Holiday Greetings.

Santa here:
I stopped by the North Pole branch of Lumen Capital Management last night. I wanted to wish them and you a happy holiday season.
The elves at Lumen have again been very busy getting everything in order. You can see that they are not so small anymore either. In fact the oldest elf can now drive the family sleigh.
Whether you have been celebrating Hanukkah or will be celebrating Christmas it is my fondest wish that your holiday be joyous and that 2007 is prosperous.
Peace.

Santa
{ AKA: Christopher R. English}
President
Lumen Capital Management, LLC

Some Time Of For The Holidays

It's the holiday season and the investment year is winding down. Posting will be spradic until the 2nd week in January. Check back then as we will begin a new series on investing in the markets with a specific emphasis on covering risk.

Some Barron's Thoughts

This week’s issue of Barron’s* highlights their 2007 outlook for the stock market based on the observations of Wall Street strategists. Collectively, the group is looking for stocks to rise about 7.4%, which translates to 1,520 on the S&P 500 and 13,220 on the Dow. Here are some other highlights from the article. {I have added some comments in Red}.

-Were the book to close today on 2006, the major indexes would have notched their fourth straight year of gains, with returns above the long-term average, at that. The Standard & Poor's 500 stock index is up 12.7%. {2005 booked a gain by a whisker with the average stock up about 2-3% last year. The average stock is up about 10% year to date.}

-More than 70% of active large-cap fund managers were trailing the market as of Oct. 31 {So are most hedge funds}

-All of this year's gains have come since midyear. {Specifically they've come since the Federal Reserve indicated that it was done raising interest rates in July}.

-This years gains so far has exceeded the forecasts of all but one of the Wall Street strategists surveyed by Barron's a year ago. {Watch for a major piece from us on investment performance and Wall Street Predictions before the end of the year}.

-Mark this the third -- or is it the fourth? -- straight year the consensus believes large stocks ought to reclaim the lead over small ones. Although there were hints that the market's largest issues were resurgent this past summer, the small-cap Russell 2000 again is besting the big-cap indexes -- however by a narrower margin.

-SO WHERE DOES THAT LEAVE investors? According to the Barron's Round Table, the financial system is overdue for an "accident" of some sort, given that some dislocation has accompanied each of the past three Fed-tightening cycles. The ingredients of excess -- hedge funds going public, mammoth buyouts on the rise -- are there, but haven't coalesced. Nor is the bull a kid anymore. Stocks are entering the fifth year of a bull market, one of the longest ever, and the second-longest free of at least a 10% drop. But as Birinyi Associates notes, in the three prior bull markets since 1962 that lasted through a fifth year, the fifth year was a good one, with average gains of 22%. That, among other things, could mean Wall Street's forecasters get it right again this year. Here's hoping so -- and happy new year.

*Source, Barron's Cover Story, "Polished Performance", Michael Santoli, December 13, 2006.

PE Compression

This information comes to us courtesy of the good people at "Chart of the Day".*

"Today’s chart illustrates that the recent growth in earnings has led to a significantly lower PE ratio. While the PE ratio has been within the confines of a tight and very steep downtrend it is worth noting that the PE ratio has recently edged above this downtrend. Regardless, even though the significant earnings growth of late is a plus, the market has not been willing to pay what it has over the past decade for each dollar of earnings. Stay tuned…Notes:- What are earnings saying about future stock prices? The answer may surprise you. Find out now with the exclusive & highly regarded charts of Chart of the Day Plus."

*Source - Chart of the Day & Standard & Poor's.

65 Years Later-Still At Sea.

USS Arizona (BB-39). Departed Pearl Harbor 0800 hours Pacific time December 7, 1941. Still listed at sea by the United States Navy.

Pfizer vs. Exchange Traded Funds {ETF's}

Event risk struck Pfizer {PFE}stock today on news of the cancellation of a promising anti-cholesterol drug. As of this writing PFE is trading down $3.30 per share. An approximate one day loss of 12%. I quickly did a spot check of some I-Shares ETF's where Pfizer is a major component.

Here are the quick facts.*

I-Shares Dow Jones Healthcare Sector {IYH}- PFE is 11.69% of the fund. Down 32 cents or .57% (less than 1%).
I-Shares Dow Jones Pharmaceutical Sector {IHE}-PFE is 8% of the fund. Up 6 cents.
I-Shares Global Healthcare Sector {IXJ}-PFE is 8.49% of the fund. Down 40 cents or .67% (less than 1%).


*At the time of this publication Lumen Capital Management was long shares of IXJ for clients although positions can change at any time. Nothing here should be viewed as a recommendation by Mr. English or Lumen Capital Management, LLC to buy or sell any of the above mentioned shares.

Bull Bear Argument.

The push pull of the stock market can be viewed in the current bull bear argument.

Bulls: Current consensus estimates for the S&P 500 in 2007 are between $95.30-95.40. Assuming a midpoint average of $95.35, then stocks are trading a about 14.71x their 2006 estimates. Assuming a 16.5 PE on this number gets you to 1570-1580 range on the S&P 500 next year or a gain before dividends of approximately 11%.

Bears: If the economy slows much more than its current rate then corporations will not be able to achieve their estimated earnings for next year. Therefore this S&P number is too high and the market must either decline to match the earnings or trade at a much higher PE than its traditional average. This is possible but unlikely in our current economic environment.

I don't know which of these vies is likely to prevail next year. Certainly Wall Street's predictive skills are no better than my own. But I do know that our money flow analysis will at least likely give us a heads up if and when the market changes from it's current bullish stance to a more bearish scenario. Unless some unlooked for event hikes over the transom there should be plenty of time to react to a change in the wind.