Happy Samhain!!

That's Happy Halloween for the rest of you folks!!!

This is the last post we'll put up till Monday as I will be traveling over the weekend!

Good Tricks or Treats to all of you with little or not so little children.

Seasonality

As we close the books on October, we also close the books on seasonally the weakest market period of the year (August-October). This year has been especially vicious as the various main market indices were down between 35-40% from their highs to their lows. The S&P 500's low occured on Oct. 10th. It is up about 14% from that date but still posting large double digit declines for the year.

Happily we now enter seasonally one of the strongest periods of the year (November-January). Hopefully that pattern will hold as we put to bed 2008. More on these thoughts later.

*Currently Long SPY and various S&P related ETF's for various client accounts.

Game plan: Energy

I have become more positive in the past 10 days on the prospects for energy companies. We sold much of our energy earlier in the year for clients into what we perceived to be a huge speculative bubble. We are now more interested in investments in these sectors. I'll give you some of the following reasons why:

1. Oil's close to 60% decline in value probably reflects current demand destruction and the slowing worldwide economy.

2. There is much evidence that indicates that oil production worldwide has peaked. At the very least oil production in the areas of the world where it is easiest to find has peaked.

3. There is no magic bullet that automatically & immediately switches oil consumption to other forms of energy.

4. Some facts from seeking alpha. The US imports 70% of its oil, consumes 25% of worldwide oil supply, and has only 3% of the world's oil reserves. Thus our demand for oil is not going to go away. http://seekingalpha.com/article/102003-cheap-crude-a-flash-in-the-oil-pan?source=yahoo.

5. Like everything else these stocks have been crushed and likely reflect attractive values at these levels.

6. Money flow analysis indicates these companies have reached levels where they are likely to find at least near term support.

7. We are currently underweight energy in most client accounts.

8. Most important from our analysis, the oil companies themselves generally pay decent dividends which at current levels are quite attractive relative to other investments in our opinion. In short in the oil companies themselves you are being paid to wait. {Please note that oil service companies generally don't pay the same kind of dividends}.

Certain negatives {That come to mind right off the top of my head}.

1. Oil is a favorite political whipping boy and will likely receive less protection from the likely coming democratic administration. For example they could still be subject to some sort of "windfall profits tax" by Congress.

2. These stocks will decline if oil prices decline further.

3. Much of the oil found today is in places that don't like us very much or like private enterprise very much.

4. The inability to find many more oil fields of size over time could over time eat into the profit margins of both oil & oil service companies.

5. Any of the above could affect the dividend paying ability of these companies.

*Currently long various ETFs related to energy for various client accounts based on what we perceive to be their risk/reward parameters. Also long certain legacy energy stocks for various client accounts.

**This is an example of the investment approach that we take for our clients after understanding their unique risk/reward profile. This is simply our analysis and opinion. We do not recommend or suggest similar investments for casual readers of this blog without: Understanding for yourself if this kind of investment fits your own investment profile. Or without you discussing this type of investment with your own investment advisor. This should not be construed as a recommendation to buy or sell any security of any kind in any investment time frame. We assume no responsibility for individuals or institutions who might make an investment decision based in any manner on our investment analysis.

Ponderings.

Well the last two days market's pricing mean that we have bumped up against or have penetrated the down trend lines that have been in place most of the autumn. The S&P as represented here by its ETF {SPY} may have sold off at the end of the day due to certain erroneous comments out of General Electric. Other major market indices look better.



Yet......
That same late day selling pattern that we've seen most of this month was back after yesterday's brief hiatus.


What is positive so far is that.

1. We are testing and so far penetrating major market down trends.
2. Market is still trading at very over sold levels.
3. We did not give back much of the gains from yesterday.


Tomorrow's another day while today is just another example of a market that can't seem to make up its mind hour by hour which way it wants to go.

*Currently Long GE, SPY and various S&P related ETF's for various client accounts.

S&P 500 Monthly.

I like pictures because I'm a simple minded person. Here's the Crash of 2008 depicted on a monthly basis.

*Currently Long SPY and various S&P related ETF's for various client accounts.

What is VIX.

I've been asked what is the VIX. Simply put the VIX measures market fear. However here is a longer definition as found in Wikipedia.

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatilty.[1] If investors see high risks of a change in prices, they require a greater premium to insure against such a change by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

Volatility-A Quick Note.

The volatility this quarter as measured by the VIX is simply off the charts. That is I literally had to rejigger my charting software so that I could get it to scale. While I only have charting data going back to the mid 90's, I thought it would be worthwhile to see how this current quarter compares to the past. (Remember this quarter is only one month old). The only two quarters with comparable volatility where the 3rd and 4th quarters of 1998. That interestingly enough, was also the period when Long Term Capital Management almost took down the banking system.

Buffett's New York Times Editorial.

I've been asked to Link Warren Buffett's recent New York Times editorial where he indicated he was buying US equities. Here it is.

http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&scp=2&sq=warren%20buffett&st=cse&oref=slogin.

Buffett is the prototypical long term investor so short term gyrations don't seem to bother him at all. Even so I figure he's down anywhere from 7-12% from where he made most of his purchases. Like India and the recent Time Depression article, we'll come back from time to time to see how he's done. Since I don't know what he bought or when he did his buying we'll use the S&P 500 open & closing average price on 10/16/08 to see how he's done. That price is 928. We'll check back on Warren in 30 days, 3, 6 & 12 months.

Magnitude Of The Current Decline

I'm going to give you some statistics that our models are pondering. I've developed some thoughts in terms of a longer term thesis as to what these mean which I'll share with you over the coming weeks and months. But since these numbers are fresh in my head, I'm going to put them out here for others to read. One note of disclaimer. Other interpretations of market money flows will likely differ from where I believe bear and bull markets begin and end so my data could differ a bit from others. Still anybody crunching the same facts will come up with similar if not identical end results.

First though the best argument against being 100% in cash at this time comes from analysing the last bull market which I believe started in March of 2003 and ended in early October, 2007. That bull market advanced close to 90% from the lows to the highs and lasted roughly 56 months. Yet that bull gave very uneven returns. Here they are:

47% of the gain came between March of 2003 and March of 2004. Almost have of that total came in the first 3 months. People that were 100% in cash missed out on a lion's chunk of the gains. In this period the market averaged almost 4% a month.

11% of the gain came in a 27 month period between March of 04 and the summer of 2006. In this period the market averaged about .4% per month and all of these years saw most of their gains in the 4th. quarter of the year-meaning portfolio managers were likely trying to manufacture year end returns for their clients.

The rest or 32% of the gain came in the 15 month period between the summer of 2006 and early October of 2007. Stocks averaged roughly 2% during this period.

With that as background and also drawing on 20 some years in the investment business I can state there is nothing like what we've been experiencing in the modern investment era. To show you how rapidly the down trend arrived ponder these numbers:

It took a bit under 1 month to give back 11 months gains from the 2003-2007 bull market.
2 months to give back the next 13 months gains.
6 months to give back the next 9 months gains.
2 months to give back all the rest of the gains to 2004.
1 month to give back everything else back to 2003.

In comparison:

The 1987 crash was the middle of a decline that lasted approximately 16 weeks and gave back about 1.5 years of market gains.

The bear market of 2000-early 2003 took about 10 months to give back most of 1999's gains, about 7 months to give back 1998's gains and about 12 months to get markets back to where they were in early 1997.

Again today I simply wanted to throw these numbers out there for you. We'll come back to them again in the future to try and address what they mean.

At The End Of The Day.

Today we have experienced a pattern that has become all too common of late. That is a massive amount of selling in the markets in the last hour of the trading day. I've circled this phenomena on a 15 minute chart of the S&P 500 over about the last trading week. Today markets were essentially flat until about the last 15 minutes of the day. Investors will likely gain no confidence on a sustained uptrend until this pattern is broken for more than 1 day!

*Currently Long SPY and various S&P related ETF's for various client accounts.

Solas! Republishing Introduction.

Solas!

Hello and Welcome!

I thought since I am restarting this that I ought to restate the rules that I set out when I started.

As stated way back when this is an experiment and Solas! 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 how and may never have time to 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.

One other thing. Where I discuss any individual security I will disclose whether I or clients currently own that stock or ETF. That disclosure is only valid for the day of the post as investments can change at any time.

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

Looking forward to hearing back from you soon.

Chris

Every Picture Tells A Story

One final thing! I'll give you what I'm keying on in terms of my road map. Here is a picture of the S&P 500 ETF {SPY} with about 20 minutes to go in the trading day. Each number listed below corresponds to the number and color listed on the chart. 2 & 3. indicate what money flow probability says a break of these various trendlines ought to signify

1. Market is very over sold based on all of the indicators we use across all time frames.

2. Money flow probability indicates that a market that can manage to penetrate this downward trending line @ 2 should either build a base or trend higher.

3. Money flow probability indicates that a market that significantly undercuts line 3 is likely to trend lower.

You can see that the market has attempted several times in the past two weeks to penetrate this line and was rebuffed each time. You can also see that the market is running out of room as it reaches the point where these two lines intersect. So my guess is that there is some resolution here at some point in the next two weeks. In any case we have a different playbook ready for either scenario in terms of how we will tactically approach the markets. Mostly it involves right now waiting out the scenario to see which way the market decides to take us. Being this over sold I would think that stocks should move higher. If that is going to be the case we should have an opportunity to add to client ETF positions on the break of that trendline at 2. We'll just have to see what next week brings.

This is the last expected post for this week. We will at least post once more before Halloween. I don't expect to put this much material up all the time but as I indicated when I restarted this blog, I have a lot to say right now.

*Currently Long SPY and various S&P related ETF's for various client accounts.

What Investors Are Saying Via Bonds.

Today 30 year government bonds are trading under 4%! Let's think about what that means. It says that investors have so little confidence in economic growth over the NEXT 30 YEARS that they are willing to accept a rate of return just slightly higher than the historic rate of inflation (3-3.5%)!

So let's take a look at two indicies (which we in fact own in some form for many of our clients) & their respective yields. These are approximate back of the envelope current calculations but they are pretty close to their likely current dividend yields.
S&P 500------indicated current dividend yield = 3.25%
Dow Jones----indicated current dividend yield =3.63%

So today you can buy the market and be paid to wait. Let's say stocks do nothing over the next year. You'll still make over 3%. If they have a 7% index return that's better than a 10% total rate of return to you. For the first time in a very long time it looks as if investors are being compensated to take a certain amount of risk.

*At the time of this publication we were long for certain investors ETF's representing the S&P 500 and the Dow Jones Industrial Average.

Fat Tails

The concept that stock moves beyond their normal price distribution is an especially important thing to grasp during a highly volatile period such as this. To put it another way, stocks can rise & fall farther than most investors think. Stephen Vita over At Alchemy of Trading posts this bell curve. His is a subscription only website and it is excellent. You can get to his portal here: http://stephenvita.typepad.com/

Our Latest Newsletters To Clients.

This is the newsletter without some of it's normal Bells and Whistles. It was originally sent around October 8, 2008 to our clients. We'll figure a better way to get this on board soon.

SPECIAL REPORT!

The Current Financial Crisis and What it Means To Our Clients.

The current financial crisis is simply an event moving so rapidly that trying to formulate a description for what is happening becomes obsolete almost immediately. Because of this I am going to dispense with any description over what has happened as this has already been covered by the media. Instead I would like to report to you on what we believe these events mean for your investments. Some of this is an update from our last newsletter. However, we have also included our latest thinking regarding our current situation with respect to client accounts. Please excuse the brevity of content. I wanted to be able to get something out to you in a timely manner.

Please note that our philosophy is to manage portfolios based on clients’ personal criteria. This is influenced by various factors such as client risk, tax considerations and targeted rates of return. In light of this, what follows is a broad statement of our thinking and how we are positioning client portfolios. It is important for our clients to understand that we always have a game plan for a given market environment. It is also important for clients to understand that we constantly reassess our plan and stand ready to change if we feel the need to do so.


Where We Are:

The stock market was down approximately 11% by Labor Day. It has lost almost 25% since then and is down 17% for the month of October. To give you some perspective we crunched the numbers today and this is how we stack up versus other market panics going back to 1987 in terms of number of weeks and percentage declines:

1987: 3 weeks. -34% decline.
1990: 13 weeks. -19% decline.
1998: 12 weeks. -21% decline.
2001: 4 weeks. -20% decline.
2002: 20 weeks -33% decline.
Avg: 10 weeks -25% decline.
2008: 7 weeks -25% decline.

The stresses on world money flows and by extension world equity markets have been severe. Financial news could likely not be worse than what we have been witnessing. In this regard we note the following: 1. The financial issues bedeviling stocks are largely a globally induced liquidity event. Stocks are currently a slave to the credit markets and equities declines have more to do with these events than to the current fundamentals of stocks. 2. Stocks are now discounting a recession in 2009 but it is likely that the majority of this is currently priced into equity valuations. 3. Even if a recession is not priced in, stocks are so oversold that some kind of rally is likely in the foreseeable future. 4. The issues besetting the banking system are being addressed.

This last point needs some explaining. The actions taken in the past week world wide indicates to us that governments have belatedly come to understand the extent of the liquidity crisis and are doing something about it. The most important of these in our eyes are as follows: 1. US and British injections of public money into the banking system 2. Treasury’s plan to remove troubled assets from the books of financial institutions 3. The extraordinary expansion of the Federal Reserve’s balance sheet, and most important in our eyes today 4. the worldwide coordinated cut in global interest rates.

This global flooding of liquidity into markets makes it extremely likely that asset prices will be pushed higher over time. The US government is flooding the economy with trillions of dollars. That money will work its way through the banking system and will eventually inflate all asset prices from stocks to houses.

Statistically by most measures including money structure stocks are oversold and have entered levels of attractive monetary valuation. According to James Altucher of The Street.com and Bespoke investments, the past five days have been the third worst investment period since 1932-the depths of the Great Depression. Altucher also notes that the single greatest year of equity valuation increase occurred in 1933 at 100%.

Part of the reason for the decline in the past week is huge liquidation by Hedge Funds. Again according to Altucher 18 of the top 20 hedge funds are down over 20% this year and are seeing huge amounts of redemption's. They have been selling in order to meet these obligations and they don’t particularly care what prices they get on the way out.

Finally markets seem to have entered a capitulatory stage where return of capital trumpets return on capital. But by every technical measure that we follow stocks are as oversold as we have ever seen and that includes the crash of 1987. Therefore we believe that we have entered unique levels where risk reward levels in many different asset classes are much better for our clients.

Notice that we don’t say that we are at the bottom. We don’t know anybody who has ever called the absolute bottom and we are cognizant of the fact that stock could still decline further. However given what we understand as of this writing we believe the odds of significant price increase from these levels is increasingly in our favor when we look out in our normal 12-18 month time horizon. We have higher than average cash positions and we are in the process of planning to start putting some of that back to work.

What We Are Doing:

One of the most important things I believe is to have an investment plan. Here in general is what we have been doing and what is our current thinking going forward.

We have been net sellers for many of our investors since late May. We became more optimistic about equity valuations given market fundamentals and valuation during the summer. Later events caused us to maintain a more cautious stance as the credit crisis deepened. Please note that we still strongly believe the long term case for equities that we put forward in our last letter to you. We think simply that the current credit crisis has simply pushed that thesis further out 6-12 months.

Concurrent with client risk factors we significantly raised our cash positions in many accounts to between 15% and 30%. Of course in a market rout individual investors never feel like they have enough cash particularly when the decline is as rapid as has recently occurred. Short of 100% cash positions there is no way to completely contain investment losses when stocks decline. We have recently begun putting some of that money to work by scaling into major index ETFs. We have been early with some of this money but feel we will be rewarded over time. We plan to continue to scale into major market ETFs where market conditions give us a compelling reason to add to positions.

Our principle investment vehicle is currently Exchange Trade Funds {ETFs}. I will reiterate that ETFs do not prevent losses. They will likely decline the same percentage as their underlying indices when markets fall. However, ETFs DO prevent investors from being exposed to single stock risk. That is the risk that some catastrophic stock event will wipe out all or most of the equity in their investment.

ETFs also benefit investors because they own everything in its underlying index (meaning the overall composition from which each ETF is derived) and yet investors own no single entity within it. Furthermore because ETFs are a basket of stocks they can be valued as such using traditional methods of valuation. None of this of course makes them immune from events like the recent market panic. But their underlying investment structure does remain intact and at some point will likely rebound when markets eventually advance again.

In my last letter to you I quoted something attributable to Warren Buffett-“it is good to be greedy when others are fearful and fearful when others are greedy”. I also said John Templeton put it another way by saying he preferred to invest at the point of maximum pessimism. Both statistical and anecdotal evidence supports the notion that we are close to that point. As such we will look for opportunities in what we feel are a much oversold market per individual client perimeters and what we feel are prudent levels of investment risk.

Again I would point to our view of ETFs as paradigm changing events as they give us new investment flexibility and continue to permit us to build portfolios and initiate investment strategies in new and creative ways.

Finally I want you to know that we understand the concerns many of you have regarding your money. This has been an extreme period of market volatility and stress. Times like these make investors rightfully nervous and I want you to know that we understand this. As I previously indicated the pace of events, market conditions and certain personal family matters have meant that have been unable to yet speak with all of you. I want you to know, however, that I will try to discuss your portfolio with you as soon as I possibly can.

With regard to my own personal matters, I am likely to be out of my office later this week and early part of next. While I will be able to access your investments and tend to any portfolio needs I will likely be unable to communicate with you in the timely manner that you deserve should the need arise. Rest assured I will endeavor to call each of you when I return. I thank you in advance for your understanding during this difficult time.

Christopher R. English

Christopher R. English is the President and founder of Lumen Capital Management, LLC.-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for private investors and also manage a private investment partnership. The information derived in these reports is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks in which he has an investment. In such cases appropriate discloser is made. Currently certain clients of Lumen Capital Management, LLC are owners of General Electric stock although these positions can change at any time. Lumen Capital provides investment advice or recommendations only for its clientele. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice. Mr. English may be reached at Lumencapital@hotmail

India & Newsweek Revisited.

When we first visited this way back in the Spring of of 2006, we noted:

"Sell when Business Week's cover says buy" is an old Wall Street maxim. Magazines are notorious for latching onto and publicizing trends, fads or investment concepts just before they end."

At that time the only way to really invest in India was through the India Fund {IFN}. It was trading around 50 on its way over the next 2 months to 65. It hasn't been so grand since then. Today IFN closed around 17.80.

With that in mind, here is the October 13, 2008 Cover of Time Magazine.

The S&P 500 closed the Friday before this issue's date @ 899.22. We'll see where it is 6 months and one year from now.

No position in IFN. Positions in index related investments tied to the S&P 500.

Old Cartoon That's Relevant Again.

I wonder how many people feel this is relevant right now!

God Speed Dad!

April 8, 1934-October 12, 2008.

The Irish say that in the end the world will break your heart :(

Restarting The Blog

I'm going to be restarting the Blog on what I think will be a temporary basis until I figure out what I want to do regarding communications. I have many things I want to say right now and I think that this may be one of the best ways to get it done. I'm going to commit to at least one post per week until further notice.