Saturday, October 31, 2009

Happy Halloween

Happy Halloween to all the goblins and ghosts on Ashland Avenue! Good luck in Trick or Treating! We thought we'd give away stock certificates in Enron this year but Mrs. Lumen Capital nixed that idea for candy.

Notre Dame Vs. Washington State.

The Irish have a Samhain/Halloween "Home Game" in San Antonio this week against Washington State. "State" should be an easy win for ND but again I'd note that nothing has been easy for these guys this year. At 5-2 the Irish are a long way towards a post season bowl game bid and a BCS bid is not out of the question if they somehow manage to win out the rest of the way. I think this one is over early and we all can go trick or treating. I think Irish win by 17 points and Jimmy Clausen has a big day.
An Samhain es ghear. An Samhain es fhear!

Friday, October 30, 2009

Who's Dancing Now. Revisited


Last December we discussed the ongoing plight of one of our local newspapers the Chicago Tribune. In that piece we discussed how Sam Zell, who over the years had earned the moniker "The Grave Dancer" for buying distressed assets in real estate and turning them around, had fared quite poorly as a newspaper owner. You can read that original story here: http://lumencapital.blogspot.com/2008/12/whose-dancing-now.html.
I thought I revisit this story given that its the Halloween season. I'd like to say that I have hands on experience by reading up on the company/newspaper in the Chicago Tribune but we at Lumen Capital cancelled our subscription this year. The primary reason for doing so was that in his quest to cut costs Mr. Zell has all but emasculated the paper. While the paper has done a pretty good job of covering local corruption particularly with our former Governor Rod Blagovich, it has also unfortunately mostly gone out of reporting and analyzing news in every other department. The sports section is a joke-big pictures instead of in-depth coverage and local stories in the suburbs are almost non-existent anymore.
The second reason we've cut the paper is that one can read all of the Tribune's content on-line for free. There is even a fee I-phone application to help you do so if you are on the go. Now we here have never understood the newspaper model that gives away its product for nothing. I think it is a big reason that circulation continues to decline all over the country. However, I am also willing to take for free what is given to me on the Internet which the Tribune certainly does every day.
The Tribune is still in bankruptcy as is our other local paper the Chicago Sun-Times. The Tribune has sold the Cubs & their baseball park, Wrigley Field now in an effort to come up with a package that can possibly put it back on solid financial ground. But the paper may have never been in this mess had Zell not put together his debt laden package back in 2007. In regards to the "Trib" we @ Solas think the Grave Dancer has one foot already in the grave!

Thursday, October 29, 2009

CNBC

This from 24/7 Wall Street:
It may be that when the stock market is not moving up or down 20% a month that people lose interest. That seems to be the case if the new CNBC ratings are any indication. They fell 50% in October compared to the same month a year ago, according to Nielsen. During "business day” viewing hours from 5 AM to 7 PM the drop was even worse at 52%.
Jim Cramer, whose popularity has been responsible for almost all the success of TheStreet.com (Nasdaq: TSCM), has carried CNBC on his back for some time due to the high ratings of his “Mad Money” show. The ratings for the program dropped 52% in October.
CNBC’s very small competitor Fox Business may have been smart to get cowboy shock jock, Don Imus, now nearly 70, as its morning host. He is, at least, a broadcasting stable will millions of listeners who appear to follow him anywhere and through any weather. His presence is already helping ratings at Fox Business.

The viewing public may have tired of hearing about the markets after over a year of relentlessly hysterical news which has been both terribly bad in some patches and improbably good in others. The business networks may have to wait for decades until the next stock market crash and credit market meltdown to get all of their viewers back.
I've said for quite a while that CNBC's ratings were likely in the tank. That's really too bad. When it started out during the 90's bull market it seemed to do a much better job of analyzing news versus just cheer leading the markets as it mostly does today. I find the network worth watching from 7-9:30 Chicago time and then when "Fast Money" is on, which here is between 4-5:00 PM. That's because it is the only show that tries to do any analysis of markets and stocks. Otherwise the programming in mostly "filler". I find that Jim Cramer adds no value anymore. Worse from an advertising perspective most of their target audience may have the TV on during the day but with the sound down. All-in-all not good news for them. I've found that I can tell which way the market is going even with the sound down by watching the expressions on the announcer's faces!
*CNBC is currently owned by General Electric (GE). I am long GE in certain client accounts.

Wednesday, October 28, 2009

Barrons On the Reflation Trade.



It has been obvious for some time that the dollar and gold have been inversely correlated this year with gold rising as the dollar has fallen versus other currencies. Now many are beginning to question whether that trade is in the process of reversing itself. Barrons was out the other day with a piece on this exact subject. I've excerpted it below and included a weekly gold chart via the ETF-GLD. {Note I am long GLD in certain client accounts}. Gold may be ready for a breather but it still has many longer term positives as long as countries all over the world continue to print money.
Subscription may be required
Reflation Trade Shifting Into Reverse?

Risk assets ranging from stocks to commodities to currencies seem to be faltering after being floated on a sea of liquidity.

THE SO-CALLED REFLATION TRADE in risk assets seems to be running into headwinds.
Free money -- in the form of dollar-denominated money-markets yielding virtually zero -- has penalized savers and paid borrowers to finance positions in stocks, currencies and gold, commodities and even bonds. This rising tide of liquidity has lifted all those sectors since the summer.
Now, there are signs they are faltering. Monday, stocks ended down 1% after being up 1% earlier in the session, and Treasuries also slid, uncharacteristically. Gold and oil fell together, but gave no support to fixed-income markets. Meantime, the beleaguered dollar bounced off the floor.
Let's resist making too much of a single session. Still, the currents that have been moving markets, mainly driven by the huge tide of cash burning holes in investors' pockets, no longer seem to be having the same effect.
Part of this could be because the big money is, in poker terms, all in. SEC filings show the top 100 institutional investors increased their holdings of equities by $570 billion, TrimTabs finds.
"Rebalancing and then performance-chasing by institutional investors were enough to send stock prices shooting higher even though companies were net sellers of shares and retail investors were on the sidelines," the research firm writes in its Weekly Liquidity Review.
"With so much money already pumped into stocks and many indicators -- margin debt, short interest, mutual fund cash and sentiment surveys -- showing extreme bullishness among institutional investors, we doubt portfolio managers have much money left to drive stock prices higher," TrimTabs concludes.
The weakness has come in economically sensitive sectors that ought to be cooking instead of tanking........
While the Dow Jones Industrial Average posted back-to-back 100-point losses Friday and Monday, the companion Dow Jones Transportation Average got pasted Friday, by some 3.5%, and another 0.8% Monday....
I'll resist putting forth ex post explanations for the markets' simultaneous seeming retreat from risk. It may be nothing more than a breather from the liquidity-driven rally of 2009. But it certainly bears watching.
*Long ETFs related to the S&P 500, Dow Jones Industrial Average, certain energy related ETFs
certain technology related ETFs and GLD for certain client accounts.

Tuesday, October 27, 2009

an-tSionna: 10.27.09


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

Monday, October 26, 2009

ETFs: Barrons Weighs In.

A week ago Barrons-the weekly investment magizine published by the Wall Street Journal published a special insert on ETFs. We're going to continue or discussions on ETFs by taking a look at some of what they wrote in that special edition. Today we publish an excerpt from their introduction on ETFs.

EXCHANGE-TRADED FUNDS probably rank as the most successful financial product of the past two decades. They have cut costs, minimized risks and allowed investors to know at any point in time exactly what they own.......
.....ETFs are not for everyone. Many investors will always want to beat the market by picking their own stocks and bonds. Others want to accomplish the same thing by picking expert portfolio managers to do the job. Still, whether you choose to use ETFs or not, it's important to know how they work and how other investors are using them.
When ETFs were introduced in the early 1990s, they seemed a gimmick. Much was made of the fact that, unlike mutual funds, ETFs allowed investors to buy and sell at current market prices during the day. That was important to some professionals. But most individuals don't have much need to jump in and out of the market hourly.
As it turned out, the attributes that contributed the most to the explosive growth of ETFs among individuals were not ease of trading but tax efficiency and low cost. While mutual-fund managers must sell stocks when clients redeem shares, ETFs do not, thus limiting owners' tax bills. As for the cost savings, they come about largely because ETFs don't have fund managers.
A substantial part of the investing public has voted with its feet. ETFs now hold about $700 billion in assets, which amounts to nearly 15% of the $4.5 trillion held in traditional equity mutual funds. As Mike Santoli points out in his story, "
Growing to the Sky," ETF assets are expected to grow by more than 20% a year for the next five years, while mutual funds grow at a much slower pace. A good part of the growth will come from high-net-worth individuals.......

Saturday, October 24, 2009

Notre Dame Vs. Boston College

The Boston College Eagles invade South Bend this weekend. BC has owned Notre Dame for years and has handed them some truly crushing losses at home. If the ND-Miami game was the best college football game I've ever seen, BC has served up for me some of the worst. This includes a bird's eye view of a winning touchdown by BC with seconds remaining on the clock in Ty Willingham's last year. That play by the way completed a 20 point come from behind Eagles win!
I think the Irish get back on track today though. I think they win rather easily as a matter of fact. We'll have to wait and see I guess. Nothing seems easy with Notre Dame this year.

De reir a cheile a thogtar na caisleain!
*Long Shamrocks in Client Accounts! :-}

Friday, October 23, 2009


From Chart Of The Day:
"For some long-term perspective, today's chart illustrates the Dow adjusted for inflation since 1925. There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, the inflation-adjusted Dow is now a little more than double where it was at its 1929 peak and trades a mere 51% above its 1966 peak – not that spectacular of a performance considering the time frames involved. It is also interesting to note that the Dow is up 54% from its March 9, 2009 low which is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today."
Link: http://www.chartoftheday.com/20091023.htm?T {Subscription Required for main site.}
*Long ETFs related to the Dow Jones Industrial Average for client Accounts.

Wednesday, October 21, 2009

Away Most Of The Week!

I have to be out of town today & tomorrow. The weekend got away from me. {Went and watched the Irish lose to USC, more on that some other time} Thus I had no time over the weekend to throw some articles into the hopper. Expect posting to be light until next week. We'll be back up and running then and I'll break in if there are any earth shattering events. Hopefully my response to the Bulls & Bears will be ready by then as well. Busy and lazy these days!

Tuesday, October 20, 2009

S&P Touches 1100.

The S&P 500 made it back to 1100 intra-day today. I thought this was a good time to review again several of our previous posts.

"Back in March we looked at one of our basic tenants which was "Markets will do what they have to do to prove the most amount of people wrong". We posed the question which way should the market go that would cause the most amount of pain for investors. We felt that direction was an explosive move to the upside. "The most unlooked for scenario would be a market that rockets considerably higher from here. There is a scenario that could get us to 1000-1100 on the S&P over the next year {or sooner} & 1300 by the end of 2010. This seems 'pie in the sky' but the first targets would get us only to where we were early in the fall and 1300 revisits the summer of 08." Link:
http://lumencapital.blogspot.com/2009/03/variant-thought.html We felt that that 1,000-1,100 level was very possible on the S&P 500. We have reached the lower end of that level now."
In late August we weighed in on the discussion of seasonal weakness-a trend that we have spent a lot of time analyzing. This was our two cents.
...."One final thought on seasonal weakness. It is a well documented phenomena that stocks don't do well in the Autumn. However, this seems to also be the most common concern among the investment class right now. Thus we won't discount the possibility that stocks will do the exact opposite and continue their rally well into year end. Remember the old adage that stocks will do what they have to do to prove the most amount of investors wrong and inflict the most pain. From our perspective the most pain would be a sharp Autumn run up in prices. This could occur because many institutional managers are behind their benchmarks this year and there is something like a trillion dollars sitting in money market accounts earning essentially 0 return for investors. I have heard various estimates on how much money is actually on the sidelines. While the actual number may be up for debate, the number is historically much higher than average"..... Link:http://lumencapital.blogspot.com/2009/08/tsionna-post-script.html

With that being said we study markets by studying probability. This is what we said about that subject back in August.

One final note on this post. We study money flows because we feel that 1.) they are analysable and not subject to spin, that is charts don't lie. 2.) We feel that some of our proprietary studies gives us a longer and shorter term investment edge. 3.)We also believe that the study of money flows gives us an investment view that we can incorporate into the "game plan" and 4.) This discipline sets out certain probabilities that we can also incorporate into our investment approach. I would now like to make one important point. Probability is not certainty. That is there is no guarantee that probability as the most likely scenario is the one that will ultimately occur. Probability last summer led us to take defensive measures in client accounts in accordance to our understanding of their risk/reward parameters. Probability did not suggest that the markets would crash since it was impossible to know at that point that firms like AIG & Lehman Brothers would go bankrupt. We got hurt like everybody else. Similar to blackjack when you have a 19, (83% probability of winning-one deck) probability suggests that you have a higher percentage win rate than if you show a 14 (48% probability of winning-one deck). You can still lose with the 19 and win with the 14 but one is an easier path than the other. We therefore discuss probability and not predictability. We are not saying that we called the market in this post. We are saying that we believe that we have benefited this year by incorporating what probability teaches us by looking back at almost 90 years of stock market data and incorporating that knowledge into the investment management of our client accounts through the "game plan".

Now if we incorporated our studies of money flows (which all indicate a very overbought market at this time) and reviewed this with a mind towards probability then one could look for some weakness in the next couple of weeks that would set the market up nicely for an end of the year rally. Such a rally could (notice the word could which is different than the word-will) take us somewhere between 1150 and 1200 by year end. Not saying that will happen just that it is at least a realistic possibility and it is a more likely scenario than many would have envisioned back a few months. We've incorporated this and several different scenarios into the "playbook" for year end.

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

Monday, October 19, 2009

an-tSionna: Market Update.


Long ETF's related to the S&P 500 for client accounts.

Inflation: Investors voting with their feet.

This From Don Dion over at The Street.com

Ben Bernanke's ETF Nightmare
Investors are on to the Fed's game, which means the game is over.
If the Federal Reserve is always on the lookout for inflation expectations, I suggest that Ben Bernanke take a look at the September ETF net cash flows, courtesy of the National Stock Exchange. It is ringing a bell, loud and clear, that investors fear inflation.
The No. 1 destination of investors' cash was SPDR Gold Shares {GLD} with $2 billion in net inflows. It was followed by iShares Barclays TIPS {TIP} with $847 million; Vanguard MSCI Emerging Markets {VWO} with $770 million; iShares MSCI Emerging Markets {EEM} with $651 million; and ProShares UltraShort 20+ Year Treasury {TBT} with $538 million.
Altogether, that's more than $4.8 billion for antidollar, anti-inflation investments, more than 50% of the $9.5 billion in total ETF inflows for the month.
*Long GLD & TIP for certain client accounts.

Sunday, October 18, 2009

Darn!

Whatever happened to The Luck Of The Irish? One second too few. Damn! I was at the opposite end of the field from this. At the game it looked like he was out of bounds. The replay is not so conclusive from my point of view. Anyway its a loss! Damn!

Saturday, October 17, 2009

ND vs USC

The Irish begin a critical stretch of their season these next two games versus USC & Boston College. These are two of their biggest rivals and when they get together generally you can throw out the records. That last comment however seems to be more reserved anymore for BC.


I think the Irish go 1-1 these next two weeks. I think they lose a close one to USC and then come back with a victory vs BC. As I think I mentioned earlier, yours truly will be at this game.


Go Irish!


USC póg mo thóin!

Friday, October 16, 2009

Selling: You Will Likely Never Get Out @ The Absolute Top

Investment Strategist Jeffrey Saut penned a really good piece earlier in the week about selling securities and following trends. It is important to remember her that Saut is talking about investment positions versus trading positions but the advice is still timely and a good read. I've excerpted it below with my own highlights. We are going to discuss selling more in the future as well.
"The absolute price of a stock is unimportant. It is the direction of price movement which counts.”
“During major sustained advances in stock prices......{an} investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.
In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price – by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small........”
“Stock Profits Without Forecasting,” by Edgar S. Genstein


They are two of the most important paragraphs I have encountered in more than 40 years of studying markets. Do not read them just once. Go off to a quiet spot that invites contemplation and read them several times. Then reflect on all of the mistakes you have made in trading and investing.......My advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision; especially if your emotions are reigning.
Ladies and gentlemen, Edgar Genstein’s comments are as cogent today as they were when first written in 1956! The most recent example would be the two-stage “melt up” that began on March 6th from the S&P 500’s (SPX/1071.49) demonic low of 666. The first stage took the SPX up 39.6% into its first intra-day reaction high of roughly 930. From there the index “flopped and chopped” around, but never gave back much ground. Stage two of said “melt up” began on July 13th and has extended every since. So far the second stage has tacked on 24.3% from the July 8th intra-day low of ~869 into the September 23rd intra-day high of ~1080.
While memories are short on the “Street of Dreams,” recall what many pundits were saying when stage one stuttered-stepped in May. The “cry” went out that the short-covering, bear market rally was over, and the March “lows” would be retested and broken. That mantra caused many investors to sell {many of } their investment positions and go to cash.....

Link:
http://www.raymondjames.com/inv_strat.htm
*Long ETFs related to the S*P 500 for client accounts.

Thursday, October 15, 2009

Dow 10,000: The First Time We Were Here.

Boston Boys {Who I don't talk about enough} are out with some notes on where we were the FIRST time the Dow Crossed 10,000.
With the DJIA approaching 10,000 again, let’s reminisce about 1999, the year it first passed that magic level on March 29th.

-Millennium by the Backstreet Boys was the best selling album
-American Beauty won the Academy Award
-The Euro was established
-SpongeBob SquarePants aired for the first time
-Hugo Chavez was elected President of Venezuela
-Karl Malone, Pudge, Chipper Jones, Jagr and Kurt Warner won MVP awards
-The average price of a gallon of gasoline at the pump was about $1.20
-US nominal GDP ended at $9.6b vs $14.1 as of Q2 '09
-Also, on March 29th 1999, the DXY was at 100.36 (now 75.60)
-The CRB was at 192.40 (now 269.15)
-Gold was at $280 (now $1,060)
-Oil was $16.44 (now $74.80)
-Corn was $2.32 (now $3.85)
-Copper was $.62 (now $2.83)
-The 10 yr yield was 5.19% (now 3.38%)
-The fed funds rate was at 4.75% (now 0-.25%)
Oh, how time flies.....
*Long ETFs related to the Dow Jones Industrial Average for client accounts.

S&P 500 Year Over Year Performance.


Bespoke Investments noted last week that the S&P 500 marked for the first time since January 10, 2008 that the index closed higher on the day that the level it was one year ago. "This streak of nearly 21 months represents the second longest streak ever, and the longest since the Great Depression (1930-1933)." When Bespoke looks at other similar periods, the S&P 500 continues to perform rather well. "With the exception of the three and six months following the 1973-1975 streak, the returns over all other time periods have been extremely positive.


Source: Bespoke Investments, B.I.G Tips 10/7/09: S&P 500 Year/Year Performance Turns Positive. {Subscription required to view this report.}
*Note: Long ETFS related to the S&P 500 for client accounts.

Wednesday, October 14, 2009

DOW 10,000






The Dow Jones Industrial Averages finally made it above 10,000 again. For some perspective we dived below this number last September as the whole world seemed to come unglued. However, the first time we crossed this number to the upside was back in 1999! Party like it's 1999. For what its worth above is an approximate look at the employees of Lumen Capital Managment back then & below is us now! Thats what a decade does.

Dow Jones: Performance After Disaster Years.


"{This chart published last week by Chart of the Day}presents the performance of the Dow for the calendar year following the 15 worst calendar year performances of the Dow since 1896. For example, the worst calendar year performance on record for the Dow occurred in 1931. During the following calendar year (1932), the Dow was down 23%. The second worst calendar year performance for the Dow occurred in 1907. During the following calendar year (1908), the Dow was up 46%. That brings us to the present. The Dow's performance during the 2008 calendar year proved to be the third worst on record. So far in 2009, the Dow is up over 11%. Today's chart illustrates that with the exception of the early 1930s, the Dow has tended to rally following an extremely poor performance during the year prior."
Link: http://www.chartoftheday.com/20091009.htm?T {Note: This chart is free and in the public domain but a subscription is required to view their other sections.}
*Long ETFS related to the Dow Jones Industrials for certain client accounts.

Monday, October 12, 2009

Managing Positions: Another Example.



Another example of using money flows to track a position. In this case I was asked by a friend about a certain well known mutual fund that he owned. Again I will not name this fund nor do I have a recommendation on it to either buy or sell. Also I do have some clients that own this fund as a legacy position.
He was asking me whether he should sell what he had. He also asked me this back in March and I told him then under no circumstances should he sell. To the right ->>
I've outlined how I would follow this position. It is a more nuanced approach since back then.
**Note: Certain clients of mine hold this mutual fund as a legacy position. I have attempted to remove any way for you to identify this fund. Also I am not a buyer or seller of it & have no opinion other than to manage this position for my clients as to how I think it will do going forward.

Ar dheis Dé go raibh a anam




Ar dheis Dé go raibh a anam

Sunday, October 11, 2009

Out For A Bit


I will be out the first of the week and posting is likely to be on the lighter side until Wednesday. Part of this time I'm hoping to work on our latest investment letter which will be posted here after we send it to clients. It's my long promised take on the Great Debate between the Bulls & Bears. We'll see you then!

Saturday, October 10, 2009

Irish Off This Weekend

The Irish are off this weekend for their traditional fall break. They get time to rest up and recoup to take on hated USC when they invade the campus on October 17th. Yours truly will be at that game. Since there is no game this weekend here are some memorable movie & game clips featuring Notre Dame football for your enjoyment.
1979 Cotton Bowl Montana To Haines: http://www.youtube.com/watch?v=xu1Ce4yzzo4
1988 Irish vs. then #1 Miami Hurricanes. http://www.youtube.com/watch?v=CcRNUFbwPiE
Note: Yours truly was at this game and it is without a doubt the best live sporting event I've ever witnessed. I went with the captain and we had 50 Yard line seats behind the Miami bench. To a man I don't think those Miami players thought they were going to lose until the final bell sounded!

Friday, October 09, 2009

The End Of Peak Oil: One Analysts View.

Deutsche Bank is out with a well thought out and researched report on the future of the oil business. The financial times did a synopsis piece. Here is an excerpt with link {highlights mine.}.


Deutsche: the end is nigh for the Age of Oil
October 6, 2009 1:22pm
by FT Energy Source
This is the end of the 20th Century of Oil; we are entering the 21st Century of Electricity,” say analysts at Deutsche Bank in a major new report warning of high price volatility for both fuels as the leadership baton is passed.
“Obama’s environmental agenda, the bankruptcy of the US auto industry, the war in Iraq, and global oil supply challenges have dovetailed to spell the end of the oil era,” says Paul Sankey of Deutsche Bank.
Deutsche argues that “oil will never run out, rather we will become more efficient,” and predicts that hybrid and electric cars will have a far greater positive impact on oil efficiency than the market currently expects.
Deutsche’s analysis predicts that by 2020, global average MPG of newly purchased light vehicles will have increased by more than 50% compared to 2009, from roughly 29 mpg to about 44 mpg.
“The impact will be concentrated in US gasoline, the largest single element of global oil demand (12%), and will be dramatic enough in its own right to cause the peak of global oil demand around 2016.....Deutsche also predicts that oil demand will be undermined by a switch to natural gas supplies........Deutsche also expects increasingly chronic under-investment in new oil supply capacity and forecasts that the peak for global oil production could arrive as early as withing the next six years.
The “concentration of remaining oil reserves into OPEC government hands will lead to under-investment in new supply and higher volatility in regulatory and fiscal regimes, and more volatile pricing. Consumer governments are adding to uncertainty with total lack of clarity on environmental legislation/regulation outcomes. That deep uncertainty in supply and demand will likely disincentivise private sector oil supply investment, exacerbating overall oil under-investment, and leading to peak oil supply within the next six years...

However, Deutsche also warns that a final upward price spiral will be required to break US oil consumption patterns and shift toward greater efficiency over the long term.“US demand is the key,” says Mr Sankey: ” It is the last market-priced, oil inefficient, major oil consumer.”
Deutsche predicts that oil prices could finally peak at $175/bbl in 2016 but will (then) be under fundamental long-term downward pressure.....
....“Beyond the the 2016 peak, Deutsche expects oil prices to fall and warns that the value of undeveloped resources such such as Canadian heavy oil sands, oil shales, and Brazilian pre-salt and other ultra-deepwater plays could be far lower than the market currently expects.
Deutsche expects relatively short-term, high capex flexibility oil projects to retain premium value.
“Companies that are relatively smaller, with lower costs of capital and stronger, more flexible managements should relatively outperform in a highly challenging world for corporate players. There will be a competitive advantage to those companies that are prepared to plan on high oil prices in the medium term, in our view. Most advantageous would be to access near-term existing supply rather than long-term resource. At this stage we believe a high oil price planning assumption will be a competitive advantage – but this changes beyond 2016.”
Deutsche also has a warning for oil refiners describing refining as “a twilight business that will struggle mightily in a world of ever declining gasoline demand.”

Link: http://blogs.ft.com/energy-source/2009/10/06/deutsche-the-end-is-nigh-for-the-age-of-oil/


Comment: I think hybrid & electrical cars are going to be a game changer as we go forward. I don't have to drive my car much and when I do it is usually 70% for business. I may put 7,000 miles a year on a car and fill it up twice a month. That's the advantage of living in a built up urban area. Millions of people are just like me. GM says its new Volt due to come out next year should get somewhere around 280 miles per gallon for people who drive in short burst trips like me. I'm not sure I buy that number but let's say it gets 100 miles per gallon. That means I'd fill up my car once every 4-6 months or so. Multiply me by millions and you can see where Deutsche Bank is coming from. I'm going to have more to say on this and the "Green Movement" at a later time. Suffice it to say though that this is a high impact and long term investable event which we hope to take advantage of for our clients.


*Long ETFs related to energy, clean energy, oil and gas exploration for client accounts.

Thursday, October 08, 2009

Managing Positions: An Example


I have a long time client with a very large position in a certain stock. We have marked some or all of this position for sale with the client since late last year. Late last week the client asked me for an update on what we were doing. In effect, how were we managing the position? This is the chart that I sent back to them. I think it is a nice illustration of using money flows to manage equity positions. One note that perhaps is not made clear in the chart although I believe that it was made clear to the client that a break above the triangle mentioned in the stock would be considered a bullish development and we would then manage the position for more profit.

Note: I am only long this stock in one client account. To avoid any appearance of anybody thinking that I am taking a position on this stock, I have removed all references to it's name. I am also not a buyer or seller of this name and have no opinion on how I think it will do going forward.

Wednesday, October 07, 2009

The Great Debate. Turn For The Bulls.

Time now for the Bull's rebuttal. This piece was published over at Market Watch last week. One note is that I believe by backtracking on the math that the author is using $75.50 of earnings for the 2010 calender year. Current consensus for S&P earnings for next years is in the $74.75-75.00 Excerpt with my Highlights.
No reason to be spooked by October this year
By Robert Maltbie
LOS ANGELES (MarketWatch) -- While some might get spooked by an often-volatile October, signs are that the markets are in strong shape.
Just the facts: My indicators are as bullish as they have been since March 2003, preceding a 26% upside surge in equity averages that year. Four out of five of our market indicators are bullish and one is neutral. Let's start with the bear case:
The market is fully valued at 17 times earnings and it is too late to get in the market. But price-to-earnings is a backward-looking measure. If we use projected forward estimates, a different picture emerges. If we value the S&P 500 using 2010 estimates, which call for a 20% or greater increase in earnings, we find a more reasonable price-to-earnings ratio of 14, far below 19 where the market topped in 2007.....
October is best known for spectacular market crashes. At the very least, the month's volatility can spook many investors. But many of our experts say there's good reason to remain in the market, despite whatever jitters you may have.
{The author's } "sentiment" indicators show... that volatility and possibly fear have greatly diminished. This is evidenced by the CBOE volatility which has retreated to 23 from a high of more than 80 a year ago when we were in free fall.
Offsetting this is a bullish AAII pundit survey showing investment advisors are bearish, perhaps bracing for "seasonal harshness," by 39% bulls to 45% bears.{The author's} remaining indicators are all currently solidly bullish -- technical indicators, monetary data, liquidity measures and valuations. ...
A final anchor of positive support is that the Dow, the S&P and Nasdaq all have broken decisively above 200-day moving averages and held their ground. These are characteristics of a market with healthy internals, good days are better and exceed bad days and more stocks are starting to participate.
Monetary Indicators: This is our most powerful market force, also called "Don't fight the Fed." Money stock is expanding at near 8% annual rate. The real rate is higher considered against the backdrop of a deflating economy which is what we have had for nearly two years now.
The yield curve is also very steep and positive in its slope. This is a powerful 1-2 punch for the market, the fed is pumping money into the markets and economy and rates are staying low. These two factors have been important catalysts of every major bull market since 1920.
Liquidity or the directionality of money flows is another bullish sign that is just getting started. After freezing up with the cataclysmic events hitting markets over the last year, corporate M&A is rebounding, stock buybacks are returning, and money is starting to flow back into equity funds, including exchange-traded and hedge funds. Big-time mergers...
are starting up again, as these and buybacks have pulsed to nearly $50 billion in September. Meanwhile, money markets have experienced a $54 billion outflow lately.
These add up to more than $100 billion in possible additional demand for equities. Offsets of insider selling and IPO issuance although increasing, are still at non-threatening or neutral levels.
Last but not least, we must not forget valuations. This is also bullish both on absolute and relative levels. While we are at the onset of a new recovery in earnings, more stable indicators such as market capitalization-to-GDP and price-to-sales provide evidence of reasonably cheap valuations.
The market is at a 20% discount to GDP and relative parity to sales. In 2000, the market traded at 1.8 times GDP and the price-to-sales ratio was 2.3. It seems we've worked off a lot of excess over the last 10 years.....Stockowners are getting paid or reinvesting back in the company more than high-grade bond owners, and stockowners should see this earnings stream significantly grow over the course of he next two years or so.
Also, cash dividends on the S&P at a 2.1% tax-favored yield far exceed treasury yields out to 10 years. Cap this off with the fact that the Leading Economic Indicators index is now at 104 following four successive monthly increases.
With easy earnings comparisons and no inflation on the near term horizon {the author} expect{s} the Dow Industrials to break 10,000 in October -- barring geopolitical events.
The author of this original article is Robert Maltbie, a CFA and principal of Millennium Asset Management.
**Long ETFs related to the Dow Jones Industrial Average, S&P 500, Nasdaq and Nasdaq 100 for client accounts.

Tuesday, October 06, 2009

Why People Hate This Market.

I talk to a lot of people during the course of a week, clients, friends of our company and strangers. Everybody has an opinion of the markets, most of which is negative. That is probably understandable after last year. I saw this thread over on Realmoney.com {subscription required} today and thought I'd post this excerpt since I think it neatly surmises most people's view about stocks right now.
No One Believes In This Market
By James "Rev Shark" DePorre
RealMoney.com Contributor
......The driving force for this action is that people just haven't believed in this market. After the collapse last year and early this year, there has been great hesitancy to embrace the market and believe the worst is over. Aren't we supposed to have a bear-market bounce or two rather than just a V-shaped recovery. especially when we went through the worst period since the 1930s?
Adding to the difficulty of embracing a market that recovers with such apparent ease is that many people simply can't reconcile their feelings about the state of the economy with the market. The market is not just acting like things are "less worse" but like we have a total and complete recovery with hardly a hiccup. That is at odds with the personal experience of many, especially since the unemployment rate is still climbing, the housing markets struggling and signs of recovery slow.
So, we have the large supply of folks who are suspect of the market and are standing on the sidelines watching in disbelief as it run higher and higher, no matter what the news might be and their personal experience.......

an tSionna: A Market Save.


Double click to enlarge.
*Long ETFs related to the S&P 500.

Monday, October 05, 2009

The Great Debate: Bearish Call On October

We're not going to probably ever be able to leave the Great Stock Market Debate as there will always be a bullish and bearish argument to almost every situation. However we are going to leave it for a little while after this week. Today we begin by excerpting a bearish argument from Bert Dohman who is a contributor for Realmoney.com and writes his own newsletter the Wellington Letter. Bert is arguing for a chilly October but I think he also manages to summarize most of the Bear's positions. We're going to follow up in the next several days with a final synopsis of the Bull's argument. Finally you'll get my reading on the markets, where I think we're going and how we intend to position our client accounts. I hope to finish this sometime next week for publication.
From Bert Dohman via Realmoney.com {highlights are mine}.
.....We see many headwinds for the stock market. When Congress is in session, the stock market has historically underperformed by a wide margin. This time the effect should be even more negative, because of all the adverse legislation coming up for vote. The two biggest are health care and "the carbon tax."....
....The "carbon tax," also known as the Markey-Waxman bill, is one of the most destructive tax programs proposed by any major government in recent history. It would impose a huge tax of trillions of dollars on most economic activity in the U.S. while our competitors abroad, such as China and India, continue to pollute and laugh all the way to the bank......
In addition, the significant looming tax increases on Americans, both on the national and local levels, will be a great impediment in getting entrepreneurs to start businesses and create jobs. In fact, small-business owners will decide the struggle is no longer worth it, and they will reduce their workforce.....
....Until now we had expected economic growth numbers to be strong late this year because of the easy comparison to the same period last year. Therefore, those numbers will be very deceptive. The big, smart traders will use any buying from the public to sell into. After all, the stock market has rallied on fumes, hopes and expectations. It will be the typical case of "selling on the news."
Furthermore, any economic strength will arouse fears of Fed tightening.....Therefore, strong economic numbers may be greeted with a stock market decline.
Economic growth comparisons will be less favorable next year. The various stimulus programs are expiring or have expired. One is the "Cash for Clunkers" auto program. .....Then we have the tax credit for buying a home. The expiration in November is causing a rush to buy now. In a number of states, the foreclosure moratoria are expiring, which will accelerate the foreclosure avalanche. The government's mortgage modification program is being overwhelmed by the deluge of increasing defaults. Now it's not just subprime -- prime mortgages and jumbos are seeing accelerating defaults. And the biggest problem with any temporary stimulus is that it borrows from future activity as consumers move up their big purchases to take advantage of the incentives.On the technical side, the summer part of the rally was caused by easy manipulation of stock prices by the big trading operations in a low-volume environment. The smallest and fundamentally worse stocks had the biggest gains. The astute analyst Rob Arnott calculated this: starting in April and using stocks in the Russell 1000 index, stocks over $50 a share had a five-month gain of 22%. But the stocks below $5 had gains of 116.9%. Whenever the low-priced stocks lead a rally, you know it won't last and is just short-covering. The worst stocks logically have the highest short positions.
Stocks are extremely overvalued, more so than at the 2007 bull-market top. And jobs aren't coming back.
The consumer is 70% of the economy.
Now traders are back at their desks after the long summer rally. They see that bullish sentiment is extremely high. That's bearish. They will find today's ludicrous prices appetizing for selling and short-selling. Additionally, mutual fund managers have bought the past several months just because stocks were rising, not because they thought stocks were bargains. But the smart money is using the strength to sell. This is called distribution, something we have noticed for the past several weeks even as the major indices went higher.
The bulls tell us that there are trillions of dollars "on the sidelines." Well, it's about the same amount as one year ago, just before the crash. Betting on that money coming into stocks is a sucker bet.
Sentiment among analysts is now at the most bullish levels since the bull-market peak in October 2007. .... When everyone is on one side of the fence and totally complacent, the market is usually close to changing directions.
Finally, we have the fact that the major indices are now close to the point of the start of the global panic of October 2008. In any market, once it gets back to the start of the last plunge, there is huge resistance and the rally is likely to end.....
The bottom line: Today's stock prices reflect the most optimistic and euphoric scenario for the future. I believe reality will return to the markets in October. The fairy tales of a "great recovery" will diminish. The inevitability of much higher taxes and possible trade wars to please the labor unions will sink in. The ability of the U.S. leadership will come into question.......
Smart money managers will raise cash. They realize that top-line growth in the corporate sector just isn't returning and that recent profit improvements are merely due to cost-cutting. You can't cut your way to prosperity. "Official" unemployment will rise to double-digit levels, although actual unemployment is already approaching the 20% area. Congress will consider the stupid idea of a second stimulus plan even though the first one did nothing. It means more of our money down the drain and flowing to those who are well connected. There are easy solutions, but they would never be considered by the current Congress.
Markets are psychological. After six months of euphoria, we will now start seeing the flip side.
**Long ETFs related to the Nasdaq, S&P 500 and Nasdaq 100 for client accounts.

Sunday, October 04, 2009

Oh My!

Irish beat a pretty good Washington team in overtime. A game that featured 3 goal line stands...Yes that's 3 goal line stands by a much denigrated Irish defense. One of the greatest games I've seen in years! Irish are 4-1 with a big game coming up vs much hated USC.
Here is the South Bend Tribune's assessment of the game.
Go Bragh!

Saturday, October 03, 2009

Notre Dame vs. Washington






The Irish host the Washington Huskies this weekend. Notre Dame is 3-1 by the Grace of God! They've only posted one overwhelming performance this season. That was week 1 vs Nevada. They barely squeaked by Purdue last week. At the beginning of the season this looked like an easy win. Since then though Washington managed to beat USC and also rolled over for Stanford last week. I think the Irish put all the pieces together Saturday and the students (pictured above) go home happy. I think it will be close at halftime before the Irish pull away in the 2nd half. Point of disclosure: Yours truly will be at the game. We'll report back next week!




Ag Criost an Siol!

Friday, October 02, 2009

We Was Robbed!

Chicago (my home city) was just voted out first in the Olympic host city bid. I'm not surprised we lost because I've always thought Rio had an inside bid (as of this writing nobody knows who is going to win). But I AM surprised that we lost out in the first round, especially since President Obama went and made a direct pitch! There's a message being sent here and I'm going to have to sit back and think about what this means for world politics and for the USA.

Earnings Keep Being Revised Higher


Stocks follow earnings. This is perhaps fundamental rule #1 of investing. One of the reason that stock prices have continued to move higher over the summer is that earnings estimates for many companies continue to march ever higher. BeSpoke Investments quantifies below the significance of these revisions and shows their relationship to stock movement these past six months: {highlights mine}

While the flow of earnings reports has been slow in recent weeks, analysts have become increasingly bullish on the companies they cover. Our daily tracking of analyst revisions for stocks in the S&P 1500 shows that over the last four weeks, 578 companies in the S&P 1500 have seen their earnings estimates increase, while 389 have seen their numbers cut. This works out to a net of 189, or 12.6% of the index. As shown in the chart {above}, this is the highest level since at least the start of 2008 (red line), and is a major improvement off of where we were six months ago, when the net earnings revision ratio was closer to "-50%".
While analysts are typically thought of as being behind the curve, so far this year they have done a good job of leading the market. When equities bottomed in March (blue line), analyst revisions were already well off their lows of the year.
With the equity markets currently in the earnings off season, investors who want to get a weekly read on analyst expectations can track the pace of analyst earnings estimate revisions. Each week in {Bespoke's} Earnings Estimate Revisions Report, {they}summarize these trends for sectors and major groups over the last four weeks. If the pace of revisions is increasing heading into earnings season, it implies that analysts are turning positive on the prospects for the companies they cover, and vice versa when the pace is slowing.
{subscription may be required}

Thursday, October 01, 2009

ETFs vs. Closed End Funds.

I often find that investors confuse ETFs with closed end funds {CEFs}. Here from ETF.guide.com is an excerpted article on the differences. Link @ the end. Highlights are mine.



It's important for investors to understand the key differences between closed-end funds (CEFs) and exchange-traded funds (ETFs). Each has its advantages and disadvantages..... Let's focus on the key points.
Fees: The expense ratios of ETFs are generally lower versus CEFs. Since ETFs are indexed portfolios, the cost of managing them is less compared to actively managed portfolios. Also, ETFs often have lower internal trading costs versus actively managed funds, due to their low portfolio turnover. The ETF cost savings can be significant, especially for long-term investors. Investing in both ETFs and CEFs will usually result in brokerage commissions. ....


Fund Transparency and NAV: Because fund components are pegged to an index, the transparency of ETF holdings is excellent. Investors can easily identify the underlying stocks, bonds, or commodities of a fund by consulting the index provider or fund sponsor. CEFs have less transparency because their portfolios are actively managed, but holdings can be uncovered by viewing quarterly or semiannually fund disclosures.
ETFs generally trade close to their net asset value (NAV). It’s rare to see ETFs trading at a large premium or discount to their NAV, but it can happen. Historically, institutions have seen this as an arbitrage opportunity by creating or liquidating creation units. This process keeps ETF share prices closely hinged to the NAV of the underlying index or basket of securities.
By contrast, CEFs are more likely to trade at a premium or discount to their NAV. .......The NAV is calculated by subtracting a fund’s liabilities from its total assets and dividing the figure by the number of shares outstanding.
Style Drift: Active CEFs are more susceptible to style drift versus index ETFs. Style drift is common with actively managed portfolios as money managers will sometimes divert from their original investment strategy.......ETFs are generally insulated from style drift because a portfolio manager's freedom to hand pick securities outside the scope of an index is limited.


Leverage:
Many CEFs are leveraged, which magnifies the fluctuations of the NAV. If portfolio managers are correct about their selections, leverage is beneficial. At the opposite spectrum, poor investment decisions in a leveraged portfolio can be damaging. ETFs do not currently use leverage as part of their investment strategy, but this could change in the future......


My note on Leverage: Currently certain ETFs that attempt to give 2-3 times the return of their stated target index do use leverage to attempt to achieve their goals. I own some of these funds for client accounts. Most ETFs, however do not use leverage.


Taxes and Portfolio Turnover: Annually, both ETFs and CEFs are required to distribute dividends and capital gains to shareholders. This is usually done at the end of each year and these distributions can be caused by index rebalancing, diversification rules, or other factors. Also, anytime you sell your fund this could generate tax consequences.
ETFs are renowned for having low portfolio turnover, which is good for investors, because it reduces the possibility of tax gain distributions.
By comparison, actively managed portfolios generally have higher turnover, which translates into more frequent tax distributions.

Note: For employer sponsored retirement plans, ETFs and closed-end funds may not be available as an investment option. Self-directed retirement plans may offer a broader menu of investment choices which may include ETFs and closed-end funds.