East Coast Hurricane Redux

The news & financial media is starting to focus on the devistating consequences of a major northeast hurricane. See CBS news' take on it here. http://www.cbsnews.com/stories/2006/07/30/eveningnews/main1847562.shtml. Our readers know we started focusing on this last spring. See our Feb 11th. Article on NBBT. The Long Island Express.

Gone Fishin

I will be out and about during much of the next two weeks some of which is vacation and some of which is business. Expect posting to be light during this time.

Mid-Year Letter To Our Clients.

Enclosed is a copy of our mid-year update to clients of Lumen Capital Management, LLC.
The stock market as measured by the S&P 500 was up slightly more than 2% during the 1st half of the year. Other major indices turned in similar performances. However, the more growth oriented NASDAQ composite was actually down over 1% during this time. Due in part to inflation, rising interest rates, and geopolitical concerns - the market has recently struggled. As of this writing, the S&P 500 (shown above represented by its ETF proxy) is down almost 7.0% since its May highs and the NASDAQ has similarly lost about 14%.
Our interpretation of these events is that stocks are still locked into trading ranges that were initially set at the end of 2003 and in most cases adjusted higher at the beginning of 2005. Within these ranges stocks have followed a fairly consistent cyclical pattern of weakness in the spring-early fall period {corresponding roughly to a period between early March and mid-September} followed by a stronger equity environment over the next 5 months. During this weaker period, peak to trough declines in the S&P 500 approximated -8.5% in 2004, -7% and -5% during two declines last year and so far in 2006 the above mentioned -7%. Similarly the market has experienced almost all of its gains basically during the last 60 trading days of each year. In 2004 the S&P 500 advanced almost 11% in that year’s last two months. Similarly in the same period of 2005 stocks advanced slightly over 10%.
If this pattern holds true to form then we can expect a market that in all likelihood should be moribund until early fall. Stocks are caught in a tug of war scenario where each piece of good news is offset by some market negative. Thus rising interest rates over the past two years have cancelled out the excellent shape of corporate balance sheets. The higher price of oil and the fears of a slowing consumer have trumped accelerated corporate earnings growth. The war in Iraq continues to fester and geopolitical concerns continuously weigh on an economy that has posted above trend line GDP growth.
While earnings reports for the 2nd quarter are not final, Corporate America is on track to produce double digit earnings gains. Companies have announced large buybacks of their own shares, well over $100 billion dollars worth which is currently an increase of 23% over last year. But Wall Street currently looks at this witch’s brew of higher interest rates finally braking the economy, some less than stellar earnings reports at high profile technology firms and the mounting tensions in the Mid-East & on the Korean peninsula and has factored in some period of slowdown ranging between a recession and a depression.
We are of the view that while the economy is indeed slowing down, it is headed back to something closer to trend line economic growth in the 2.5-3% area. This would likely mean that inflation should be contained. Indeed inflationary expectations may be subsiding already as gold copper and other major metals are well off of their recent highs. We also think that odds favor a scenario where the Federal Reserve will signal in August that it is done raising interest rates. Further signs of economic weakness could mean that interest rates might actually start to decline by the end of the year.
Stocks behaved in a similar pattern in the 25 months between December 1992 and late January of 1995. Like now the monetary environment was not seen as favorable during most of that period and stocks were consolidating large gains which occurred after the 1st Gulf War. At the end of 1994 the Federal Reserve indicated that its tighter period of monetary policy was finished and stocks began the great bull market of the 1990’s. Coincidentally, stocks are now trading at a cheaper Price to Earnings (P/E) ratio than they were in 1995 and the current forward P/E has compressed to about 14x next years earnings.* While we do not envision a reoccurrence of that era, we do think that an end to current monetary tightening plus sustained but moderate economic growth could equal more normal equity returns later this year and in 2007.
In such an environment some areas we favor are securities in financial sectors and in the medical sectors of the markets. As well we would note that the largest companies by market capitalization are statistically as cheap as in that mid 90’s period and could begin to outperform the market. We also think that certain technology names may warrant a second more serious look if they continue their present declines. Many of these securities are pricing in some of the direst economic circumstances they have seen in many years. While technology may not be the growth driver it was in the 1990’s there are many companies in these spaces that are becoming statistically too cheap to ignore. For most of our investors we believe at the current time the best way to participate in these areas are through exchange traded funds. We would also note that for our investors who purchase fixed income securities, if the Federal Reserve is indeed close to being done raising rates that we will be looking to become more aggressive in purchasing these securities for your accounts as their value increases in a benign to falling interest rate environment.

*Source: “Ticker Sense”, Birinyi & Associates, Birinyi, Lazlo June 134 & 14, 2006.

Bastille Day!

Happy Bastille Day to all our friends at the Hotel California & in Divisions 1 & 6!

Ike's Baby Turns 50.

In July of 1919 a young Army Lt. Col. named Dwight D. Eisenhower joined the first automotive transcontinental convoy that traveled from Washington, DC to San Francisco, California. One of Eisenhower's responsibilities was to gauge the feasibility of transporting military troops and supplies cross-country. The trip was hardly a success and instead put the spotlight on the poor condition of the nation's roads. The 81-vehicle convoy completed the journey in 62 days at an average speed of 6 miles per hour over 3,251 miles of mostly unpaved roads.

In 1945 this same man was Supreme Commander Allied Forces Europe and in the the spring of that year as his British and American troops crossed the Rhine river and broke into the heart of Germany they used its famed Autobahn system of limited access roads to fan across the country at a much higher rate of speed than they had been able to achieve before.

In 1955 Eisenhower, then President, using these two experiences as his basis, drafted and signed the Federal-Aid Highway Act of 1956 on June 29th, 1956. Under this act, the federal government agreed to finance 90 percent of the construction costs of the new interstate system, largely paid for by gas taxes. The state governments were responsible for the remaining 10 percent of the starting cost and the system's upkeep expenditures.

Ike's baby is now 50 although the seeds of its genesis are much older. The Eisenhower interestate highway system is perhaps one of the best examples of postive government investment spending as the returns on the original dollars invested to build the highways dwarf the monies spent on its behalf. Not only has this system given Americans greater access to the open road it has also brought major societal changes to our country. I'll let others chronicle that part. Below are some fun facts that perhaps you didn't know about our interstate system.

Interstates by the numbers
-- Total miles: 46,837
-- Interstates in California: 25
-- Miles in California: 2,456
-- Longest: I-90, Seattle to Boston. 3,021 miles
-- Shortest: I-110, El Paso. .92 of a mile
-- State with most miles: Texas, 3,233
-- Highest point: I-70, Eisenhower Memorial Tunnel, Colorado. 11,158 feet
-- Lowest point: I-8, El Centro (Imperial County), 52 feet below sea level
-- Bridges: 56,512
-- Tunnels: 82 (104 bores)
-- Interchanges: 14,750
Sources: Federal Highway Administration, Caltrans

One other fun fact. All East-West highways end in even numbers, North-South roads end in odd numbers and for what it's worth nobody ever wrote on ode to the interstates that compares to "Route 66"

Happy 4th of July.

Happy 4th everybody. This was sent to me over the weekend a couple of times. This is actually a reprint of a radio address given 5-10 years ago by a DJ whose name escapes me. I remember hearing it before and thinking it is a nice holiday thought for this most American of days. If nothing else it is good to think back on what freedom cost the signers of the Declaration of Independence.

"Have you ever wondered what happened to the 56 men who signed the Declaration of Independence?
Five signers were captured by the British as traitors, and tortured before they died.
Twelve had their homes ransacked and burned. "

"Two lost their sons serving in the Revolutionary Army; another had two sons captured.
Nine of the 56 fought and died from wounds or hardships of the Revolutionary War.
They signed and they pledged their lives, their fortunes, and their sacred honor.
What kind of men were they?
Twenty-four were lawyers and jurists. Eleven were merchants, nine were farmers and large plantation owners: men of means, well educated. But they signed the Declaration of Independence knowing full well that the penalty would be death if they were captured. "

"Carter Braxton of Virginia, a wealthy planter and trader saw his ships swept from the seas by the British Navy. He sold his home and properties to pay his debts and died in rags.
Thomas McKeam was so hounded by the British that he was forced to move his family almost constantly. He served in the Congress without pay, and his family was kept in hiding. His possessions were taken from him, and poverty was his reward.
Vandals or soldiers looted the properties of Dillery Hall, Clymer, Walton, Gwinett, Heyward, Ruttledge, and Middleton. At the battle of Yorktown, Thomas Nelson, Jr. noted that the British General Cornwallis had taken over the Nelson home for his headquarters. He quietly urged General George Washington to open fire. The home was destroyed, and Nelson died bankrupt. "

"Francis Lewis had his home and properties destroyed. The enemy jailed his wife, and she died within a few months. John Hart was driven from his wife's bedside as she was dying. Their 13 children fled for their lives. His fields and his gristmill were laid to waste. For more than a year he lived in forests and caves, returning to find his wife dead and his children vanished. A few weeks later he died from exhaustion and a broken heart. Norris and Livingston suffered similar fates.
Such were the stories and sacrifices of the American Revolution. These were not wild-eyed, rabble-rousing ruffians. They were soft-spoken men of means and education. They had security, but they valued liberty more. Standing tall and straight, and unwavering, they pledged: "For the support of the declaration, with firm reliance on the protection of the divine providence, we mutually pledge to each other, our lives, our fortunes and our sacred honor."

"They gave you and me a free and independent America. The history books told you a lot of what happened in the Revolutionary War. We didn't fight just the British. We were British subjects at that time and we fought our own government!
Some of us take these liberties so much for granted, but we shouldn't. So take a few minutes while enjoying your 4th of July holiday and silently thank these patriots. It's not much to ask for the price they paid. "

"Remember: Freedom is never free! I hope you show your support by sharing this with as many people as you can. It's time we get the word out that Patriotism is NOT a sin, and the Fourth of July has more to it than beer, picnics, and baseball games."

~Author Unknown~Contributed by: Harry Updegraff, Jr.

June Scorecard

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

Dow Jones Industrials .86%
S&P 500 -.22%
Nasdaq Composite -.24%
Russell 2000* 1.54%

*Data may have been effected by semi-annual rebalancing of the Russell Index.

Source: Data courtesy of Q-Charts. Lumen Capital Management, LLC reports this information as a courtesy and is therefore not responsible for the accuracy of this content.