and soldier. McCrae served in the Second Boer War and World War I. He also taught medicine at the University of Vermont and McGill University in Montreal.However, McCrae is not remembered for being either a soldier or a physician. McCrae was appointed as a field surgeon in the Canadian artillery and was in charge of a field hospital during the Second Battle of Ypres in 1915. There, touched by the battle death of his friend and former student, Lt. Alexis Helmer, and inspired by the red poppies that grew in profusion near Ypres, McCrae wrote one one of the best known poems to come out of the “War To End All Wars” It is still recited by Canadian school children……

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved, and were loved, and now we lie
In Flanders fields.
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

In 1918, while still serving in the same field hospital, McCrae caught pneumonia and meningitis and died. Poppies, particularly in Commonweath Countries are still used as symbols of the Great War and are still closely associated with Veterin’s Day here in the United States.Please take a moment today to remember all of our soldiers past and present. Especially remember those who have made the ultimate sacrifice in the service of our country.

Why Obama Really Won!

Theres no one as Irish as Barack OBama- Hardy Drew Irish Obama Song

http://www.youtube.com/watch?v=4Xkw8ip43Vk


& Then There's This.....

Records unearthed in Ireland reveal that Democratic presidential hopeful Barack Obama can trace his ancestry back to a shoemaker in a small Irish village, according to a report in the Chicago Sun-Times. Click here to read the Chicago Sun-Times story. A Church of Ireland rector scoured files from the church dating to the late 1700s, and confirmed that Obama descended from Moneygall, County Offaly, the newspaper reported. The village today holds little more than a couple of pubs, shops and a Roman Catholic church.Canon Stephen Neill, from a nearby town, began delving into Obama's past after a U.S. genealogist told him about the possible connection, the newspaper reported.
"I would be convinced beyond a reasonable doubt that this is categorical evidence of Mr. Obama's link to this part of the world," the rector said.It was initially believed the would-be president's great-great-great-grandfather Fulmuth Kearney was the only one of his family to have sailed from Ireland to New York at age 19 in 1850. But the newly uncovered records show other family members had in fact emigrated to America since the 1790s. They also reveal that Fulmuth's father, Joseph, was a shoemaker — a wealthy skilled trade at the time, the newspaper reported."They would have been among the upper echelons of society back then," said Neill.Obama was born in Hawaii to a black man from Kenya and a white woman — with Irish links — from Kansas."I've got pieces of everybody in me," he has been quoted as saying.The Sun-Times published also published a breakdown of Obama's ancestry, which, according to the newspaper, included: American Indian, Irish, Kenyan, English/Pilgrim and Scottish.

Moneygall (Muine Gall in Irish) is a small town in County Offaly, Ireland. It has a population of approximately 300 people. Moneygall has a Roman Catholic church, five shops, a post office, a national school, a Garda Síochána station and two pubs.[1]
President-elect of the United States of America Barack Obama's great great great grandfather, Falmouth Kearney, emigrated from Moneygall to New York City at the age of 19 in 1850 and eventually resettled in Tipton County, Indiana.[2] Kearney's father had been the village shoemaker, then a wealthy skilled trade. {Source Wikipedia}

I know some folks who sure would like to see him Irish Dance.

Stock Price Evaluation-A Starter.

I prefer to deal in probabilities since nobody can predict the future. With that in mind I've given some thought to the markets valuation. The market has had to deal with two huge issues.

The first has been the massive world wide deleveraging and contraction that has been occurring. I believe the majority of this has been priced into stocks. I do believe that markets have mostly discounted the further systemic risk of significant failure by a major financial institution. While the odds against this cannot ever be 0. I would assign a probability of another major institution going belly up at less than 10%.

The second issue is how deep of a recession are stocks currently discounting? Obviously nobody has an answer to that as yet. For our own economic analysis right now we are using this scenario: The US has been in a recession since the beginning of 2007. Economic decline began in earnest at the end of September and we will see at least three-four quarters of negative economic growth. We see trough economic numbers being reported in the first quarter of 2009. The second quarter will be negative but better and marginal growth will return sometime in 2009's third quarter. We are using a ball park range on S&P 500 earnings between $62 & $75 for 2009. We are using a very broad and preliminary scale of $73-$86 for 2010. Obviously we will change this scenario as time passes but this is where we stand today.

Also when evaluating equities one has to look at investment alternatives. Longer term government bonds are yielding between 3.6%-3.9%. Since this is considered a risk free rate of return one ought to demand a higher rate of return from stocks as compensation for the simple fact that they are more volatile and a riskier asset class than bonds. The Consigliere always said demand a 5% return greater than the 10 year bond before even looking at an investment. In this environment I'm upping that number to 6%. So at a minimum I basically need a 10% return over the next 12-18 months to be interested in buying.

With that in mind and using the range of our earnings analysis:

The PE {Price to Earnings Ratio} on stocks is currently between 15 & 12.5 based on our projected 2009 earnings range. Stocks are either currently then fairly valued at around 15 times next years numbers or are historically cheaper than they usually trade. Based on these numbers we can infer current equity valuation on the S&P 500 of 930-1,125. That is all things equal probability indicates that the S&P 500 stocks should be worth in aggregate this amount by the end of 2009. This equates to a possible current total return of -2% to 21% by year end 2009.

Assuming our 2010 numbers are somewhere within the ball park then stocks trade between 12.9 & 11 times 2010 numbers. This analysis says that stocks are currently historically cheaper than where they usually trade. Based on these numbers we can infer current equity valuation on the S&P 500 of 1,022-1,450. That is all things equal, probability indicates that the S&P 500 stocks should be worth in aggregate this amount by the end of 2009. This equates to a possible current total return of 12%-58% by year end 2010.

Again these are just the probabilities we are working with. Nothing says these will come about. They are unlikely to come about if the recession is worse than it currently looks. They could also be better if the recession is not as deep as most of us fear. But this is our base line starting point of analysis as we go forward managing client's money.

d'oineach a chailleadh

d'oineach a chailleadh {to lose face}

BC 17 ND 0!!! Nuff said!!

an tSionna: S&P 500 Weekly Chart

A weekly chart gives a better perspective of the damage done to stocks this year. You should be able to click on this and expand it. My reading of these entrails is still the same: A market potentially trying to find some sort of bottom by establishing a trading range. Of note is the current level of volatility. Simply put it's at levels most of us have never seen with the possible exception of the trading periods right after the 1987 crash.

Taxes: Who Pays Them.

Vince Farrell of CNBC fame and currently Chief Investment Officer for Soleil Securities is out with an interesting thought on taxes yesterday.

"President-elect Obama promised 95% of the people a tax cut. That would require raising taxes on the other 5%. Raising taxes during economic hard times is never a good idea."

According to Vince, here is how taxes currently break out using the last full year of data available which was 2006:

*The top 1% of all wage earners make at least $364,657. That group earned 22% of all income and paid 40.4% of all taxes levied on individuals. The top 1% paid almost as much as the lower 95%. The percent of taxes paid by the top 1% has increased from 19% of all taxes to the current 40% over the last 25 years.

*The top 5% of all wage earners made at least $145,283. The top 5% paid 60% of all taxes.

*The top 10% of all wage earners brought home at least $103,912. The top 10% paid 70% of all taxes.

*The top 25% of all incomes made at least $62,066. They paid 86% of all income taxes.

*Almost 40% of all American earners are currently scheduled to pay no income tax by 2009.

We always say follow the money. I think it's going to be almost impossible given all the money we've spent to give 95% of us a tax cut based on what we know today and the current income statistics. Watch for a certain amount of hedging on this to creep into the new Obama Administration's rhetoric over the coming weeks.

#Source: Soleil Securities, Perspective: Taxes, Vincent Farrell, 11/06/08.