Latest Investment Letter-Abridged

As I stated to you in my last letter and as you are undoubtedly aware the stock market has suffered a major decline this fall. October has been especially grim and while stocks have recovered somewhat into the end of the month the S&P 500 is down approximately 15% in October as of this writing. As such I would like to give a brief update.

First our standard disclaimer:

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.

Six Thoughts.

1.) The current environment owes itself to these four intertwined events.

I. The unwinding of the credit excesses in housing.
II. The unprecedented manner which the world wide financial community levered itself to such.
III. The decelerating worldwide economic conditions.
IV. The extraordinary deleverging that has occurred in the world wide hedge fund community.

2.) We have continued to manage money according to our investment plan and the known parameters of our clients. Depending on the client, account size and risk profiles this has meant that we have largely been net sellers of equities since May. Thus in general autumn has found us with larger than normal cash positions. Cash, as we have said in the past, while a cushion will certainly not keep portfolios from declining along with the market. This is especially true in a market rout like we have just experienced. But it has given us that cushion and given us the ability to take and to continue to take the opportunity to add to securities at what we believe are attractive levels. Therefore we have incrementally added to investment positions in appropriate client accounts during the course of the month. Our preferred way to do this is through Exchange Traded Funds.

3.) This market decline is unprecedented. It is rivaled only in my experience by the 1987 crash-which had a different set of economic characteristics. It is important that you know that I do not believe that this is the end of the world. I do believe that markets are largely discounting a worse case economic scenario. Corporate America is in better shape than most people might think. Certainly every corporation is not General Motors and certainly at this point the US is seen to be in better economic shape than most of the rest of the world.

4.) The U.S. & other governments have injected an unprecedented amount of liquidity into the financial system. That money is only now starting to get to where it needs to go. The cavalry is coming so to speak. This will not be evident overnight but is starting to have the intended effect of reliving the stress to the international financial system and taking the risk of financial systemic failure off the table. That is major institutions that are likely to fail have probably already done so.

5.) Markets sharp October decline has largely been due to hedge fund liquidation. Too many people have unfortunately discovered that financial leverage works both ways. In our business the margin man always gets paid first. Funds that have been leveraged 4-1 and 5-1 have likely not survived and have been forced to sell at what will likely prove to be very low levels of valuation.

6.) It is impossible to know at this point if we have reached the ultimate bottom of this bear market. But we will invest assuming that equities at this point have reached a level of attractive longer term valuation and we will continue to invest according to our playbook. While this decline has been both unprecedented and historic, I believe that we will look back two to three years from now and marvel at how cheap stocks became. Someday I believe that we will say "I can’t believe that _____ was ever that low".

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 disclosure is made. Lumen Capital Management, LLC 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.com.