Apologies :-{

I've been having major problems imputing into the system for my posts these past several days.  Even just getting to do an update like this has taken about an hour.

I'm back when the bugs are worked out!

an tSionna {Financials}

Financial stocks rallied on Friday on news of a compromise being reached in Congress on financial regulation. This was one of the items on Jim Cramer's checklist that I mentioned some time ago that we need to see happen for the market to rally. Whether or not this moves the whole market only time will tell, but I do think given what we now know that this could lead to a summer rally in these names and their respective ETFs. Above I've shown the SPDR bank ETF-symbol KBE {a position that I am long in various portfolio strategies}. I've also given some guideposts that I'll be looking for to see if my thesis pans out. I may also look to add to this positions or some of the other financial ETFS in several of our portfolio strategies over the coming week.

*Long KBE in certain client accounts. Long other ETFs related to financial ETFs in client and certain personal accounts. Long some individual financial stocks in certain client accounts.

Apple Computer & The "Q's"

Bespoke Investment points out something that has been concerning me for some time which is how large a weighting Apple {AAPL} has developed in the Nasdaq 100 ETF {QQQQ}.  A direct explanation of why this has happened is listed below.  This explanation by extension also applies to the NASDAQ Ultra ETF-QLD {an index that attempts to mimic 2x the daily performance of the QQQQ}.  I'm going to have to think about this on a strategic basis going forward as APPL becomes an even larger part of this index.  Here's Bespokes look:

"With shares of Apple (AAPL) rallying even as the overall market remains weak, the stock's weighting in the NASDAQ 100 is beginning to make a mockery of the index. Believe it or not, AAPL now has a 20% weighting in the index. No, not even AAPL has rallied so much that its market cap actually accounts for 20% of the NASDAQ 100's market cap (although it does currently have the highest market cap in the index). The reason for the large weighting dates back to the creation of the index when the market cap of Microsoft (MSFT) dwarfed the rest of the stocks listed on the NASDAQ. Back then, in order to avoid making the NASDAQ 100 an index dominated by MSFT, they had to arbitrarily lower MSFT's weighting and raise the weighting of the rest of the stocks in the index. 


Today, the NASDAQ 100 is increasingly becoming an index of Apple (AAPL). At current levels, AAPL's weight in the index equals the combined weight of MSFT, GOOG, QCOM, ORCL, CSCO, and INTC! Given that MSFT's weight was once adjusted so that it didn't dominate the entire index, some would say that it's time for the NASDAQ to adjust the weightings again so that AAPL doesn't dominate the index now. However, according to NASDAQ's methodology for the index, AAPL's weighting in the index won't be up for review until its weight reaches 24% of the index or more."

*Long QQQQ and QLD in certain client accounts and investment strategies.  Long APPL in two client accounts as legacy positions.

Link:  Apple is 20% of the Nasdaq 100.

Gold A Longer Term Perspective

From Chart of the Day:

{This} chart provides some long-term perspective in regards to the gold market. ...Gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold surged once again. While gold made another record high today, it still trades significantly below resistance (red line) of its upward sloping trend channel. In the end, with gold currently trading near $1,250 per ounce, gold has more than quadrupled in price during its nine-year bull market.

Link:  Gold

*Long ETFs that invest in gold as an asset class in certain client accounts.

Ex-Dividend

Be careful when you look at ETF quotes today and early next week.  Many of them go ex-dividend.  That is the dividend is declared as of a certain date prior to the close of the 2nd quarter.  ETFs and stocks generally fall by the amount of the dividend on this date.

On a seperate note I will be out of the office the first part of next week.  Posting will be light to non-existant until later in the week.  I'll have more to say about the state of the market then and I'll give a road map as to where we might be going for the rest of the year then.

Black Swans

This blog post originally appeared on RealMoney Silver on June 14 at 8:00 a.m. EDT.  {Excerpt with my highlights.}

"Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words, it creates devastating Black Swans...... The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen, they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ... ...I shiver at the thought. Banks hire dull people and train them to be even more dull. If they look conservative, it's only because their loans go bust on rare, very rare occasions. But ... bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.....

The Achilles' heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.......As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with "scientists" among their staff taking care of exposures.

Owing to ... a misunderstanding of the causal chains between policy and actions, we can easily trigger Black Swans, thanks to aggressive ignorance -- like a child playing with a chemistry kit."

-- Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.  

The new normal is abnormal and is bound to haunt investors for some time to come.

....I am referring to the new normal of disproportionate, high-impact, hard-to-predict rare events beyond the realm of "normal expectations in business, history, science and technology" that are occurring with startling frequency......

Risks of black swans, previously perceived to be small by corporations, investors, politicians and regulators, are now being reassessed, owing to (among other issues) globalization, tighter correlations, advancements in technology, the growing/excessive complexities of interlocking supply chains and derivatives, the acceptance of greater/extreme risk-taking ("the longer people make money by taking risk, the more imprudent they become," the Minsky moment), the greater connectivity of increasingly more complex systems (see Paul Ormerod and Rich Colbaugh) and so forth.

A greater and more dynamic instability is the new normal. Witness some of these historical black swan events over the past decade:

-the September 11 attack on the World Trade Center;

-financial derivatives roil the world's banking system and financial markets;

-the failure of Lehman Brothers and the sale/liquidation of Bear Stearns;

-BP's (BP) Gulf oil spill; and

-the market's flash crash (a 1,000-point drop in the DJIA on May 6, 2010).

....We can no longer turn the clock back to a simpler time. We must play the hand we are dealt.  For years, investors have been blinded to the uncertainty and unaware of the broad effect of the rare, black swan event, but we now know that these black swans (which seem to be occurring with greater regularity) are not only growth-deflating but, more importantly, are valuation-deflating.

The world is interconnected, interlinked and increasingly complex. It faces numerous structural issues (e.g., extreme fiscal imbalances at the federal, state and local levels), with governments (here and abroad) not necessarily up to the task of dealing with the complexities. Given the "newness" of these and other challenges as well as the greater frequency of black swan events, P/E multiples are being pressured and should continue to contract as a comparison between today's valuations to those of history can be expected to lose some of its significance Again, it's different this time.

While the above valuation comparisons are based on historical experience, similar to the belief in bell curves, they should be used with caution because, in all likelihood, another black swan will appear on our investment doorstep ... sooner rather than later! In this setting, a more conservative asset mix and higher cash position than normal seems to be the prudent strategy.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

Link: Black Swans Return

Shocker! Wirehouses Don't Like Their News Coverage!

I read this article via The Big Picture  yesterday.  It struck close to the bone regarding many of the people who pass for financial consultants at most of the major brokerage firms.  I'll repeat something I've said many times in the past.  I worked for three brokerage firms before starting Lumen Capital Management, LLC.  At the end of each year I had a review with my boss.  Those reviews always looked back on what I'd done and how I was going to increase my production in the year ahead.  {Production is the securities industry term for commissions and fees earned from your client base.}  I never had a review where any boss asked me whether my clients made any money in the past 12 months or how their accounts had performed in bad markets!   {Excerpt with my highlights!}

 

Clearing the air about wirehouse news coverage

By Evan Cooper April 7, 2010 

In response to a request for an interview, InvestmentNews reporters received an e-mail the other day from a public relations person at a wirehouse. The firm’s spokesman wrote that he would “need to be convinced” why it would be in the firm’s best interest to make a senior executive available to InvestmentNews.  According to the spokesman, InvestmentNews has been “consistently hostile to the so-called wirehouses, highlighting every possible negative without much balance.”

{The author} would like to address that point of view in a few ways.

First of all, I don’t believe our news coverage of wirehouses has been hostile or negative. We report about developments affecting all financial advisers, including those at the wirehouses, and that means coverage will include news about fines, censures, scams and other things that everyone wants to know about.  Apparently, everyone enjoys reading this coverage, especially when it’s about someone else.

We also report plenty of neutral and positive things about wirehouses, such as when one hires a big team or when a wirehouse broker is selected as a Community Leadership Award winner, for instance.  Unfortunately, most corporations are very thin-skinned. To them, any news coverage beyond a Fortune cover story canonizing a CEO is negative......If everybody thinks we’re picking on them, it probably means we’re serving the people we’re supposed to be serving: our readers....The choice, however, is theirs to make.

Finally, in a stab at full disclosure, let me offer my own two cents about the wirehouse world.

In general, I believe many wirehouse brokers do a great job for their clients. My chief negatives, however, are two: the quality of service providers at the wirehouses is very uneven and clients often don’t know whether they’re getting impartial advice or sales talk.

About uneven quality: Wirehouses spend a fortune promoting their brands and implying that the Morgan or Merrill experience is of high quality, regardless who delivers it. But in real life, Mr. or Mrs. Investor can wind up dealing with a rookie, a vet, a planner or a product expert. There is no uniformity. Unlike a Ritz Carlton, where the service is stellar from Palm Beach to Palm Springs, the brands Merrill, Morgan, Wachovia and UBS can’t deliver consistency of service. And because those firms are so huge, the quality issue is hard to manage.

As far as impartial advice or sales talk is concerned, consistency is spotty there too. Only when wirehouses adopt a fiduciary standard will I believe that they truly are placing their clients’ interests first. Not that registered investment advisers are perfect — or that fiduciaries can’t be crooks — but the adoption of a business model that puts the client first would be a giant step forward. ....

Link to the original Investment News story: Clearing the Air About Wirehouse Coverage.

*Long ETFs that may have positions of certain investment banks or financial firms in client accounts.

an tSionna 6.15.10

We will raise our intermediate rating on equities to Net Market Positive today as well.  Click here for a definiton of that term.

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

Last Week's Market.

Barrons on last weeks market. {Excerpt with my highlights}

This Picture Looks Familiar

By MICHAEL SANTOLI

There's been queasy tedium in staring at "key" index levels that "should hold," while stocks move tick-for-tick with the euro, and traders wonder whether fundamentals-driven funds have cash to express their view that "stocks are cheap." The longer view is one of much energy expended to go nowhere.

Admonitions to keep the big picture in mind usually take the form of a resigned lament. Large-cap stocks delivered a negative annualized return over the past 10 years, without even considering inflation or opportunity cost. A generation of investors who did the "right thing" have nothing to show for it.......Agreed, all around. But what do these sorrowful yesterdays tell us about all our tomorrows?

Ten years ago–an exceedingly poor time to buy the major indexes–the New Economy was supposed to have banished the business cycle. Now we are said to face a new normal of suppressed growth for years. Back then, we had a putative federal surplus; today, deficits look intractable. In 2000, government was deregulating and CEOs were celebrities. Not so much anymore.....

....The public at century's turn was in lust with stock investing and ebullient about the economic future. Last month, a Newsweek cover advocated trashing the 401(k). ......Does this mean that today's unhappy brew of worry and want should usher in an unexpectedly generous investment regime....?

This is quite unlikely, mostly because equity valuations haven't cheapened nearly enough for a long string of above-average returns to ensue, and there will be no help from falling debt costs.  But it does mean that something approaching the historical market returns of the pre-bubble period has become a decent bet again. The S&P 500 is down by a quarter since 2000, while its companies' profits have doubled and long-term interest rates have been halved.

Near the recent market lows, the comprehensive Wilshire 5000 index was flirting with a trailing three-year annual total return of minus 10%. Since 1970, it has had a 10% or greater three-year annual loss three times: near the 1974 market low, at the 2002-2003 bottom and in early 2009. In the first two instances, the markets didn't quickly turn for the better as the trailing loss hit 10%. But both times, after first reaching a 10% three-year loss, the market produced a handsome annual return over the next three years—22% and 18%, respectively.......

Link:  "This Picture Looks Familiar"

PE Ratios

One positive argument for stock prices is their valuations.  Based on what we currently know about the economy stock prices look cheap.  Chart of the Day took a look at this recently.  Here's what they've noted:

"Today's chart illustrates how the recent rise in earnings as well as the the recent pullback in stock prices has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the early 1990s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to astronomical levels during the financial crisis (late 2000s). Currently, the PE ratio stands at a touch below 18 which is near the lowest levels that have existed since the early 1990s."

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

Link:  PE Ratios.

Stanley Cup!!!

Oh did I mention we played a little hockey in Philly last night!

"Here Come The Hawks!"

an tSionna 06.09.10 {Holding on}

One other housekeeping note.  We issued a tepid Net Market Positive view in the shorter term on 05.17.10. I am much more definitive in my assessment and purchases regarding my time period at this time.  You can click here for a definition of that term.

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

Cramer's Checklist

Monday evening on his "Mad Money" show Jim Cramer discussed a checklist of things that need to happen before the markets start to rally.  I think its a pretty good list so I thought I'd summarize it here.  While I don't know how much the market's already discounting some of these problems, I think without a doubt we will stabilize if folks begin to think some of these issues are at least not getting worse or finalized.  {I'll add some thoughts where appropriate}

Financial Regulation:  Banks, brokers and by extension the market itself needs to see the final bill to understand what it's going to cost financials going forward.  {While I don't remember Cramer mentioning Goldman Sachs, I think a heavy burden will also be lifted once they settle.}

European Banks Stabilizing:  Markets don't want a repeat over there of what happened here.

Unemployment declines:  Last Friday's unemployment number was horrid and it has put significant pressure on stocks since it came out.  {Market needs to get a sense that this is getting better.  Stabilization probably doesn't help.  Market needs further evidence that we're not going to double dip into recession.}.

Oil spill must be stopped:

Market needs to see evidence that China can engineer a soft landing.  {Very important for commodities and their related stocks.}

Euro quits going down. 

Source:  "Mad Money, CNBC, Monday June 07, 2010.

*Long ETFs related to major market indices in client accounts and certain personal accounts. Long ETFs related to the financial markets in certain client and personal accounts.  Long ETFs related to certain markets with exposure to Europe in certain client and personal accounts.  Long ETFs related to China in certain client accounts.  Long ETFs related to certain commodities in certain clients and personal accounts.  Long ETFs related to oil and certain oil related ETFs in certain client and personal accounts. 

Contrarian Investing: Go Long America!

Guest editorial in this weeks Barrons.  Excerpt with my highlights:

By JOSEPH QUINLAN

The U.S. is No. 1 for the foreseeable future.

.....From the ashes of the U.S.-led global financial meltdown, a new world order is in the making. According to popular opinion, America is declining, while China is rising.  The consensus could be wide of the mark. Yes, there is plenty wrong with the U.S. The economic challenges before the nation are Herculean. Yet there is plenty right with America. The country has the critical endowments -- if deployed and nurtured properly -- to emerge from the recession stronger than ever.

The U.S. economy is the largest and most productive on the planet. With just 4.6% of the global population, the U.S. accounts for roughly one-quarter of global output, generating more output in a year than the next three largest economies (Japan, China and Germany) combined. America's economy is three times the size of China's; the per capita income of China is only about 10% of that of the U.S.

The United States is a manufacturing superpower; we're still in the business of making stuff, despite incessant reports to the contrary.....The U.S. makes more goods in a year than any other country, although America's share of global manufacturing output was roughly 17.5% in 2008, down from 22.4% in 1990 and about 20.5% in 1980.

Many U.S. manufacturers have held their own the past few decades, even in the face of stiff competition from Japan, Germany and China......most of China's gains came at the expense of Japan, South Korea, Mexico and others -- not the U.S.   The largest exporter in the world is neither Germany nor China. It's the U.S., despite annual trade deficits and all the chatter about U.S. companies not making anything the world wants to buy.

Yes, China is the largest exporter of goods in the world. But why count only goods? Why not count services?  Thanks to falling communication costs and the ubiquity of the Internet, global service exports have soared the past decade, with the United States in the forefront. U.S. exports of "other private services" -- including data-processing, accounting, medical services and telecommunications -- totaled $252 billion last year. When goods and services are combined, U.S. exports top all others, totaling $1.5 trillion in 2009, or nearly 10% of the global total. Germany, with 8.5%, ranks second.

The U.S. remains the world's preferred destination for foreign direct investment.....Cumulative foreign direct investment in China from 2000 to 2009 was $666 billion, just a little more than one-third the total invested in the U.S. by foreigners.  America's global share of foreign direct investment was 16% in that span, versus 6% for China. The noisy debate about U.S. outsourcing should be balanced with a more intelligent debate about U.S. insourcing.

The U.S. remains one of the world's technology leaders, with a culture of innovation second to none. America is at or near the top of the charts when it comes to scientific research institutions and corporate spending on research and development......Yes, China and India are rapidly moving up the technology curve. The two are graduating more scientists and engineers each year relative to the U.S. Various studies, however, have questioned the quality and employability of these graduates. 

In general, the quality of higher education in China, India and many other parts of the world remains poor. That stands in stark contrast to America's system of higher education, the best in the world. ....One-fifth of all international students in post-secondary education in 2007 came to the U.S., making it the top destination for foreign students.

America is home to the world's top global brands. According to the research firm Interbrand, more than half of the Best Global Brands of 2009, ranked by brand value, were American. Other critical strengths include America's expanding population -- we are a youthful nation, relative to Europe and Japan......

.....The U.S. is not an economic clunker. Investors infatuated with China and other emerging markets should reconsider. Now may be a great time to go long America.

Link:  Go Long America!

PS On Today's Chart.

While the market ended down a bit over 1% today.  We're still holding in that range I highlighted on today's chart.

An tSionna 6.07.10

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

Who Pays What In Taxes

We've put up a lot of charts and pictures this week.  I'm going to continue that trend by showing this graph which depicts percentage of income earned versus percentage of Federal taxes paid.  To show you how it works, the lowest 20% of income earners make between 0 and $18,104.  They also pay almost nothing in taxes.  The top four percent of wage earnings, those making in excess of $212,666 pay of 40% of all Federal taxes paid.  Two trends really jump off the page:

1.  Households comprising over 60% of the population pay less than 15% of the overall Federal taxes levied.

2.  Households comprising the top 20% of the population pay nearly 68% of the overall Federal taxes levied.

Remember that the next time you hear politicians saying that the "rich" don't pay their fair share of taxes.

That's all for these week.  I'll be back with some market thoughts and commentary Monday.

Source:  Income & Federal Tax Shares

Market Gains By Month

We posted here back in May about Market Cycles.  Here's a different way to view that via a chart posted over at The Big Picture  {Chart itself is from the Chart Store}.  It shows the monthly average percentage gain or loss for the S&P 500.  According to this analysis, February, May and September are the worst months in terms of market performance.  May's almost 9% loss can certainly qualify it as a bad month.  In fact it was horrible.  You have to go back to 1962 to find a May this bad.  The good news is that stocks historically tend to perform seasonally much better now through the summer months.  

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

Change of Major Trend {I Think Not Yet}

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

an tSionna 6.01.10

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

Earnings Rebound

The folks over at Chart of the Day take a look at current S&P 500 corporate earnings history.

"With first-quarter earnings basically in the books (99% of S&P 500 companies have reported for Q1 2010), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936). Since its Q1 2009 low, S&P 500 earnings have surged (up over 700%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles."

Comment: Earnings have rebounded but they have to be viewed in the light of the previous cycle's credit shock. Corporate balance sheets {ex financials} were pretty strong back then and are for the most part in better shape now. If we could somehow wipe away the late 2007-early 2009 era, we'd be looking at an earnings decline peak to trough that is closer to what we've seen in other recessions. That's why I'm still optimistic on stocks for the next 12-18 months. Current S&P earnings for this year are in the 79-83 dollar range. Next year I've seen estimates as high as $98 dollars! Now I think that number is going to prove to be too aggressive. Yet if we ratchet that down to say the $93-95 dollar range then stocks are trading at what has been historically seen as cheap levels of valuation.

I'll have more to say on valuation and stocks later this week.

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