May Scorecard

For the month of May, 2006. (Results do not include dividends)

Dow Jones Industrials -1.8%
S&P 500 -3.1%
NASDAQ Composite -6.2%
Russell 2000 -5.7%

Source: The Street.com

Why I'm Not A Fan.

Minyanville is out with a report from Thomson which I guess has used data from Dalbar Inc. It states "that investors in stock mutual funds over the 20-year period ended 2005 have averaged annualized gains of 3.9% compared with 11.9% for the S&P 500 Index."

"The lost opportunity means investors missed out on nearly 80% of the stock market's return for the period due to poor timing decisions, according to a new study by investment research firm Dalbar Inc."

"Meanwhile the average investor in fixed-income funds has earned only 1.8% annually compared with a 9.7% gain for the Lehman Aggregate Index which measures the US bond market, Dalbar said."*

I've seen Dalbar's research in the past and this is pretty consistent with what they have always said. I think this might be more an indictment on individual investors as opposed to the mutual funds themselves and it is part of the investment theme we are discussing this year. But I also think it shows that mutual funds themselves may not be the best way to invest assets in the markets anymore.

*Source: Minyanville News 1:37:21 PM {EST} published on 05/24/06.

India & Newsweek Revisited

Well I was a little off on the prediction in terms of time but the India Fund has now lost close to 30% since it put in a high just 8 days ago! It's also now down 11 % since we flagged this all the way back in March. My guess is that a lot of international funds are seeing reversals of all that money that flowed into their coffers since the beginning of the year. As for IFN it's likely due for a bounce soon but this market probably needs to cool off and any short term advances are likely to be met with renewed selling.


Certain clients of Lumen Capital Management, may currently either own this stock or be short it. Certain clients may also be buyers of this security in the future although positions can change at any time. Please note that we consider this a very aggressive investment & therefore not suitable for all investment accounts. Please note that positions may change at any time and this by no means should be construed as a recommendation to buy or sell this security.

Not A Crash But Something.

The tone of the market was negative today as the advance/decline line finished lower, almost every sector fell and volume was above average which may be an indicator of increased investor anxiety were mixed into the close. You have to go back to at least 2004 and in many cases earlier to find instances where stocks have experienced such a "woosh" down in such a short period of time. In fact the NASDAQ has now traded down for the past 8 days. You have to go back 12 years to find a similar occurance! We've yet to see the "crash" anecdotes or the 2000-2003 bear market comparisons. My guess is that they show up this weekend, maybe in something like Barron's.

Still the market is trying to tell us something here. I've my own ideas on that subject which I will start to cover next week. (I'm off on business tomorrow afternoon and will not have a chance to post again until the first of the week). One of the things as I've alluded to is that I think it is possible that a change of leadership is in the offing for stocks. We'll get a better clue about that when stocks finally rally (and they will go up again sometime I promise).

In the short term future economic data may be interpreted to mean more rate hikes and weak data to mean an economic slowdown is on the way. However, we should be open to the possibility that any continuation of the recent commodity decline will result in an end to the string of recent rate hikes.

In the short run I think that the major averages are very close to a tradable bottom and will work under that assumption for next week.

Taking The Market's Temperature. (Where We've Been)

It is no secret that the market has had a rough go of it for the past week. Investors hoping for further clarity from the Federal Reserve as to when it might be done raising interest rates were disappointed last Wednesday with the signals coming from that meeting. Further economic reports such as today's consumer price index (which seemed to show inflation a bigger problem than the markets had previously thought) did nothing to soothe investor's interest rate jitters. "The fears we have are coming to the surface," says Steven Goldman, market strategist at institutional brokerage firm Weeden & Co. Investors are not going to wait for inflation to be a huge problem but are responding while it is still a relatively small one," he said. Investors may be using the latest scare of inflation in order to dump stocks yet from my perch I think what we have really been seeing are the symptoms of a market that had grown tired and simply needed to sell off.

As you know I think that looking at the S&P 500 is the best place to take the overall temperature of the market. I have included two charts of the S&P Spyder* (SPY) which I often use as a proxy for illustration purposes for the actual index. (You can double click on each chart to enlarge them.) The chart at the top is a longer term weekly view of the SPY going back to the bear market bottom that stocks put in between July, 2002 and the spring of 2003. From that period till today we can present several points. The first is that the trend line from those bear market lows is still intact. Even with this weeks retracement we are still longer term biased to the upside. The second thing of note is that even though the SPY has increased well over 50% since the spring of 2003, the majority of that move came in the last nine months of that same year. Since early March, 2004 the SPY has returned only about 9%. In other words the market has basically meandered albeit with an upwards bias for over 2 years, returning something like 4 1/2% on an annualized basis during that time.

The second chart is an enlarged and daily view of the markets from the period starting roughly a year ago to the present. This is a market that was deeply oversold early last fall and experienced a healthy rally of over 13% from its trough to its peak. Yet early in the spring this market was showing all of the characteristics of being tired. I commented on April 1 that when you strip away the first 11 trading days of this year that the SPY had largely done nothing year to date. http://lumencapital.blogspot.com/2006/04/rally-where.html. In addition the market's leadership had increasingly narrowed with commodities and certain industrials being the few areas to show any substantial appreciation during that time. As of today, if you strip out those first 11 days of 2006 the market is negative for the year and is now trading at levels also seen in mid December of last year. In fact many components of not only the S&P 500 but also other indices such as the NASDAQ 100 have basically gone nowhere during that time. As mentioned above what has held up the SPY this year has been the almost parabolic rise in commodities and commodity related stocks. Outside of this index there have been large moves in foreign stocks and in smaller cap names. See these posts to review: http://lumencapital.blogspot.com/2006/03/magazine-cover-curse.html & http://lumencapital.blogspot.com/2006/03/thousands-as-in-dollars-are-sailing.html.

From where I sit I think a large portion of what has carried this market in 2006 is being unwound. I think that it is possible that new leadership is going to emerge in the market. That possible change of leadership spells opportunity for investors and yet I also want to inject a note of caution as we head into the summer months. We'll discuss this in detail next week.

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 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.

Why We Don't Chase Parabolic Stock Moves-Part 1

Having some posting problems today. In part 2 is a chart of the largest point losers in the market today. Most are commodity related. Many have lost a similar amount on a dollar and percentage basis since Thursday of last week. Commodity and commodity related stocks have been the media and investment darlings since the beginning of the year. There is an investment case to be made for these kind of companies. But chasing parabolic moves often ends badly.
You can double-click on the chart below to enlarge it.

Why We Don't Chase Parabolic Stock Moves-Part 2

What IF There Are A Lot More Of Us (Fun With Census Data).

With President Bush set to give a major speech on immigration on Monday I thought we should take a quick look at some census trends & data to see what themes might arise out of this debate.

To start the US Census Bureau says that there are roughly 300 million Americans. I have not been able to find a number that states how many illegal immigrants this includes but I will assume that it includes a large percentage of the 11 million or so that are deemed to be in the country at this time. When you try to look at numbers of illegals in this country you see estimates all over the map. I've seen as low as 5 million and as high as 20 million.

Based on anecdotal evidence here in Chicago I'm reasonably confident that 5 million is way too low and 20 million may not be high enough. We'll cover this in more detail in later posts but for now lets just say for the sake of argument that the real population of this country is between 305-311 million people. In otherwords we are undercounting right now anywhere between 5 and 11 million people that supposedly don't exist but in the real world work and spend money and who have to eat and live somewhere.

Now what should we start to think about?
1) All our assumptions about retail spending may be wrong. That is retail store analysis is done based on an economy that is severely undercounting its population. That means that the reason for the strong retail economy could be because there are more people than we think spending money that we don't know about. Most of this would also be cash something harder to trace and analyze.
2) It would explain the paradox of how for example a city like Chicago supposedly has lost population in the past 10 years but is (along with this whole region) experiencing a building boom unlike any that I have seen in the almost 20 years that I have lived here.

This is one of those issues that irregardless of one's feelings it is just better to follow the money. Doing that can tell you what is ultimately going to happen in spite of the current political rhetoric. Let's say there are 15 million illegal immigrants here. They are mostly young and mostly doing menial day labor and service industry type jobs which most Americans do not want to do. The US needs younger people in order to make up the monetary deficit that is being created by social security and has a entry level employee vacuum. Even at minimum wage a day laborer earns more in a day than he can in a week in many places like Mexico. Perfect Adam Smith as supply is meeting demand and this will continue until the demand side of the equation goes away.

They will continue to come and we will continue to employ them. We are not going to deport what would amount to the equivalent population of some small countries. Instead we will have to figure out how to assimilate them into proud American citizens (which by the way many would clearly like to be). As I mentioned above I will have more to say on the investment themes regarding immigration. However, each of these themes is best left to future posts where we can explore them in more detail.

Large Cap Stock Break Out

There was a break out in the OEX stocks today. The OEX is comprised of the 100 largest stocks in the S&P 500 by market capitalization. The OEX can be purchased through an ETF with the symbol OEF. Here is a profile link to the OEF's current statistics & components. http://finance.yahoo.com/q/hl?s=OEF

I find it interesting that currently you can get over a 10% exposure to energy (one of the current go to areas for momentum money managers) by simply purchasing this index. These stocks have been largely left for dead since the end of 2003. As I briefly highlighted earlier I like these kinds of stocks right now because they are statistically much cheaper than much of the rest of the market.

Their price action today could foretell some decent price appreciation in the months ahead.

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 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.

Smart Money?

Barron's "Big Money Poll" (a roundtable of large portfolio & mutual fund investment managers) weighed in this weekend with their Spring prognostications. By and large the pollsters were bullish on interest rates, they think the Dow Jones Industrial Average will see 12,000 by year end and think the Federal Reserve keeps hiking interest rates for awhile. In the same article Barrons also published "Big Moneys' stock performance on their cumulative picks and the the cumulative performance on the stocks they panned over time. For brevity I have taken the liberty to average each of these periods. That is Barron's tracks their performance in each year from 2002 until present on a 6 month and 12 month basis. The Poll has been conducted twice a year (Spring & Fall). Averaging each period the stock picks that they liked returned 6 months out 3.15% and 11.22% over the average of a cumulative year. The yearly average performance numbers were not too bad except when stacked up against the stocks they panned-those they did not like and specifically thought at the time of the polls were overvalued or should underperform the market during these respective periods. Those they turned a thumb's down returned 6.5% over 6 months and 16.58% over a year on average. Maybe not such smart money after all!

Source Barron's Magazine: May 1, 2006; Big Money Poll. Page 28. Data compiled by CarpenterAnalytix.com (I averaged the 6 and 12 month polls for the sake of brevity the individual breakdown of each period can be found in the above cited article).

Bill Miller on Large Cap Stocks.

As evidenced by the most recent quarterly returns, the largest capitalized companies continue to lag their more smallish and more exotic brethren. In today's momentum based world emerging markets and small to mid capitalizations continue to dominate. The legendary Portfolio Manager at Legg Mason, Mr. Bill Miller recently issued some thoughts on the subject.

Miller has only seen net redemptions in his remarkably successful mutual fund on three occasions. "The first was in early 2000, at the height of the dot-com boom. The second was in early 2002 in the depths of the Bear Market. The third is now."

Please read this important piece. I find the following paragraph to be perhaps the most important part of his letter which is why I am reprinting it here.

People want to buy today what they should have bought 5 or 6 years ago; call it the 5-year psychological cycle. Today people want commodities, emerging market, non-US assets, and small and mid-cap stocks. Those were all cheap 5 years ago and had you bought them then you would be sitting on enormous gains. But 5 or 6 years ago, everyone wanted tech and Internet and telecom stocks, and venture capital and US mega caps. The time to buy them was in 1994 or 1995, when they were cheap. But in 1994 or 1995, people wanted banks and small and midcaps, which should have been bought in 1990, and well, you get the picture. In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is long-term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years."*

What areas of the market are unloved today (perhaps not 5 years ago but at least in the past year or so) Financials, various sectors of health care, and large cap equities.

*Legg Mason Value Trust: 1Q 06 Bill Miller Commentary