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
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
posted by CR English at 7:00 PM
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