A Sea Change.

This is an almost 5 year chart of a large company that everybody knows. Because I'm not in the business of on line stock recommendation, it's name has been omitted to protect the innocent. This company's share price has done nothing for these past 5 years. I have inserted it today to illustrate several points. For one thing the price tracks of this chart indicate that some resolution to its base should be forth coming soon. More importantly there are a lot of really big companies with similar looking charts. I'm using this illustration as a backdrop to give you my current thinking on the state of the markets.

Please remember that what follows is not a recommendation. I am simply stating a thesis and deriving certain probabilities based on the facts as I see them at this time. Something could happen tomorrow that would make me rethink this whole process. If such a change comes about I am prepared to turn on a dime and adjust portfolios accordingly. I write this blog to give my clients an insight into how I analyze and invest the money that they have entrusted to me. All others act on these thoughts at their own risk.

My clients are no doubt aware that I have developed a relatively cautious stance on equities since early 2004. My thinking has lately turned more positive. I think that the market is on the verge of a sea change that could finally move us out of this long trading range and has the possibility of giving us significant or above average returns over the next 6-18 months. I think this is a possibility because in the main the broader averages have done nothing since early in 2004. I think they have been digesting the big gains that they achieved in the last 9 months of 2003. Stocks in the main correct in one of two ways, time and price. Most larger stocks have stagnated during this time period. Any corrections that they have seen have tended to be shallow. At the same time corporate earnings have been strong and corporate balance sheets are in good condition. Each day that passes when stocks trend is a day in which their valuations contract.

The economy is in much better shape than most economists would have thought a year ago. As evidence note that the budget deficit is actually contracting versus estimates given at the beginning of the year. There have also been the twin head winds of rising interest rates and rising oil prices. Any indications that oil prices have peaked or that the Federal Reserve is close to finishing its raising of rates would in my opinion be viewed as extremely positive by stocks.

While investors have turned a general thumbs down towards equities, corporations have been buyers of their own stock and the shares of other companies. CNBC recently stated that corporations are buying back shares to the tune of 1.5 Billion dollars a day while corporate mergers and acquisitions have substantially accelerated, the most prominent example of this is Procter & Gamble's pending purchase of Gillette.

Now a caveat: My more positive attitude & approach comes with several cautious remarks. While the market has experienced a fairly substantial rally since early April, we are entering a seasonally weak period for stocks. July, August & September are typically months where the market is apt to underperform. Therefore it would not surprise me to see stocks slightly lower or flat from these levels by early fall. Again this may not happen this year but that is the seasonal pattern. The 2nd thing is that there are events that could derail this thesis. A major terrorist attack or some unexpected glitch in the economy would render these thoughts suspect. Investors are always worried about the consumer (I usually am not, see some of my earlier posts) but any evidence in consumer spending slow down could have a dampening effect on stock prices. An unexpected price move in oil (i.e. oil at 100 dollars a barrel) could pose a substantial risk to economic growth. Finally it is the nature of investors to become more optimistic as stock prices advance. Stocks, particularly smaller capitalized securities have had nice rallies off of their spring lows. This thought process has little to do with this current rally (although I did find it very positive that world stock prices shook off the tragic events in London last week). In the short term as I stated above, it would not surprise me to see stocks experience some sort of pullback. This might occur for no other reason than stocks have experienced some nice short term gains in anticipation of the earnings corporations are going to report during the rest of the month. Investor complacency is also relatively high at the moment and that is often a short term negative. The nature of that pullback (should it occur) will determine how I will structure portfolios for the fall.

One final caveat: If I am correct this will not be a move to higher prices that occurs in one day, week or even a month. This is not a call that says we need to invest everything all in the market today. Indeed I believe that there will be many opportunities to become further invested as stocks trend generally higher but experience normal backing and filling over the coming months.

All that being said, I am more positive on equities than I have been since the spring of 2003. I do not know if this will happen in a short violent upward thrust or whether it will be something that occurs over a period of months but I am in the process of becoming more aggressive for accounts based on their investment parameters and risk profiles.

I will add detail to this post in my mid-year letter to clients. All other interested persons will be able to have a copy of this letter by e-mailing me after August 1st.

*Mr. English and/or clients of Lumen Capital Management, LLC hold or have held positions in the above pictured chart. Although said positions are subject to change at any time. NOTE:You can see a bigger picture of any included charts by placing your cursor over the chart and double clicking on it. If you then wait a few seconds a little box should appear typically in the bottom right hand corner. Clicking on that box should give you a full screen version of the chart.