Merry Christmas

Merry Christmas to all!

Christmas Eve

Merry Christmas! 

Thank You So Very Much

To all my clients, friends of my company and readers of this blog:

Usually you receive a holiday card from me. This year I’m doing something different. You see 2011 has been the 10th anniversary of Lumen Capital Management, LLC. When I embarked on this journey I could have hardly imagined that I would be working through such a tumultuous time! Looking back, I’m amazed at how quickly it all went! When I started this adventure my children were eleven, eight and six. Now my oldest is preparing to graduate from Providence College, I have a freshman at Butler University and my youngest just received her driver’s license. I have now watched many of my client’s children grow up as well! There is also something my father told me years ago.

My Dad was a country lawyer in Union City, Indiana. His was the most retail variety of law that could be practiced. He did everything from wills to divorces, business law to DUI work. Add a bit of criminal work and a little work for the county and you would have his business. He kept “farmer’s hours” on Saturday until he was sixty. That meant his office was open Saturday morning when farmers traditionally came into town. As such my Dad dealt with everybody. I believe I inherited my love of people from him. Dad gave me four pieces of advice when I started out as a stock broker, long before I ever hoped to build my firm.

“Be the best you can be at what you do, be frank, be honest and if possible do business with people you like.”

I have tried to follow all four of his lessons, particularly when it comes to liking my clients. Words alone will never convey how honored I have felt over the years for the opportunity to do business with you. Many of you have been with me through some very troubling financial times in the markets so thank you for your continued trust and support.

We're going to take a little time off between Christmas and New Year's.  Many years ago I was a student in Vienna, Austria.  I always promised myself if able that I'd take my kids someday to a few of my favorite spots over there.  I'm keeping my word this Christmas as I'm taking my family to parts of Germany & Italy.  Since both countries are ground zero for the debt issue over there, I'll report back what I learn in January.  Posting is going to basically be non-existent over the next two weeks unless some major issue comes up.  We'll pick this up again sometime in early January. 

Once again please let me say thank you for the opportunity to serve you during these past ten years. For what it’s worth in the business department I think this next decade will surprise us in a more positive manner! Hopefully I will be writing a similar letter to this on the anniversary of my 20th year in business as well. I hope you have a merry holiday season this year. It is also my hope that 2012 is joyous and profitable for both you and your family.

By the way, I often putter around my office on Saturday mornings as well!

Very truly yours,

Christopher R. English

Then:

Now!

Mortgages

Bespoke Investment Group comments on the continued decline in mortgage rates: 

"It's been an epic ride down for mortgage rates over the last decade, and the 4% mark has finally been broken. Below is a chart of Bankrate.com's national average for the 30-year fixed mortgage rate. As shown, the rate is now down to 3.92%. No one can blame high interest rates for the weakness in housing, that's for sure."

My comment:  Rates may be low but as anybody who's tried to get a mortgage can attest, banks have no interest in making loans except to people with stellar credit.  I have a friend who's trying to sell his home and at least two offers have fallen through because the buyers can't get financing.

Link:  Bespoke: Mortgage Rates

A few Quick Reads.

Here's a few quick link reads for you today. 

1. Hedge funds end 2011 with a wimper. {Wall Street Journal-Subscription required}.  According to the Journal all seven trading strategies tracked by the Dow Jones Credit Suisse "Core Hedge Fund Index" are showing losses as of Wednesday, Dec. 14, with the entire index dropping nearly 8%. 

2.  A Boom in Shale Gas? Credit the Fed {Washington Post}

3. Investors continue to lose faith in stocks. {CNBC} Just over a week ago, equity mutual funds globally had the second-biggest one-day outflow of money in 2011, capping four straight weeks of net redemptions, according to data from EPFR Global.

Worldwide, investors have yanked $34 billion out of equity funds this year and put $75 billion into bonds.  {This for what it's worth I think has the ability to be a bigger picture story in 2012.  So much money has left the markets and is essentially earning nothing on the sidelines that any little spark could really ignite a rally if investors decide that they're willing to take on a bit more risk next year.}

Ex-Dividend

A quick housekeeping note:  Clients may note unexplained swings in ETFs over the next several days.  That is likely due to many going ex-dividend for their final payments in 2011.  Stocks will generally decline by the price of the dividend on the day they go ex-dividend.  Case in point Vanguard MSCI Europe went ex-dividend today.  That means people that bought yesterday or before are entitled to the most recent dividend by the ETF.  Since it is scheduled to payout $1.908 in dividends on December 28 the stock will normally drop by the amount of the dividend.  Take that out of the equation and VGK was down about .16 cents on the day.

*Long VGK in client and personal accounts. 

ETFs: Thoughts

Morningstar  article on 9 Things We Learned About ETFs in 201.  {Excerpt with my highlights.}

ETF adoption continues unabated....we continued to see more and more adoption and more and more mainstreaming of ETFs as core portfolio holdings and also as tactical trading tools.

....{R}isk is everywhere. There was a lot of discussion about derivatives in funds or synthetic ETFs in Europe, all of it on the backdrop of the continuing liquidity and banking crisis happening in Europe. At the end of the day, risk is everywhere, and risk equals return.......{P}eople are very risk-averse right now, but also that there is a problem in the dialog that all risk is bad. And that's not true, because risk has to equal return. So, if you don't want any returns, then you won't take on any risk. But if you do want some returns in your portfolio, you have to take on some risk to do that. Keep in mind that there are no riskless returns, but there are returnless risks, and you need to be able to separate the two.

Staying with that risk theme......We saw tremendous amount of inflows into low beta, low volatility strategies where investors are clearly looking to tamp down market volatility, while still getting some equity risk and therefore equity return.

.....{I}ncome was one of the huge drivers in ETF new product launch success and general flows overall. Dividend-themed income funds, low volatility funds which kick-off a nice dividend stream. Also dividend-themed income funds that move beyond just U.S. large-cap dividends, but also international.....Investors--especially, ETF investors--clearly are looking for income.

On that theme of income, one of the other more interesting trends is the move into non-U.S. debt. ....The U.S. investor is also looking to diversify their fixed-income portfolio away from traditional dollar-valued bond areas and into some of these more diverse, different currencies and really different economies and different government backing those things.

Another trend that we see in 2011 is actually the arrival or the continued arrival of the alternative tool ETFs. .....{W}hat we really saw in 2011 is the continuing launch of these very specific, risk-mitigating tools or exposure tools. Things like the factor-products launch by Russell and continuing launches in VIX products, in other products that help to manage duration risk on the fixed-income curve. None of these ETFs are really designed to be held per se forever or as part of a core, but they are meant to be tools implied to reduce risk or fill out exposure gaps that we see out there. So, we continue to see that evolution. I think a lot of people forget that the first ETFs, back in 1994, were the on-exchanging of a very simple structured product. And what we're seeing now is the fifth and sixth generation of structured products moving onto the exchange. ... A lot of these funds and the techniques they employ have been used by institutional investors for years, if not decades. And now they are moving onto the exchange in a low-cost way for investors of all sizes to be able to employ in their portfolio risk management.

One of the other things I think that was most notable in 2011, is that there was a lot of noise about ETFs ... creating market volatility or raising correlations, and that's true whether it was just regular ETFs or leveraged ETFs, in particular. So, one of the things we learned was that in 2011 we had a Congressional hearing based on a lot of these accusations more or less, and the funny thing is, nobody showed up to it..... We had testimony from the NASDAQ exchange, BlackRock iShares, and a member of the SEC. None of it was really new information. Actually, I think a lot of it confirmed that ETFs are not the cause of volatility.....

We also learned that price continues to matter in ETFs....We've also seen fund companies and ETF providers cut their fees in order to make their products more palatable and more usable. We've also seen the entrance of some more low-cost [providers]...So, price continues to matter. We continue to see money flow to lower-cost ... options. But what we learned in 2011, as well, is that while expense ratio is important, we want to make sure people understand that that's just part of all the costs that go into it. And you have to think about the liquidity effect, and you also have to think about tracking error and tax efficiency when we look at the total ETF cost structure that's out there.

Last but not least in things we learned in 2011 is that ETFs are evolving, and the use of ETFs is evolving in a major way. What I'm talking about here is the use of ETFs in solutions, and that is managed portfolios..... 

Link:  Morningstar: 9 Things We've Learned About ETFs in 2011.  {Subscription may be required.}

Happy Hanukkah

Happy Hanukkah. Best wishes and prosperity for 2012.

65 Years Ago Today

It's A Wonderful Life made its debut 65 years ago today at the Globe Theatre in New York City.  While the film has become a Christmas classic over the years, it opened to mixed reviews back then.  According to an article in Wikipedia, "Bosley Crowther, writing for The New York Times, complimented some of the actors, including Stewart and Reed, but concluded that "the weakness of this picture, from this reviewer's point of view, is the sentimentality of it — its illusory concept of life. Mr. Capra's nice people are charming, his small town is a quite beguiling place and his pattern for solving problems is most optimistic and facile. But somehow they all resemble theatrical attitudes rather than average realities."1.

If you've grown up or lived for any length of time in the Chicago area and you've never seen this movie then you must never watch TV.

1.Wikipedia It's a Wonderful Life.

an tSionna {12.20.11}

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

Long Term Interest Rates

Chart of the Day  today gives us a longer term perspective on interest rates.

"For some perspective on all-important long-term interest rates, today's chart illustrates the 112-year trend of the 10-year Treasury bond yield (thick blue line). As concerns over government debt as well as a struggling global economy have increased and fears over inflation diminished, investors have moved towards safety resulting in a significant decline of the 10-year Treasury bond yield. The 10-year yield has declined a fairly dramatic 300+ basis points (i.e. 3%) since the peak of the credit bubble. This decline has brought the 10-year Treasury bond yield to a 112-year monthly low. It is worth noting, however, that the quarter-century downtrend of the 10-year bond yield remains intact and will remain intact even if the 10-year yield were to drop significantly below 1.5% over the near-term."

Comment:  10 year rates below 2% are saying that investors have so little confidence in the US economy over the next 10 years that they are willing to accept a rate of return that will likely yield a negative return after taxes and inflation during that time period for the surety of a return on their principal.  Meanwhile the yield of the S&P 500 is roughly 2% and has the capacity to gain in value during that same time period.

Link:  Long Term Interest Rates

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

Doug Kass: 10 More Reasons To Buy American

We excerpted a post by noted investment writer & investor Doug Kass over a month ago where he made a strong argument to Buy American.  Kass is back with some more reasons to buy our markets.  Below I've excerpted a piece from an article he originally penned for Real Money Pro {subscription required} and later posted here  at thestreet.com.  {My highlights in green!}.  Here it is:

"Europe's economies are moving in reverse -- at best, a deepening recession is in the cards. (Europe used to rule the world, but it no longer dominates.) The U.S. economy is moving forward, with a 3%-plus real GDP for fourth quarter 2011 expected and growing signs that the domestic recovery will be self-sustaining (albeit, at a moderate pace).

I believe, more than ever, that the events over the past decade have highlighted the likelihood that the U.S. stock market will be favored among most other investment markets in the world. As I have written, the U.S. stock market has become the best house in a bad neighborhood.  Below are 10 reasons for my optimism.

U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.

U.S. banks are well-capitalized, liquid and deposit-funded. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world.....

U.S. corporations boast strong balance sheets and healthy margins/profits. Our corporations are better positioned than the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock-solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.

The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)

The U.S. is politically stable. ....Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.

The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)

The U.S. is rich in resources.

The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.

The U.S. dollar is (still) the world's reserve currency that is far more solid than the euro.

The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

In summary, conditions that have evolved over the near- and intermediate-term have conspired to favor risk assets in the U.S. over many other areas of the world.  In the period ahead, look inward (not outward), as I expect a powerful reallocation trade out of non-U.S. equities into U.S. equities.

Buy American, I am."

Doug Kass writes daily for TheStreet's premium service Real Money Pro.

This Movie Had It's Premier 72 Years Ago Today!

Movie premiered in Atlanta.  The audience is alleged to have booed when Sherman's troops burned the town.  Elsewhere off in Europe, a real war was waging that winter!

Tough Year.

It's been a tough year as of yesterday with the major averages down between 2-6% for the year now.  Foreign markets have done much worse all on average down well into the double digits.  I thought I'd give you an idea how various other institutions, companies and asset classes have done.  Analysis does not include dividends that have or will be paid out between now and year end.

-Berkshire Hathaway {Warren Buffett's company}  down 6%.

-Hedge Funds {the folks who keep 20% of profits in a good year} see here.  On average most of these asset classes are down for the year as well.

-Jim Cramer's Action Alert's Plus:  -12.48% {Source Data supplied by Action Alerts Plus-Subscription required}

-Some well known mutual fund managers: 

  

Bill Miller, who has been managing the $921 million Legg Mason Capital Management Opportunity Fund (LMOPX_) since 1999, has seen his mid-cap value fund tumble 36% this year.  

  Ken Heebner, manager of the $1.8 billion large-growth CGM Focus Fund(CGMFX_) since 1997, has lost 27%. Heebner's $1.8 billion CGM Focus Fund(CGMFX) has plummeted 28% this year, Heebner, who's managed the fund since 1997, is known for having years in which the fund has rocketed more than 50% on outsized bets on targeted industries such as commodities or technology.

The $7.5 billion Calamos Growth Fund(CGRRX_), run by a large team including family members John P. Calamos Sr., John P. Calamos Jr. and Nick P. Calamos for 21 years, has dropped 11% this year. Like other large, known funds, the performance is better over a longer period, particularly 10 years.

Data Source:  Thetreet.com-Fund Managers Who Should Hang Their Heads.

General Electric.  -7.98%.

How have we done for clients?  While I never discuss specifics, I will say that on average we are down for the year in client accounts as of last night.  We are down in line with most of the major averages but not down as much as the most extreme.  Translation:  On average we are down a bit more than that 2.5% which is where the S&P 500 traded as of last night but on average not down the 6-7% which is where some of the more volitile major averages are currently trading.    {Note these results are not audited although I am willing to discuss and offer the evidence as to how I came up with that number if anybody is interested.  Also these numbers will likely change between now and year end-so treat it simply as a snapshot in time.} 

Everybody has been predicting a Santa Clause rally.  So far we haven't seen that.  We'll have to see what transpires in the next several weeks.  So far the 'jolly old elf" has brought nothing but coal.

*Long ETFs related to the S&P 500 in client and personal accounts  Long GE in certain client accounts as well as a legacy position or as an unsolicited position.

War Is Over

The war in Iraq ends today, in time for the holidays.  Here's John Lennon singing Happy Xmas (War is Over).  You can read a history of this song here.

Everybody Using A Broker Should Read This.

The Most Dependable Wealth Managers In America

I'd add that most of the fellows I know that are retail brokers are pretty good at what they do.  They do have to fend off their managers and branches most of the time.l

an tSionna {12.14.11}

US Dollar breaks out.  Could make it harder for our exporters as it makes our goods more expensive but great for anybody going abroad.

Chart courtesy of Bespoke Investment Group on 12.14.11

Higher GDP Than Expected in Q4

A nice explanation from Calculated Risk:  about the numbers behind the expected increase in 4th quarter GDP this year.

"From the WSJ: Economy Poised for Growth Spurt, but Risks Abound {Subscription Required} 'Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago.  Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.'

It does look like GDP growth will be slightly above trend in Q4, but this is still weak growth considering all the slack in the economy. Back in Q4 2009 and early 2010, real GDP increased at around 3.8% annualized for a few quarters, but almost all of that growth was from increases in private inventories (a classic inventory cycle). This quarter most of the increase will be from final demand.

However some of this "growth spurt" is just a bounce back from earlier events - auto sales have finally recovered from the impact of the tsunami, and consumer and business spending have bounced back a little from the threat of a U.S. default in August during the debt ceiling debate.   And recently personal spending has been increasing faster than personal incomes, and the saving rate has been declining. That isn't sustainable.

Also, there are significant concerns about the first half of 2012 both from the European financial crisis and from fiscal tightening in the U.S. (fiscal policy in the U.S. will subtract from GDP in 2012 even if the payroll tax cut is extended)."

My Comment:  All that being said S&P 500 earnings for 2012 right now are clocking in at an estimated 100-102 per share.  These so far are not pie in the sky numbers but reflect roughly about 7% earnings growth for next year.  That number is also a traditional rate at which earnings grow.  At 1224 where the S&P closed yesterday that reflects a market trading with a forward PE of between 12 and 12.5 next years earnings. Assuming these numbers are good{and that could of course change over time}, then stocks could show a potential return from here between 6% and 25% next year.  That last number assumes that everything goes completely right for the market in 2012.  That return doesn't include dividends.  A good 4th quarter is a nice tailwind as we head into 2012.

Now as always there's a lot that could go wrong with this market and there is no law that states these numbers won't get cut or that Europe won't trump valuation again next year as it has here since this summer.  But a market trading with a yield in excess of 2% with short term rates well under this number and an earnings yield of nearly 8% points to a market that is cheap by historic valuation standards.  We'll see how it goes into the new year. 

Link:  Better GDP in 4th Quarter.

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

Out Today

Business will keep me away from posting today.  I'll be back in front of the screen bright and early tomorrow!

One Of The Best Beer Commercials Ever

an tSionna {12.09.11}

We first flagged that we thought we'd initially have trouble at this resistance level shown in the chart above here on Monday.

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

Inflation's Effect on Portfolios

A very good article on the effects of inflation on portfolios published over at a blog I've started reading called Abnormal Returns.  {Excerpt with highlights and a comment at the end.}:

Inflation is Still the Silent Killer  By Tadas Viskanta

The goal of every investor is to generate real, after-tax returns. Pretty simple stuff. The financial media spends most of its time talking about nominal returns. In a very real sense inflation and taxes play just as important a role on investor outcomes. We don’t spend a lot of time talking about inflation rates and tax laws because the evolve much more slowly than market returns. Therefore our attention is drawn to market returns which as we all know are volatile. It therefore is easy for investors to become complacent about inflation. (Let’s leave aside taxes for this discussion.) Ever since the end of rampant inflation in the 1970s and early 80s, inflation by and large has been off the table as a issue for investors and the economy.....

....This view of inflation unfortunately misses the bigger picture. 2%, let alone 3%, inflation over the lifetime of an investor compounds at a pretty good clip. Mebane Faber at World Beta in the chart below shows the difference between a 9.4% nominal return and the returns less 3% inflation. As you can see the difference this makes compounded over a lifetime of investing.

Faber goes on to talk about the challenge inflation poses to investors in balanced portfolios, let alone those trying to make a go of things in cash equivalents:

"Even investing in a 60/40 portfolio is only expected to return around 3% a year in real terms while STILL exposing investors to 70% losses. These strategies should all be seen as simply strategies to keep up with inflation. That is depressing of course, but true. The worst outcome is the cash under the mattress strategy which will expose the investor to anywhere from 2% to 7% losses per year. You may not notice the effects, kind of like a boiling frog, but at some point you look back and say, “wow, I remember when a Coke cost 25 cents….”

A lot of investors these days are holding large cash balances in the hope of riding out current market volatility. The problem is with the return on cash hovering around 0% in nominal terms and -2% in real terms, if you believe the inflation expectations, this puts investors in a pretty deep hole......Inflation never really went away as an issue for investors. What went away are decent, low-risk options to try to keep up with inflation. The Fed’s policy of zero interest rates has made difficult choices for investors. Unfortunately no let up seems imminent. All the while inflation is still the silent killer of investor portfolios, compounding away in the background.

My Comment:  Many investors are afraid of the market volatility which has increased in recent years.  They automatically look for ways to avoid this and still have some sort of nominal rate of return after inflation. They most often look to what is perceived to be risk free investments such as government bonds or less risky investments like other bond instruments or annuities.  In my mind there are two issues here.  The first is that many of these so called risk free or less risky investments turned out to be much more dangerous than people thought.  There are many folks that purchased annuities today for example that have no idea how close some of the underlying companies that guaranteed these investments came to going out of business in the 2007-2009 period.   Often as with annuities, they also pay substantial real and hidden fees for this perceived level of protection that eats away at what they might otherwise have been able to have saved.   

The second issue is what price people are paying for this so called security.  A 10 year US Treasury bond today yields 2.06%.  A 2 year piece of the same paper pays 25 basis points {1/4 of 1%}.  Money market accounts are worse, basically yielding nothing.  On an after tax basis and assuming a 2% inflation rate, investors are basically losing money by losing purchasing power when they hold these investments.  As an aside and as I've noted before, when you hold a piece of paper that basically gives you the right to lose money via purchasing power for 10 years, you are basically saying that you have so little confidence in economic prospects over the next decade that you are willing to lose money slowly for the chance to get back all of your principal amount {absent its loss of purchase power} on some distant date.

I understand people's concerns and current distrust of stocks and I'm not advocating that every bit of a person's assets should necessarily be tied up in the markets.  But many people need to gain some balance and perspective about this issue which judging by the trillions of dollars locked up in money markets is still sorely lacking by investors.

Finally as an aside the one thing forgotten by investors is that money markets, {unless they are backed by government securities} are not normally guaranteed by FDIC and they are run by investment companies in the business of making a profit.  The yields are so low on money markets right now that many firms make no money on these and run them simply as a courtesy to clients who invest in other higher yielding funds with these firms.  If rates stay low into perpetuity look for firms to try to find ways to make money off of these accounts or perhaps get out of that business entirely.

USS Arizona-Video

This film was found back in 2001.  It shows actual footage of Arizona's destruction from 12 seconds into this video.  The sound apparently is dubbed.

Still At Sea

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea these past 70 years by the United States Navy.

Times Article On Angela Merkel

Pretty good New York Times article titled Angela Merkel Brinksmanship For A Debt Crisis.   Here's an excerpted part of the article. 

"At critical junctures throughout the crisis, Mrs. Merkel has resisted appeals to appease the financial markets by lowering borrowing costs. Instead, she has wielded the pain of soaring interest rates as a cudgel to extract painful changes — and demand leadership changes — in countries like Greece and Italy that have proven resistant to those changes in the past. It is a clever strategy, one that allows her to juggle divergent interests at home, where the German people do not want her offering more guarantees of taxpayer money to combat the sovereign debt crisis, and abroad, where they are begging her to do so. It is also highly risky.


If the euro is preserved and Europe moves toward a more unified future, Mrs. Merkel will probably win the lion’s share of the credit, perhaps one day being hailed as Europe’s savior. But if her prescriptions turn out to be inadequate, she could reap the blame for presiding over the collapse of the euro, with untold consequences for the world economy.   Either way, Mrs. Merkel, a steely champion of austerity and fiscal discipline, seems to have assumed the nickname of her 19th-century predecessor Otto von Bismarck: the Iron Chancellor."

I have a feeling where going to be paying a lot more attention to Germany in the coming years.  It is increasingly a country that is leaving the shackles of its past behind.  In that regard I'll tell you a short story.  Several years ago we hosted an exchange student from a smaller city in Bavaria for a long weekend.  Since I speak a little German {from a former life as an exchange student living in Vienna, Austria} I ended up being her tour guide of Chicago for three days.  Over the course of that period at some point the war came up and this was her thoughts:

"I know Germany did horrible things during the war.  We accept them and are truly sorry for them.  However, my grandparents were children during the War.  My parents were born after the War and I certainly did not do or condone these things.  While I wish those things had never happened, it's not my fault."

I sometimes think we forget that just as our veterans or people with direct experience of the war are dying so are those in Germany, Italy, Japan and the other countries that were directly involved in World War II.  It's a brand new world.  What was old is new again and we here in the US need to adjust to that.

I will be in Germany over part of the Christmas holiday and will report back on what I find when I'm there.  Also going to be in Italy which is now ground zero for the debt crisis and will bring back my thoughts from there as well.

Irrational Exuberance

I almost forgot that Monday marked the 15th anniversary of Alan Greenspan's Irrational Exuberance speech which suggested that stocks were overvalued.  Here's what he said in a speech before the American Enterprise Institute on 12.05.1996. 

....."Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?..." 

      Source:  http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

Greenspan was right in the long run.  According to Greg Mankiw the return on the U.S. stock market has been 5.55 percent in that time period while the the return on the U.S. bond market has been 5.98 percent.  But he was wrong in his timing as stocks would continue to advance for almost 2 1/2 more years and advance a bit over 100% during that period. 

Best Market Opportunities In A Half-Century

Everybody should read this Barron's interview  interview with veteran investor Joe Rosenberg for a concise and well thought out argument on why stocks are cheap. It was published in that paper over the weekend.

Market Breadth

From Bespoke Investment Group: 

"After last week's and today's rally, 81% of the stocks in the S&P 500 are back above their 50-day moving averages. While the index is having trouble breaking above its 200-day, underlying breadth has not been an issue. Both big rallies since the start of October have now seen much larger than normal stock participation, which is something the bulls can hang their hats on."

According to Bespoke, the sectors with the best breadth are Energy, Financials, Industrials, Materials and Utilities.  Sectors that are weaker include Health Care and Telecom.

Link:  Bespoke: Sector Breadth

*Long ETFs related to the S&P 500 in both client and personal accounts.  Long certain energy, financial, industrial material, utility and healthcare ETFs in certain client and certain personal accounts.

Unemployment

Chart of the Day with a longer term look at unemployment.  Their chart and their commentary below.

"{On Friday}, the Labor Department reported that the unemployment rate declined significantly to 8.6% -- the lowest level in 32 months. For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate since 1948. As today's chart illustrates, the unemployment rate has been generally trending lower. However, the pace of that overall downtrend has been significantly slower than what has typically occurred following previous peaks in the unemployment rate. Though, following the previous two recessions, it did take much longer than normal for the unemployment rate to peak. While the significant decline in the unemployment rate for the month of November is a positive step, it is worth noting that the current unemployment rate remains at a level that was surpassed only during two previous periods (1975 and 1982-83) over the last 60+ years."

Link:  Unemployment Since the 1940's

an tSionna {12.03.11}

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

State Farm's Tribute to 9/11.

State Farm commemorated the 10th anniversary of  the 9/11 attacks in New York with this tribute.  State Farm partnered with award-winning director Spike Lee and used a song originally sung by rapper Jay-Z and singer Alicia Keys titled "Empire State of Mind" .  Nearly 150 school children (ages 8-11) from the New York City area visited four firehouses and thanked the firefighters during the commercial.

If you have the time watch the behind-the-scenes video on the shooting of this commercial with commentary by director Spike Lee.  Behind the Scenes: Empire State of Mind.

PreMarks {12.02.11}

The market is set to spike higher here at the open on benign to perhaps better than expected employment statistics and more indications out of Europe of an increased willingness to come to grips with their debt problems.  Yesterday there was one economic statistic that really caught my eye.  Apparently car sales in the U.S. are soaring.  Apparently it was noticed over at  Bespoke as well. 

Bespoke says that "On a seasonally adjusted annualized rate, sales rose to 13.59 mln, which is the highest total since the 'cash for clunkers' program in the Summer of 2009. Outside of that one month in August 2009, you have to go back to June 2008 to find a higher monthly reading. Even the luxury sector saw strong growth. Sales of BMWs rose 15%, while Mercedes sales rose 55%!"

I've been saying for awhile that I think the economy is doing better than most people think and that stocks are cheap.  This is pretty good supporting economic data.  While on the one side average fleet ages on cars continues to get older and so there is a replacement factor that needs to be understood.  However, cars still are for the most part a discretionary purchase especially those in the luxury category.  You have to be pretty confident about your own personal job prospects right now if you're out purchasing a new car.  If you add that with the so far much better than expected early holiday season sales, it's becoming pretty undeniable that things for now are perking up.  I think that besides Europe this evidence is what has pushed the markets substantially higher this week.

Link:  Bespoke: Car sales.

Leon Cooperman's CNBC Interview

Busy morning and going to be out much of the day.  I wanted to follow-up on the piece I noted yesterday on a public letter that Leon Cooperman of Omega Partners sent to President Obama.  He also did a follow up interview with CNBC  yesterday.  Follow this link: CNBC-Cooperman.  Pay attention at the end to the very practical and common sense proposals he has for fixing the economy.

More tomorrow.