Thursday, December 24, 2015

Merry Christmas


The stock market took a breather today from a Santa Claus rally that's basically taken stocks up a bit over 2%.  Actually the markets have mostly taken a breather this year as the S&P 500 is right now trading where it ended 2014.  Next week will most likely be a quiet time on Wall Street with most money managers licking their wounds from a year that for many went sour over the summer.  I may be back with a thought or two next week but for us as well we'll likely spend the time with family and friends.  We will definitely be back here as the year turns into 2016.  I have some ideas for changes in the blog and hope to roll out a few new business ideas next year so I think it will be an exciting time.

Reflecting the trading the past six months, the mood on Wall Street is pretty sour.  I think things might not be as glum, although I do believe there's a higher probability of continued volatility in the year ahead.  We'll detail these thoughts to you after the beginning of the year.  For now we'll leave all of that for 2016 and today celebrate Christmas Eve, my favorite day of the year.  I've already received my present as I have all three of my children and my mother here this year.  There are no little English's running down the stairs screaming with glee tomorrow morning but their young adult versions bring a ruckus and excitement to our place that's fun to be around.  

On behalf of all of us at Lumen Capital Management, LLC, we wish you a Merry Merry Christmas as well as a prosperous and joyous 2016.  

God bless you all.

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.

Tuesday, December 22, 2015

The Earth Turns.

"The earth turns, but we don't feel it more. And one night you look up. One spark and the whole sky is on fire."-Gangs of New York.


This post has nothing to do with the markets so if you're looking for a discussion of the latest investment numbers or you're looking for something about the future direction of the markets then go someplace else today.  Last night the earth turned.  Last night the rocket company SpaceX did this:

The first stage of SpaceX's Falcon 9 rocket is seen just before touching down on Landing Site 1 at Florida's Cape Canaveral Air Force Station on Dec. 21, 2015.   Credit: SpaceX

That is the company's Falcon 9 rocket landing safely back on our planet after a successful launch and subsequent deployment of communications satellites yesterday.  Below is a time-lapse picture showing both the launch and landing back at the same facility.

This long exposure captures the launch of SpaceX's Falcon 9 rocket and its subsequent engine burns to return to Earth during a historic flight from Cape Canaveral Air Force Station on Dec. 21, 2015.   Credit: SpaceX


The launch and subsequent landing of an orbital-class rocket along with a similar success of a sub-orbital rocket by the company Blue Origin marks a turn in the era of space exploration.  The ability to launch a rocket into orbit and retrieve one of it's main components means the cost of getting into space is going to continue to come down and that means the potential of whole new levels of economic development.  You can go here to read more about what all this means for the industry.  Besides rockets there are rudimentary plans today for example to go out into the solar systems and mine asteroids.  In the coming years NASA will begin testing a new generation of rockets capable of carrying the Orion spacecraft into deep space and perhaps ultimately on to Mars.  Mine Asteroids?  Explore Mars?  That's truly Buck Rogers  stuff! 

I said at the beginning that this wasn't about the markets but in a way it is.  It is this sort of innovation and expansion that drives the economies.  Space, or at least the space that is immediately beyond our outer atmosphere,  is becoming an easier destination to reach.  The industry and innovation needed to do that and then expand beyond that domain creates economic opportunity.  That ultimately drives stocks and at the end of the day creates wealth.  A new industry is being born.  Welcome to the 21st century.

Back Thursday with one last post for the year.


Monday, December 21, 2015

Market Performance

Performance charts going back to November last year.  The top chart shows the performance of major equity ETFs around the world.  I've also thrown in an ETF showing the performance of the gold ETF and US High Yield.  Owning the portfolio shown below would give you something like 95% exposure to most equity markets around the world.  As you can see you take out the US tech-heavy Nasdaq, {That's the Fidelity OneQ-2nd from left} and REITS {Third from right} and every other major index represented in this ETF universe is down for the year.   Owning this whole basket would have you down around 5% in 2015.  This is a pretty diversified group of companies.  It's lacking US bond exposure and maybe some US small and mid-cap stocks but you can get the idea of the tough road equities have had since November, 2014.  By-the-way, US small and mid-cap stocks are down respectively 1.95% and 4.25% during the same period so they would have been no help in any event.


If we break down the different sectors of the S&P 500 then you can see what has really ailed the markets.  The commodities bust and the decline in the oil sectors have been a significant drag on both corporate earnings and on the index during the same period.  If you take these two sectors of the market out then the S&P 500 would have been up about 2.5%.  That's nothing to write home about but it still is a gain.  Same problem in commodities and energy is what's bedeviling much of the rest of the world. 
  
*Performance charts via Stockcharts.com.

**Long many of the above represented ETFs in personal and client accounts.  Positions can change at any time though.

Thursday, December 17, 2015

Thoughts {12.17.15}

Well the Federal Reserve {the Feds} raised interest rates yesterday by 1/4 point or 25 basis points and the world did not end.   Stocks rallied on the dovish announcement and subsequent news conference.  The forward guidance on when they might likely raise rates again was either dovish or hawkish depending on who you listened to.  Stocks didn't care as they continued a rally that began the day before and looks like it will run now for a third day based on how futures are trading right now.  I've always thought that the first few rate increases would be greeted well by stocks as they would be considered evidence that the economy recovery had advanced to the point where the Feds could take off the training wheels.  I just don't see how a 25 basis point increase in rates affects the sales of cars or the like.  Since I remember years of much higher rates of GDP and economic growth when interest rates were substantially higher than they are now, it's hard for me to understand how moving rates slightly north of 0% is going to have a dramatic impact on growth.  If it does then the economy is in worse shape than we think.

Speaking of stocks, the last big bad event of the year is behind us now with the Feds off the table.  Seasonal patterns and probability suggest that stocks now are free to run somewhat between now and December 31st.  May of course not happen as there's no guarantees in this business.  But right now there are too many people on Wall Street that want stocks higher for the next two weeks.  Too many hedge and mutual funds are having poor years.  Best way to alleviate that somewhat is to try and goose the markets for the rest of the year.  Easier to do at the time of the year when folks begin to think of time off and volume thins out.  The holiday season is a good time for these folks to try and push things around.

The investment world has also been transfixed by the implosion of the junk bond world.  I haven't commented on this because 1) my computer systems were on the fritz.  2) While I think that most of the time the implosion in that section of the markets would be more cause for concern, I think that most of the problems in high yield are related to the lowest credits and to the energy markets.  I don't think at this point in the cycle these issues are representative of credit issues throughout the system.  We'll of course continue to monitor this but that's our current assessment of that sphere.....and finally....3) with the exception of small legacy amounts we do not directly own high yield ETFs for clients or in personal accounts at this time.  We did have positions in this sector until about a year ago but sold these back then when the decline in their yields did not in our opinion justify the risk of owning the securities.  It is generally not my policy to discuss individual ETFs that we might own for clients.  I am making an exception here due to the high profile nature of what's gone on in this sphere and the questions that I've had about it.  We do own some legacy mutual funds for clients and it is possible that some of these funds have the potential to have invested in this space.  But as of this time we do not directly own these funds {again except for small legacy amounts}.

Again as mentioned computer issues kept me from posting this week.  Here's the schedule until the end of the year.  God willing and the creek don't rise {an old Indiana expression}, we'll be back in the turret next week.   The week after we'll be off and we'll pick up back here bright and early next year.

Wednesday, December 16, 2015

Chart Talk {12.16.15}

Two charts that show a daily and weekly perspective of the S&P 500 ETF SPY*.  Basically we've spent over a year going nowhere and in retrospect been in a correction.  However, this correction in what we still believe is a longer term secular bull market has so far mostly been by time instead of price.

First chart is a daily view of things going back to March.  Both unedited charts come to us from FINVIZ.com.


The 2nd is a weekly chart of the same ETF*


*Long ETFs related to the S&P 500 in both client and personal accounts although positions can change at any time without notice.

Tuesday, December 15, 2015

Computer Problems

Problems of a technical variety have kept me more or less off the grid these last two days.  We'll be back with some commentary tomorrow.

Thursday, December 10, 2015

Hedge Fund's Annus Horriblis

Hedge funds, the generic names for those private partnerships that generally charge investors 2% management fees plus 20% of any profits didn't have a great 2014.  We noted back in February that by at least one measure of their investment returns these funds returned around 3% versus 13.7% for the S&P 500 last year.   

It doesn't look like 2015 is going to be any better in aggregate.  While the S&P 500 flirts with break-even for 2015 many of these funds are solidly in the red for the year.  Bloomberg, in a recent article noted that:

 "Hedge fund investors are losing patience even with marquee firms as many of them struggle this year, especially those that offer macro strategies or stock funds heavily weighted to rising shares. Some managers have lost money for two years running, while others such as David Einhorn’s Greenlight Capital are suffering declines that rival their worst year. After the weakest third-quarter inflows in six years, the industry could see outflows in the fourth quarter, said investors and bankers who watch the ebb and flow of hedge fund assets."   


I think we may be on the verge of a serious rethink in how money in this realm is invested.  These so called alternative investment strategies just haven't worked as well as they did a decade or so ago.  The investment reforms after 2008 and too much money sloshing into the space have likely leveled the playing field versus other investment strategies.  I don't think hedge funds are going away.  I do think there is going to be a rethink in how dollars are invested with them and I think there is going to be a compression of fees.  It gets hard to justify that 20% profit return to the funds when there is little or no profit to be had.  

And if you want to add a bearish argument for stocks next year then the compression of the hedge fund universe could mean less extra money sloshing in and out of the markets.  You need more buyers than sellers for stocks to move higher and often it's those hedge funds that are the marginal buyers in strong markets.  There absence could mean a lack of liquidity going forward and fewer funds could mean stocks fall further in corrections as those extra dollars just aren't there to invest.  This isn't my view of things.  For reasons I'll discuss in future posts, I think there's a higher probability that stocks may do better in 2016 than most people expect. But if you want a bearish argument then the compression of the hedge fund industry, especially after a year as horrible as 2015, is one you can likely hang a hat on.

Back Monday. 

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Wednesday, December 09, 2015

Thoughts {12.09.15}

Energy looks to be catching a bid in early trading.  Energy is also broadly oversold now.  Not great short-term fundamentals in that space.  Market higher on on Dow/Dupont merger?split-up/whatever you want to call it news.

The term "technological deflation" is the new economic buzzword.  Its concept is that technological deflation is a good thing {classic economics would disagree} because it improves our standard of living even in a world where wages are stagnant.    You can read about that over here at Business Insider.   The example they use in the article is the iPhone, a device that even though it is expensive replaces the need for several other devices that in aggregate cost more.  I largely agree with the thinking regarding technology but I don't think we've thought about or worked through all of the societal implications from this.  For example two jobs that technology endangers would be bank tellers and your neighborhood mailman.  Cash stations and electronic banking are making costly branch offices for banks obsolete.  Email and, again, electronic banking  has for the most part done away with what a first class letter was supposed to be used for, to pay bills and send personal messages.  Both job classifications have been entry level ways for minorities in this country to enter the middle class.  Nobody seems to have come up with ways to replace the jobs going out with similar ones to take advantage of these gains.  It's hard then to think about technological deflation if a larger and larger percentage of the population can't afford to the products that are becoming cheaper.  

In a strange twist of events, Bloomberg notes that a strong dollar hurts China more than it does the US.  That's because, "the asian nation has tethered the yuan, for the most part, to the dollar in order to enhance financial stability.  That means as the dollar advance against most currencies across the world on expectations of rising U.S. interest rates, the yuan does too.  China suffers more though because its slowing economy is almost twice as dependent on trade".   It is fascinating to see all the odd twists and turns the money pumping policies of the past eight years have loosed upon the world.  I doubt that there's to many economists a year or so ago that would have thought an appreciating dollar might have ended up hurting the Chinese.  That's why it's so hard to trust those in the financial media who think they know all the outcomes and have all the answers.

*Long Energy ETFs in client and personal accounts although positions can change at any time.  Dow and Dupont are components of many of the ETFs we own in both client and personal accounts.

Tuesday, December 08, 2015

Thoughts {12.08.15}

Markets are set to pick up where they left off yesterday as futures are indicated down well over  100 points at the open. Energy and certain high flying levels of the markets are largely to blame for the current softness.  If we follow money flows then probability would suggest we become oversold by the end of the week or early next and then see some sort of rally into the end of the year.  Even if we see that situation occur, markets will likely eek out very small gains in 2015.  More on this in a sometime in a future post.

OPEC put a shank into the energy sphere last week when they declined to cut oil production.  You can see Jim Cramer's take on this over at CNBC here.

The shooting in San Bernardino is likely a game changer in many ways as it seems that folks are becoming less likely to believe that governments at all levels can protect them from incidents like the tragic events last week.  We're going to talk about the investment implications of this at some point when we have a bit more time to come up for air.  One thing we think is that we can expect security infrastructure to be amped up in the coming years.  It's very likely we're going to see stepped up bag and personal inspections at malls and movie theatres.  There is also a rush now by many to buy a gun.  This has been particularly pronounced in San Bernardino but is also on the rise in other spots.  Gun maker stocks went through the roof yesterday in a soggy market

Finally a really informative piece from Bloomberg on the demographic make-up of the Millennial Generation.  I have an interest in this because I have three millennial kids but I also think the investment implications arising from this cohort makes this section of the American demographic portfolio a serious area of investment study.

*Long Energy ETFs in client and personal accounts although positions can change at any time.

Monday, December 07, 2015

Still At Sea


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

Lest we forget.

Thursday, December 03, 2015

One Measure of Expected Returns


Chart above comes to us from the Research Affiliates website and shows us the 10-year expected risk and return outcomes using a measure of analysis known as the Shiller P/E.  Shiller P/E is a calculation popularized by Robert Shiller that divides real prices by an average of real earnings per share over the prior ten years.  As Research Affiliates points out this approach allows the P/E relationship to be viewed in the context of several business cycles and is supposedly not biased by recent events.  

Using Shiller analysis the US markets look expensive, trading right now at nearly 25 times earnings.  However, Shiller's earnings averages include right now the deep trough from the Great Recession and also are not adjusted for the extremely low level of interest rates world-wide.  Never-the-less, by this level of thinking US stocks are very expensive and should post very muted returns over the next ten years by this method of analysis.   I think if I often paint what I see is a more optimistic view of things going forward then it is only fair every once and awhile to show the opposite view.  Looking at the expected returns in Shiller though does show us that expected returns {as well as higher risk} has the potential to come from foreign markets.  This is why I think as long as they can stomach the risk of volatility, some portion of client's portfolios should be invested abroad.

We may come back and discuss Shiller in more depth at some point.  I'd be willing to take the side of the bet that says US equities return something more than the 1-2% shown above over the next 10 years.  I do think there's a real possibility that markets abroad do better than the US in the next few years.  However, I've also been saying that for what seems like forever!

Will be back posting on Monday.

*Long many of the represented countries above via ETFs in personal and client accounts.  Positions can change at any time though.

Tuesday, December 01, 2015

Seasonal Patterns

As we enter the final trading month of the year we find the major US averages more or less break-even for the year, many money managers behind their benchmarks and hedge funds having their worst year since 2008.  A lot of folks need the market up this month to save their performance years. Therefore probability suggests, given the seasonal patterns, that stocks have a stronger bias for positive performance this month than any other time perhaps this year.   We've talked in the past on our theory of seasonality and the theory of how institutional money is invested, but I think it bears repeating today:

"Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks. 

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out.  One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks.  If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon,  may begin to lock in their profits.  

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.} 

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year."

Think about it.  If you're a money manager and you as well as other institutions can goose the major indices up 2-3% this month {while throwing in dividends of 1-2%} then your year looks a bit more reasonable.  A 2-3% move in the S&P 500 from yesterday's close would put the index in a range of 2,120-2,145.  A close on the high end of that range would give us nominal new highs but wouldn't be that much different than levels we saw back in the early summer.  Of course there's no law that says this has to happen.  For all we know this December will break a long standing seasonal pattern we've seen in almost every year I've been in this business.  But I think there's a stronger probability that we see this occur and I wouldn't be surprised if we see that 1-2% move this month.  

And for those of you that want to scream about excessive valuations, well we can have that argument another time.  But even if you're right.  Even if stocks are truly expensive and should trade down that 10-20% I hear folks like you throw out all the time then I'll tell you what the average portfolio manager is going to say, "I'll worry about that in 2016".  For now it seems to me that the seasonal patterns may just be in our favor for the next month or so.

So now we must end with the usual caveats and cautions!  If you're going to go long based on this thought process then I'll remind you of the following.  What I've posted above is opinion.  It may be educated opinion, but it is opinion non-the-less.  It has a certain probability of being wrong and I will acknowledge that it has a higher probability of being wrong this month then perhaps in other years given the current state of the world.  You should not act on anything you read here without discussing the above with your financial advisor or doing your own individual research or better yet, hire us.  If you do act on your own after reading this consider yourself warned.

Having a busy week so I will post here next either Thursday or Friday.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.