Chart Talk {The Triple Q's}

Today's chart is of the "Triple Q's".  That's one of the nicknames for the Powershares Nasdaq 100 trust.  That's an ETF {that tracks the top 100 stocks in the Nasdaq.  Its symbols is QQQ*, hence the nickname.  Chart is from of Tradingview.com and you can double-click on it to make it larger if you would like.

Chart is a bit more of a mixed bag.  True it is up since the election, but the performance has been more choppy.  While QQQ is near its highs,  it also gave back most of its post election gains before going on a run about mid-month.  This largely has to do with its components which are heavily skewed towards technology.  Tech hasn't had the run that some of the other sectors have seen.  We'll show a few of those charts in the next few days for illustration.

Because of this choppiness this index isn't as overbought as some others.  It will likely move higher if money rotates into the largest technology names between now and the end of the year.  No reason to say this will happen and I'm not saying anything that should be construed as a guarantee but these large cap tech names are the ones that have been ignored since the election and if they start to be bought then this index will likely be a beneficiary of that move.

*Long ETFs related to QQQ in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

Chart Talk {SPY}

A chart of the S&P 500 ETF {Symbol SPY*}.  Chart is from of Tradingview.com and you can double-click on it to make it larger if you would like.

SPY has traded straight up since the election.  It is up nearly 6% since the lows reached in early November.  Yesterday saw the ETF pull back about a half of a percent from all time highs last Friday.  Probability would suggest that at some point a move like this needs a breather.  Then again one could argue that with market seasonality just around the corner, we could keep moving higher in the index and begin to rob some of next year's gains out of the market.  This becomes more plausible if money managers panic into the market trying to make their year in the next few weeks.   It's been a horrible year for most active managers and it is likely some of them are chasing the markets.  Remember, the only trade most of Wall Street gets paid on is the one printed at 4:00, December 30th this year.  That's the last trading day for 2016.  

In any event SPY is overbought by our work across multiple time frames.  That doesn't mean it can't continue to move higher.  It just means it's overbought.   A higher probability scenario {especially in the absence of an unlooked for event} would see a period of digestion in the index before another attempt at an advance in the final weeks of the year.   No guarantees on that though and remember it's been a crazy trading year in the markets.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

The Advantages of Using ETFs in Client Portfolios

My clients have different investment goals, time horizons and risk tolerances.  The challenge is to develop portfolios that are a reflection of these differences. One of the underlying tools I use in client portfolio development is Exchange Traded Funds (ETFs).  I value ETFs because they trade like stocks, generally have lower expense ratios than mutual funds, enable portfolio diversification, and offer clients the ability to take less risk than traditional stock portfolios.

Trade Like Stocks

Unlike other types of equity vehicles, such as mutual funds, ETFs are traded similar to stocks throughout the day instead of only one pricing at the close of business. Since they are priced like stocks, their value changes constantly depending on supply and demand.

This stock-like quality allows me to actively create a game plan that can take advantage of market discrepancies when trying to find the best values for my clients.^[1]  Because ETFs trade like stocks, they can be valued like stocks.  Therefore we can use our traditional disciplines of fundamental, valuation and money flow analysis to make both strategic and tactical decisions in client portfolios.

Low Expense Ratio & Taxes

In addition to being priced like stocks, ETFs have a low expense ratio, which can save you money on fees over time. The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest.^[2] This lower cost is especially important if you put the money you save back into growing your portfolio.  By the way, many ETFs have expense ratios substantially lower than 0.44%.  For example, the S&P 500 ETF {symbol SPY} mirrors that index and carries an expense ratio of just 0.10%.  I would also note that expense ratios in basic index ETF have been trending lower as the major ETF index providers have been caught in a war for market share by lowering the costs of their funds.

Along with being relatively inexpensive, ETFs are also tax efficient.  Most ETFs are better at this than traditional index mutual funds and far outstrip the tax efficiency of most actively managed mutual funds. This is due to the way they are structured. Without getting too technical, ETFs usually have less turnover or taxable events than a traditional index or actively managed mutual fund. The average turnover rate for an ETF is less than 10%3 while the many actively managed funds can turnover more than 100% of their fund during the course of a year.  So many transactions and portfolio changes can lead to unwanted tax bills for clients at the end of the year.  The structure of ETFs largely solves this problem.^[3]

Diversification

Being tax efficient is a huge benefit of ETFs, but the ability to eliminate single stock risk while at the same time diversifying clients’ portfolios is an even bigger draw to utilize ETFs as an investment vehicle. Over the past 10 years, ETFs have been increasingly used as substitutes for single-stock exposure. Since there are hundreds of ETFs available, I can create specific asset allocations for my clients using ETFs in order to help create a diversified portfolio and mitigate risk.

Transparency

Another advantage of ETFs is transparency. Because they are traded on a daily exchange, ETFs must report their performance and holdings each day. After the financial scandals of the late 2000s, this transparency is increasingly attractive to investors because they are able to see exactly where and how their dollars are being invested.  It also enables me to do traditional fundamental and valuation analysis on a known pool of portfolio assets. 

Ability to Structure Risk

Speaking of risk, many investors have been wary of jumping back into the stock market since the Great Recession of 2008. ETFs have become my primary investment vehicle for clients who want exposure to the market without the worry of single stock risk

ETFs can provide some stability in unstable markets and there are enormous advantages to ETFs, especially during volatile times.  But it is important to note that ETFs are not immune from market declines.  If their underlying index declines then they will also lose value by something that mirrors the decline of that underlying index.  They are also not a panacea for volatility.  Past events and market flash crashes show that ETFs can be violently whipsawed about.  However, because ETFs are based on an index we can invest during such periods knowing we are buying a diversified portfolio of assets, backed by the value of the securities in an underlying index and structure that risk by removing single stock exposure from the portfolio. 

The history of equities tells us they can be wracked by fraud, can trade to zero due to a catastrophic loss or be rendered obsolete by unforeseen technological change.  It is an extremely low probability event that a plain vanilla ETF, especially one with a long trading history and based on a well-established index, will suffer such a catastrophic event causing it to lose all value.  I say this is a low probability event because 30 years of investing has taught me there are no guarantees.  However, the inherent value of the underlying assets and the unique creation and redemption process of ETFs make this unlikely.  Frankly probability suggests the only events that would cause the inherent value of a majority of ETFs to trade to zero would be ones where we think most of us would have more things on our minds then the value of our investment portfolios.  Because the underlying assets supporting ETFs have value, we can use our systematic approach to creating portfolios and strategies from this asset class.

How I Can Help

Are you interested in seeing if ETFs are a good fit for your investment portfolio? At Lumen Capital Management, we can help put together a strategic plan to incorporate ETFs into your investment strategy. Call my office at 708.488.0115 or email us at lumencapital@hotmail.com to set-up an appointment today. I look forward to helping diversify your investments with a low-expense, tax efficient investment vehicle, while limiting risk of unexpected market changes.

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

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^[1] http://www.investopedia.com/articles/mutualfund/05/060605.asp

^[2] http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/

^[3]http://www.investopedia.com/articles/investing/090215/comparing-etfs-vs-mutual-funds-tax-efficiency.asp

Thoughts: Happy Thanksgiving!

The stock market has been straight up since the election.  This seems to fly in the face of what the media keeps shouting about since the nation voted Mr. Trump as the next President of the United States.  Here are my thoughts on what we're seeing.

The press and much of America has been caught off-balance by Mr. Trump's win.  Having failed to have seen this possibility the national establishment press will give him no quarter in the early going.  There will be no honeymoon for the new Trump Administration.   This resolve from the press seems to be hardening since Mr. Trump seems to be in no mood to kowtow towards them.  Expect the majority of the news out of the New York-Washington corridor to at a minimum be skeptical and for the most part negative.  This is not a political call but a bow at reality.  They will continue along this vein until they see it does not work.  If the Trump Presidency gets off to a decent start then expect some organization to break ranks and tack more towards the center in its reporting.  I would peg Chuck Todd at NBC for this roll if Megyn Kelly over at Fox News doesn't get there first.  Remember this when you wonder why the market rally on what will be perceived as negative news in the papers or on TV.  Again I am coming at this from how financial markets will view the world and not how political pundits want to posture on TV or on Twitter.

Markets have rallied because they expect positive economic developments in the next two years in the forms of renegotiated trade deals, changes to the tax code, repatriation of US corporate dollars from overseas, some sort of infrastructure spend and less regulation for business.  They are also rallying because President Obama is going to turn over a pretty decent economy to President-elect Trump come January.  We have said time and time again over these past few years that things are getting better.  The economic statistics show this.  Almost by every definition from low unemployment figures to robust housing sales, positive consumer sales, an uptick in wages low inflation and low interest rates the US economy is doing ok at the moment.  Even rising interest rates can be viewed positively as an example of an economy that is more on the mend today than it was even a year ago.  It is not perfect, it never is, and there a blemishes out there.  However, President-elect Trump is going into a much better economic situation than what waited for President Obama eight years ago.  Stocks reflect that as well.  The S&P 500* is up over 170% since President Obama took office.  All the nay-saying can't ignore that fact.  President Obama made some mistakes.  He probably went for the wrong health care deal for example.  But he did steer the the US economy through probably the worst economic environment since the Great Depression.  If we are going to blame him for his mistakes then let's give him credit for his accomplishments as well.  Mr. Trump will inherit this base. Only time will tell if he builds on it effectively.

And finally, contrary to what you may read at other places or see on TV, I believe that we as Americans have much more in common than what we perceive as our differences.  We may not agree on the best way to get to certain places but I believe we all for the most part want to get to the same destination.  It is my hope that we remember that in the coming months and years.  Tomorrow is Thanksgiving.  It is the most American holiday with traditions that extend as far back as the first European colonists and was thrust onto our national consciousness by President Lincoln during our most terrible of wars.  No matter how you feel about the election, and in particular if you are feeling negative or scared remember if we can live through and recover from our Civil War then we'll probably get through this.  Whether you are elated about the election results or depressed or perhaps even indifferent then know through whatever lens you view the outcome, America has dealt with better or worse Presidents and survived.

Whatever we are or whatever we feel, tomorrow in some manner it is my hope that each and every one of us can give thanks for something.  It is my hope that you are surrounded by family or friends sharing a moment of good cheer.  In that vein I wish you the happiest of Thanksgivings.  Leave the politics aside for one day.  Don't worry about the markets or your portfolios, stocks will still be there on Monday.  Eat too much, be merry, enjoy loved ones and give thanks.

We are back early next week.

Peace and God bless to you all.  Happy Thanksgiving.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

100 Year Bonds.

Barron's this weekend ran an article arguing that the Federal Government should issue 100-year bonds to lower the borrowing costs of the United States.  Part of Barron's argument is that interest rates have likely traveled as low as they are can go in this cycle {and maybe ever} given the probable spending and expansionist policies of the incoming Trump Administration.   Barron's published this long term chart of US interest rates going back to the 1700s as part of the article.  You can see how low rates are on a historical basis right now and that's even with the move higher we've seen this fall.  You can double-click on the chart to make it larger if you want a better view.

Individuals should also heed this advice.  Rates have already jumped since their lows last summer but they are still quite reasonable by historical standards.  If you have any debt at all and you are in a position that gives you options, then you should take this opportunity now to look at refinancing.  This could mean refinancing a mortgage, looking into the availability of a home equity loan or looking at various credit card options if you have that kind of debt. 

While interest rates are unlikely to see historical levels anytime soon, we are also unlikely to see rates as low as we experienced for most of this year any time in the near future.  Wall Street is almost unanimous in their opinion that the Federal Reserve will hike rates at their next meeting in December.  If you can refinance then do so.  Better yet if you are in a position to pay off all or some debt right now then consider doing that now as well.  Especially consider this when your debt can reset higher as interest rates move up.

Next post Wednesday.

Link:  Barron's: "Taming Federal Debt: The Case for 100-Year Bonds."

How Illinois Voted

Illinois will show up on a map of the Electoral College as a blue state with its electoral votes going to Hillary Clinton.  A closer analysis shows a more nuanced view that mirrors the national map.  Illinois like much of the country showed a sharp urban-rural divide this cycle.  Rural areas of Illinois voted heavily for President-Elect Trump.  More urban areas and counties with universities went for Mrs. Clinton.  

If elections were determined by counties instead of the popular vote then President-Elect Trump would have carried Illinois  by a wide margin as he won 91 of the state's 102 counties.  As it is the population in the country couldn't offset the urban vote, especially coming out of Cook County and its collar environs.  According to the Chicago Tribune more than half of Mrs. Clinton's 2.9 million votes came from Cook County.

*Link:  Chicago Tribune:  "Election Analysis:  On the Edge of Illinois' Urban-Rural Divide."

Back Monday.

Trump Economic Policies

Donald John Trump will be the next President of the United States, a result almost no one would have thought possible at any time during a tumultuous and dramatic election season.  Why he won will be the subject of debate for years to come.  That he took down not only the Clinton but also the Bush political dynasties is something not quite yet appreciated by the general public.  President-Elect Trump represented change at a time when the electorates in western democracies have had it with the old order.  However, the sun came up the morning after the election and the stock market has liked the results.  As of this writing, The S&P 500 has tacked on a nearly 5% gain since the lows on November 4th.  It has also rallied six of the last seven trading days, although this may have as much to do with Republicans now controlling all branches of the Federal Government than just Mr. Trump winning the Presidency.

What The Election Results May Mean For Your Portfolio

Regardless of whether your preferred candidate won, you are probably curious and maybe a bit nervous about how a Trump presidency will affect the economy and your portfolio. While we can’t predict the future, here are some thoughts on what might happen.

There are multiple factors to take into consideration when trying to determine what will happen to markets going forward. In general, markets hate uncertainty.  The election results are removing that from some sectors in the markets.  Financials, industrials and certain areas of the healthcare sector have seen a substantial rally since the results have come in under the belief that regulatory burdens may be diminished and the US may be on the verge of a large infrastructure spend in the coming years.

While no one can be sure which policies will be enacted once Trump takes office, based on his campaign promises, here are some broad overview considerations for how a Trump presidency could affect the economy:

Taxes

Trump has vowed to slash taxes for top earners and corporations, which could boost consumer spending and attract more foreign investment. However, tax revenues are expected to fall $6.2 trillion over the next decade, according to the Tax Policy Center.  Some of this amount may be reduced if tax code revision occurs.  That legislation would potentially include provisions allowing US corporations to bring home nearly $3 trillion dollars of profits earned by them overseas but subject to much higher tax rates here at home. 

Government Spending

During the election, Trump promised to spend heavily on programs that would create jobs in construction, and steel manufacturing. He said his focus would be on transportation, water, telecom and energy. This spending could create jobs and boost consumer spending.

Debt

Economists have feared that Trump's spending stimulus and tax cuts would increase the national debt by $5 to 10 trillion or more, according to a report by the Committee for a Responsible Federal Budget. Trump has countered that a growing economy would mitigate the deficit. Experts disagree over whether the overall results will be positive or negative.

Trade

During his campaign, Trump promised to increase tariffs on Mexican and Chinese imports, among others. This could increases prices for U.S. consumers and even trigger a breakdown in international trade, which could hurt U.S. exports.  The Chinese in particular have already warned of this potential should a Trump Administration turn too much of a focus their way.

Immigration

According to USA Today, undocumented workers make up about 5% of the labor force. If Trump follows through on his immigration policies, it could potentially make it difficult for U.S. businesses to find certain types of low wage labor.  Thus wages could increase but also bring about an uptick in inflation.

What Should You Do?

While this election season has been volatile and many have resorted to dire predictions and extreme emotions, we expect that the markets will follow historical trends.  Remember that a President may influence markets but he or she cannot control them. There are always other variables involved that play an important role in market success or failure, such as international events, interest rates, consumer prices and corporate earnings. In any case, here are some basic guides in thinking about the months ahead.

It pays to stay focused on the long-term. A wise investor needs to learn to ignore the “trees” and keep their eyes on the “forest,” or the historic long-term market returns. We believe our ETF oriented portfolios and investment strategies are built for the long-term, with short-term uncertainty in mind. While current events, particularly the results of a hard fought presidential race, can be upsetting, there’s no reason to deviate from your long-term financial plan.

We’re Here to Answer Your Questions

When current events bring uncertainty, it helps to have someone that can help you remember to see the bigger picture. An experienced financial professional can help you evaluate the markets and make decisions based on knowledge and understanding instead of media hype. If you would like to review your current investment portfolio or have questions regarding the stock market, please contact our office today.

Now May Be a Good Time to Review Your Other Accounts

While the accounts we manage for you are well diversified, now may be a good time to review your other investments including 401(k)s and other assets to assess risk and determine if any action is warranted.

We’re Here to Help The People You Care About

Your friends and family may be stressed during this market volatility.  If so we are never too busy to talk to someone you care about. We are happy to offer a free second opinion to your friends, family, and coworkers. Please feel free to share this article with them or send them our contact information.

As always, your portfolio should adhere to a long-term strategy. The short-term changes that will result from the election should not impact your long-term plan. If you are worried about your investments, please contact us by calling 708.488.0115 or emailing lumencapital@hotmail.com. We’re happy to hear from you and discuss your concerns.

About Chris

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Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

Regarding a President-Elect Trump { An Introduction}

I was traveling last week on business and the events of everything that has unfolded since election day has left me dumbfounded.  Almost the entire political, economic, social media and news punditry got this election wrong.  I will include myself in this group.  I assumed all along that while the election would be close, that Mrs. Clinton would ultimately prevail.  Nearly all of America missed the signs that he could win.  That includes me when I noted this while driving to the World Series in Cleveland:

"If the political sign factor means anything then Mrs. Clinton would be in trouble as I never saw a campaign sign for Hillary along the Indiana/Ohio toll roads.  The good thing for her is there's not a lot of people that live in these rural areas.  My guess is she's going to do well in the Indiana toll road cities of Ft. Wayne & South Bend and the Ohio cities of Toledo & Cleveland.  More than enough votes there to offset the countryside."

That in and of itself is telling and will be commented on at a later date.  However, now that the dust has settled, we as investors need to look at what a Trump Presidency looks like in regards to our investments.  Over the course of the next posts on this blog we are going to do that.  I am less concerned with how Mr. Trump won that what he will do going forward.  These posts are designed to do that.  Today will be the only day that we look back and we shall do so through the lens of a few articles posted by others.  After that we will look at Trump from an economic perspective.  Then I want to talk about what I think Trump Administration will look like regarding social policies.  The third post will deal with foreign affairs.  By-the-way, this to me is the area I think most of us should be concerned with as Trump has no foreign policy experience.  Then I want to look at certain market implications of a Trump Administration.  Finally I'm going to discuss predictive analysis and tie that into portfolio management.  That's a lot to digest and write about while also managing my clients assets so  I'm thinking you can expect something here every two to three days through Thanksgiving. Here are a few comments on how we got to this point with perhaps a pertinent line or two thrown in from each as well:

Wall Street Journal. Peggy Noonan: "What Comes After the Uprising?'.  “We have witnessed something epochal and grave. It is the beginning of a new era whose shape and form are not clear, whose personnel and exact direction are unknown. But something huge and incalculable has occurred. God bless our beloved country.”

The Hoover Institute: "Why Trump Won."  "What was forgotten in all this hysteria was that Trump had brought to the race unique advantages, some of his own making, some from finessing naturally occurring phenomena. His advocacy for fair rather than free trade, his insistence on enforcement of federal immigration law, and promises to bring back jobs to the United States brought back formerly disaffected Reagan Democrats, white working-class union members, and blue-dog Democrats—the “missing Romney voters”—into the party. Because of that, the formidable wall of rich electoral blue states like Pennsylvania, Michigan, Wisconsin, Ohio, and North Carolina crumbled.

Beyond that, even Trump’s admitted crudity was seen by many as evidence of a street-fighting spirit sorely lacking in Republican candidates that had lost too magnanimously in 1992, 2008, and 2016 to vicious Democratic hit machines. Whatever Trump was, he would not lose nobly, but perhaps pull down the rotten walls of the Philistines with him. That Hillary Clinton never got beyond her email scandals, the pay-for-play Clinton Foundation wrongdoing, and the Wikileaks and Guccifer hackings reminded the electorate that whatever Trump was or had done, he at least had not brazenly broken federal law as a public servant, or colluded with the media and the Republican National Committee to undermine the integrity of the primaries and sabotage his Republican rivals.

The Daily Beast; "Seven Reasons Why Hillary Clinton Lost and Donald Trump Won."

Armistice Day 2016

An earlier generation knew the holiday that we now call Veterans Day came from  remembering the commencement of an armistice that ended the hostilities on the Western Front during World War I.  The Armistice began on the "eleventh hour of the eleventh day of the eleventh month" of 1918.  Today marks the 98th anniversary of that event and has become a remembrance of all veterans past and present.  Many parts of the world still take two minutes of silence at 11:00 AM to honor the more than 20 million people who died in that war.  Today's post is a repeat of an article we first published back in 2006:

Most of the world has never heard of John McCrae. A Canadian of Scottish descent whose family had a history of military service, John Alexander McCrae was both a physician and soldier. McCrae served in the Second Boer War and World War I. He also taught medicine at the University of Vermont and McGill University in Montreal.

However, McCrae is not remembered for being either a soldier or a physician. McCrae was appointed as a field surgeon in the Canadian artillery and was in charge of a field hospital during the Second Battle of Ypres in 1915. There, touched by the battle death of his friend and former student, Lt. Alexis Helmer, and inspired by the red poppies that grew in profusion near Ypres, McCrae wrote one one of the best known poems to come out of the “War To End All Wars” It is still recited by Canadian school children……

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved, and were loved, and now we lie

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

In 1918, while still serving in the same field hospital, McCrae caught pneumonia and meningitis and died. Poppies, particularly in Commonweath Countries are still used as symbols of the Great War and are still closely associated with Veteran’s Day here in the United States.

Please take a moment today to remember all of our soldiers past and present. Especially remember those who have made the ultimate sacrifice in the service of our country.  

God Bless them all.