One Last Thing (Using Banks As An Example)

Many of the same attributes that banks were showing a few months ago are also starting to emerge in areas like Healthcare. They are also starting to show up in the largest stocks which have basically been comitose since the end of 2003. I will try to find some time to highlight why this is so in the coming weeks.

Long certain healthcare stocks and Exchange Traded Funds such as the OEF for client accounts.

Microsoft-Where Do You Want To Go Today.

I am not normally in the habit of discussing investments on this site but I felt the need to review Microsoft (MSFT) not only because it is a well known company but also because I have held it for a very long time for client accounts. Unfortunately MSFT delivered an lousy earnings report this week while at the same time indicating that their spending would increase substantially over the next year. Wall Street lopped 11% off of the company or over $50 billion dollars in market capitalization.

What do I think? What is there to do here?

Owning MSFT over the past 2-3 years has never been about hoping that the company would ever get back to its high growth days. It is simply too big for that now. But the thesis was that after they paid out their one time 10% dividend that you were being paid to wait for a new generation of products namely XBox for gaming and Vista-the new operating system for computers. Early this year the introduction date for Vista was pushed back to the end of this year. The announcement made on Thursday puts 2007 seemingly out of reach as well.

Goldman Sachs published a piece on Thursday which I will summarize:

"The revenue story at MSFT looks good, with a strong new product cycle upcoming in calendar 2007, some upside developing in the growth rate of deferred revenues, and evidence of some early progress on the piracy front. The spending outlook, however, is quite surprising, with management disclosing plans to accelerate spending by roughly $2 billion more than expected in fiscal (June) 2007. This effectively takes the wind out of the sails of investor sentiment at a time when investors were beginning to warm up to the prospects for accelerating earnings momentum expected from the Vista and Office 2007 product launches in January. We should still see about 20% EPS growth in calendar 2007, but the investment spending will be disruptive to EPS growth for the balance of calendar 2006 and leaves investors unresolved on what the benefits might be of this radical acceleration in spending.
MSFT has not yet disclosed much about its plans to build out what we believe is an online platform of hosted services to address the online advertising market (similar to Yahoo! and Google) and its efforts to build an ecosystem of third party developers with Atlas and other developer tools and support services. We believe much of this incremental spending is intended to fund this initiative, although the strategy has not yet been disclosed. There are pieces of the puzzle that we have talked about that shed light on the unfolding strategy to address the online advertising market, which we review below.
Results for the third (March) fiscal quarter were a bit below expectations, with revenues coming in at the low end of expectations at 13% growth and EPS of $0.31 (excluding litigation charge of $0.02) falling a bit below our $0.33 estimate. Mostly, it appears that there has already been an acceleration in sales and marketing spending that is likely to accelerate in the June quarter and throughout fiscal 2007. This is the quarterly conference call when management typically offers guidance for the following fiscal year, but this guidance was very far from expectations, leaving investors quite surprised. Normally, there is some directional commentary on the January conference call to prepare investors for what plans may be, perhaps this has been a late decision to step on the accelerator and ramp-up investment spending. There were a number of areas of investment noted including Xbox, support for greater sales headcount in the small business market, product launch costs etc, but the areas that we believe are most strategic and likely to receive the majority of this incremental spending will be in the online market. It may have been difficult to address this specifically on the call given that the strategy has not yet been fully disclosed, but management did respond that they expected to devote substantial time to this at the upcoming July 27th analyst meeting. We are revising our estimates for fiscal 2007 and fiscal 2008 downwards to reflect the announced increases in spending by the company. FY2007 is being revised downwards by $0.15 to $1.42 and FY2008 is being revised downward by $0.14 to $1.64.
From an investor sentiment perspective, this is clearly a discouraging development, taking away from the anticipated excitement over the strong upcoming new product cycles in calendar 2007. The value that this investment might generate can probably be better understood at the July analyst meeting when the online initiative is more fully articulated. In any event, the potential for near term gratification from the upcoming new products will need to be traded off for lowered earnings expectations and the uncertain value to be created by this sizable investment in positioning the company in the online advertising market."*

MSFT seems to be caught in no man's land. To slow growing to be a growth stock. Not cheap enough yet to be a value play. Its earnings and prospects probably amount to limited downside at this juncture. Yet there is also no catalyst for much upside unless some new information is forth coming from the company. It seems to be unable to execute as technology shifts away from the PC and becomes more net centric. It is likely dead money and dead money is the worst kind of money on Wall Street.

Thus I have made the reluctant decision to start to move away from this name. That means that in smaller accounts I will ultimately be selling my position and for larger and more longer term oriented accounts I will either lessen their exposure to the name or employ strategies that will hopefully making owning this name less painful. That said nobody has ever made a dime panicking out of a stock and friday's action certainly qualified as such. There may be some spillover in this regard early next week and there is possibly another dollar or so downside in the name. However, I believe that there will be a time and place to start lightening up on this name and that is what I will look to do going forward. Ultimately it will be a source of funds for clients while taking into account their various portfolio profiles.

Possibly at some point in the future this will be an attractive security once again. Perhaps some new information will be forthcoming from the company that lets us change our minds regarding its prospects. Today is not that day. Time to move reluctantly on.

*Sherlund, Rick. Goldman Sachs Investment Research. April 28, 2006.

Long MSFT in various client account. The above posting states what my opinion is regarding MSFT and what I plan for it regarding my own clients. It should not be construed as a blanket investment opinion or any form of an investment recommendation. Please note that my opinion could change with further disclosures from the company which may or may not be commented on in this blog. Please do your own investment research or talk with your own investment advisor before you follow anybody elses investment thoughts.

Where is the Love?

Microsoft (MSFT) missed its earning's targets last night and provided disappointing guidance for the rest of this year. As such, the stock looks to be down a couple of dollars prior to today's market open. To me this looks like panic selling mixed with some end of the month window dressing. I'm unlikely to do anything with this stock today for clients, namely because in general I'm not a fan of panic buying or selling for investment accounts. I am going to do a more thorough analysis on the company over the weekend and I will try to post my thoughts about MSFT as an investment over the weekend.

Long MSFT in certain investment accounts.

Revisiting the Banks (Again)

So yesterday the Chairman of the Federal Reserve said openly what others had been hinting at privately for the past month, namely that an end or at least a pause could occur soon in the Fed's seemingly relentless campaign to raise interest rates.

Guess what? What I've been saying for sometime about banks finally dawned on people today. Which is that if we are done with the rate raising thing, banks can make a lot of money the way the yield curve is currently structured. If so, then banks and other financial's are cheap and should be bought. We first talked about the banks back at the end of January after they had experienced a mini meltdown and again most recently here: http://lumencapital.blogspot.com/2006/04/shhhhdont-tell-anybody-about-banks.html.

Since that decline these names are on a roll and have just gone parabolic in the past couple of days. Citigroup (C) is up close to 10% since early January. In the same time frame, Wells Fargo (WFC) is up close to 11%, JP Morgan (JPM), a turnaround idea as well as a play on banking, is up over 15%. The Spyder ETF (XLF) is up around 9% (you usually sacrifice some of the upside in the individual names for less volatility with the ETFs).

Now for the really interesting part--these stocks are probably not done going up. In fact we should hope for some pullback here in order to add to positions. (Note: The following pertains to my clients only. If you are not a client of my firm please do not construe what is written here as investment advice for you as I do not know your own individual goals, risk tolerance or investment objectives.)


Why do I think this?

Finanicals are under owned by institutional investors and they still pay pretty decent dividends even at these prices. These institutions are buying back huge chunks of their own stock, have been for a couple of years, although most investors have paid scant attention to this. Numbers-Wall Street slang for earnings-are going to be revised higher over the course of this year so they will appear still cheap even at these higher prices.

But the most important reason to own these is the change in investor psychology. Look these names have been stealthily trending up for a couple of months. Today the Fed told you that it was OK to own these stocks and everybody wanted to be long these securities. In the world that is populated by hedge funds, momentum and day traders these names lit up trading screens today like tracers over Baghdad during the Gulf Wars. These folks want to be buyers on the day the whole world wants the same thing. That door was opened wide today and traders will likely reach for these names with any weakness going forward. For them the psychological trend has reversed from negative to positive.

I will keep what I own and hopefully buy some more at the appropriate time.

*Accounts of Lumen Capital Management may own individual securities or ETFs in the above mentioned sectors at this time. Please note that security positions can and do change from time to time. Purchases & sales of individual securities or ETFs as well as client portfolio holdings varies among the clients of our firm due to their individual goals and risk parameters. Nothing in this current post or in past or subsequent postings should be construed as advice or a recommendation to buy or sell any particular security. Please consult your investment advisor as to the suitability of above stated securities for your own investment portfolio.

DJIA- Food For Thought.

Barron's {The weekly stock magazine published by Dow Jones*} highlighted this weekend the stocks that hurt and helped the Dow Jones Industrial Average {the Dow}as it has made its roundtrip from the high's it last garned in 2000. I have included a monthly chart of the Dow. You can click on it to enlarge it.

First what Barron's didn't say in the article. Which is that from its absolute high in 2000 to its absolute low in 2002, the Dow lost almost 40% of its value. Also it has not yet recovered that absolute high last seen in January of 2000.

Now to what they discussed.

-3 names are different from the 2000 list.
-Only 9 current members of the Dow are higher than where they were back then. Among this list are the heaviest of industrial names: Boeing (BA), United Technologies (UTX), 3M (MMM), and Caterpillar (CAT) where the biggest winners up 20% or more. All are heavy industrial names.
-The growth components of this index the Microsoft's (MSFT)& Intel's (INTC)and Home Depot's (HD) have significantly underperformed during this time.

This is likely the exact opposite of what most investors would have thought would have occurred during this time.

Here is a yahoo link for those interested in what makes up the current Dow components. http://finance.yahoo.com/q/cp?s=^dji


Accounts of Lumen Capital Management may own individual securities or ETFs in the above mentioned sectors or securities at this time. Please note that security positions can and do change from time to time. Purchases and sales of individual securities or ETFs as well as client portfolio holdings varies among the clientf of our firm due to their individual goals and risk parameters. Nothing in this current post or in past or subsequent postings should be construed as advice or a recomendation to buy or sell any particular security. Please consult your investment advisor as to the suitability of above stated securities for your own investment portfolio.

*Barron's Magazine April 24, 2006. Page M-6

Investment Plans Vs. Financial Plans

I want to start this investment series by making the important distinction that investment planning is not the same as financial planning. I'm going to use some very basic definitions here simply to seperate investment plans versus financial plans. This is simply to draw a distinction between the two. You can probably find better definitions elsewhere but mine will serve for the basis of my presentation. As we shall see going forward, I will mostly deal with investment planning.

First let's define financial planning which is the process of understanding & setting long term financial goals. This can involve the investment process but is largely a comprehensive review of many financial areas such as tax planning, asset allocation, retirement planning, and estate planning. Accountants, attorneys, insurance companies and financial planners are the professionals that are most associated with this process. In the interest of space I will simply call all of the professionals in this industry financial planners. The role of a financial planner is often to deal with various aspects of a client's financial picture. These can include but are not limited to a client's tax situation, estate planning concerns, funding future obligations such as college or retirement, insurance issues both personal and business, and perhaps overall lifestyle or investment goals. This type of planning is important for many individuals with higher net worth's, particularly as they progress through life and acquire assets.

Investment planning and the investment process is the development of an investment plan based on a client's investment objectives. Such a plan should take into account two extremely important factors:

1. How much risk a client is willing to take in a portfolio.

2. What is the long term growth rate that the client seeks on the assets.

Understanding these two variables enables the investment manager to develop an appropriate investment portfolio while at the same time helping the client to realistically gage appropriate investment results. Once you can gage these variables you can put in place an investment "playbook" for a client.

It has been my experience that in the people in the investment business are usually either very good at financial planning or the investment process but not both.

Peter Lynch for example knew stocks. You did not see him discussing the merits of various types of insurance.

Now most financial planners I'm sure will argue that the asset allocation process is the investment process and they are just as sophisticated at this as those who basically just do investments. I'm sure that there are many who can do an excellent job at both parts of the investment process (financial and investment process). Unfortunately many planners when they finally get to the investment process usually use a fire and forget process that often does not take into account for example where we are in the investment cycle and usually means investing money in the asset classes that are currently "hot". If you really want to witness this process in full then take a look at all the money that is flowing into foreign stocks this year. Now foreign equities may keep up their torrid pace for a while. I don't know when money shifts away from these into cheaper asset classes. But it is likely that when these assets inevitably correct that financial planners/ asset allocators are not going to be the first ones to recognize this.

Please understand that I am not trying to denigrate financial planners as I believe that many people need their services. But I think that each side of the profession has its own areas of expertise. You wouldn't want a heart surgeon taking out your appendix unless absolutely necessary in an emergency because they are too different disciplines. It is the same with your investments.

Next we will start on the investment plan by discussing risk.

A Monster Move!

Just a monster move in stocks today! The S&P 500 did in one day what it took about 6 months to do last year. All because somebody at the Federal Reserve intimated that they may be close to being done raising interest rates. Well the market has hoped that for about 10 months! The action today reminds me of what it was like at the end of 1994 when the Fed signaled that it was done raising rates. Maybe too soon for that kind of market pin action but a positive tailwind overall for stocks if we are close to being done. If the end of the tightening cycle is near then financial stocks should do well and they still pay great dividends.

Healthcare and drug stocks could be close to finding a bottom soon as well. I really like financials if rates are close to peaking. We will need to do some work in the medical world to figure out if these companies are done losing price. If so there are some potential great values in both individual names and ETFs setting up in this sector.

Accounts of Lumen Capital Management may own individual securities or ETFs in the above mentioned sectors at this time. Please note that security positions can and do change from time to time. Purchases and sales of individual securities or ETFs as well as client portfolio holdings varies among the clientf of our firm due to their individual goals and risk parameters. Nothing in this current post or in past or subsequent postings should be construed as advice or a recomendation to buy or sell any particular security. Please consult your investment advisor as to the suitability of above stated securities for your own investment portfolio.

An Introduction & Welcome!

Solas

Hello and Welcome!

One of my promises at the beginning of the year was to begin an investment series that covered a multitude of topics. Yet as you all can see it is almost May with so far nothing written. It has not been for want of trying but rather timing! I have a lot that I want to cover and not enough time to put it all into literate thought. As an experiment I am going to try for a time to put out parts of this series in serial form on the internet. A blog so far seems to me to be the best opportunity to focus on what I want to write in a time efficient and hopefully interesting manner. However, please keep in mind that so far this is a hit or miss experiment. I don't yet know if this is going to work, how it's going to look or even if I am going to be satisfied with the end product. As a work in progress, especially at its inception, this may be a hit or miss endeavor. I don't know yet how to import charts or pictures or do many of the things that make this look pretty or more professional. Nor am I going to take time away from my business to become an expert blogger. I do over time hope to make this better. I welcome your comments and suggestions.

What this is:

A learning experience.

A way for me on occasion to make a point.

A way for me on occasion to discuss markets and investing.

A place for me on occasion to discuss the vagaries of life and perhaps editorialize.

A place to discuss the investment process.

What this is not:

A forum to tout any form of individual investments. (Particularly individual stocks).

A place for me to give individual investment advice. (Call me or others for this).

A theatre for me to tell you how wonderful I am.

An environment for me to make stock valuation predictions. i.e. "XYZ is worth 50 dollars!"

And anything else that I might think of going forward.

Well with the introduction out of the way, let's begin.

Looking forward to hearing back from you soon.

Chris

I Have An Investment Plan Do You? {Introduction}

This cartoon is not an investment plan! Neither is relying on the lottery or a windfall from relatives at some point to fund your retirement, your children's college or that vacation home you've always dreamed about.

If tomorrow I had to turn my personal money over to somebody else to invest I would after an initial vetting process arrange to meet a select few advisors. I'm assuming that I would sit through a presentation of their investment style and/or investment process. Then I would then ask them one question. "What is your plan for managing my money." By this I would mean what are your plans for my assets in both good times and bad? Do you have bull market & bear market strategies? How will you protect my money? I think that most advisors once they made it past the asset allocation process would be hard pressed to answer any of the three questions posed above. Much is made in the financial media about asset allocation. It is an important part of the investment process but it is the beginning not the end of the process.

I'm going to begin a series on what I've learned in almost 20 years investing money for myself and for clients. My hope is to do one piece of this each month. In these articles I will lay out how I formulate the investment process that I use at Lumen Capital Management and then how I translate that process to a portfolio investment plan. This point of having an investment plan I believe is the most important weapon that I can bring to the table in the war for investment survival. Because I have an investment plan for all of my clients which is based on what I know of their investment goals, what I know of how much risk they are willing to take at any given point and what I know of where they are at a certain point in their lives.

If you are not one of my clients do you have a such plan?

First Quarter 2006 Report Card.

These numbers are approximates as I do not know the income components for these indicies.

S&P 500 4.13%
Russell 1000 3.09%
NASDAQ 100 3.73%
S&P 100 2.98%
Russell Midcap 7.61%

Blended Composite of above. 4.30%

IEF* -2.76%



*I Shares Lehman 7-10 treasury ETF. I currently use this as a proxy to track the fixed income markets. This number currently reflexts the price value of this etf and does not include its income component.

Information taken from sources deemed to be reliable but cannot be guaranteed.

Shhhh....Don't Tell Anybody About The Banks

We alerted you on January 28th that we thought that banks, financial companies and financial ETFs might be places to consider investing money. Quietly many of these have staged nice little rallies over the last couple of months. Many of these are currently short term overbought but I still believe that financials are compelling investment considerations on any price consolidation or price retracement. Remember that many of these pay nice dividends as well.

I will be traveling on business thursday through the weekend so there will be nothing posted here until sometime next week.

*Accounts of Lumen Capital Management may own individual securities or ETFs in the above mentioned sectors at this time. Please note that security positions can and do change from time to time. Purchases & sales of individual securities or ETFs as well as client portfolio holdings varies among the clients of our firm due to their individual goals and risk parameters. Nothing in this current post or in past or subsequent postings should be construed as advice or a recommendation to buy or sell any particular security. Please consult your investment advisor as to the suitability of above stated securities for your own investment portfolio.

Rally? Where?

There has been much talk in the past few days about the S&P 500 (SPX here illustrated with the S&P Spyders SPY) having its best 1st Quarter in 5 years. Oh Boo On That Talk! The SPX may have had its best "first 11 days in 5 years" but the rest of the time the market more or less churned in place. What do I see when I look at this?

1. A market that did what markets often do, which is to have a fairly substantial move in a short period of time. From the end of the year (horizontal blue line) till January 11, the SPX went up almost 4 %. If you annualize that kind of advance the market would be up almost 90% this year. That's not going to happen!

2. Since January 11 the SPX has returned approximately .40%. That's 4/10s of 1% in about 3 trading months folks. That's 1.6% annualized. Stocks have essentially been basing and largely trendless in their direction. If we look a little further back, the SPX is also only up about 2% since the middle of December. This is because stocks experienced a moderate decline in the last 10 trading days of 2005, probably due to end of the year trading issues which the market largely made up at the beginning of the year.

3. There has been a lot of churning among sectors and industry groups but no real substantial progress in the past 4 months for the overall markets.

I think that you can interpret this data in either a postive (Bullish) or negative (Bearish) manner.

4. Conclusions To Be Made- Bearish: A negative way to look at this is that the markets are in a topping phase with the smart money selling into most rallies and switching to more fixed income type securities because interest yields have become much more competitive in the past 2 months. This bearish view would also take note of the fact that the Federal Reserve has given no indication that it is done raising interest rates. It could be further bolstered by political uncertainty upcoming in this year's elections and by the statistical fact that May-October tend to be a weaker period for the equity markets.

5. Conclusions To Be Made-Bullish: The bulls could point to a market that in the past 6 months has had a lot thrown at it while continuing to press higher. This market has absorbed Katrina and higher gas prices. The overall economy continues to expand and corporations' balance sheets are in pretty good shape. Some of the geopolitical concerns (Iran for one) have pulled back a bit this year. A break or two in Iraq could really set the table for a good run later in the year. The Fed's actions in raising interest rates have only had the effect of harnessing a bull that might under other circumstances be ready to ramp.

6. My Take: I don't know which way the market is going to lean and I don't really think anybody else does either. The indicators that I follow show that stocks are in the aggregate overbought but not in areas that signal impending danger (i.e a crash of some sort). Absent some unlooked for event I think that it is best to stay the present course for portfolios. That can generally be defined as searching for pockets of undervaluation in attractive market sectors and keeping a bit more cash than normal in portfolios as a hedge. It also means constant monitoring of what we own for clients for hints that either the bulls or bears are going to hold sway in the coming months.