Update.

I had hoped to post my Game Plan article today. Life has other plans however. Look for this piece along with a year to date update the first of the week.

GE: Dividend Cut

Ge cut it's dividend to 10 cents a share per quarter today. Here is the link to the story.

http://finance.yahoo.com/news/GE-cuts-quarterly-dividend-to-apf-14497822.html

Housing Inventories Falling.

According to Tony Crescenzi of Miller Tabak + Co., LLC and a contributor @ The Street.com-New home sales fell to a record low annual rate of 309,000 in January, from 344,000 in December. Importantly, inventories continued to decline on an outright basis and are now near normal levels after having moved materially above normal levels in 2006.

The current level is below both the 25-year average of 355,000 and the 15-year average of 369,000. Inventories are falling because builders are severely under-building relative to population growth and household formation. Crescenzi asks an important longer term question. "Where will the country's 3 million additional inhabitants live when they enter the country this year? It is a simple fact of human existence that people need shelter. I therefore am sticking firmly with the idea that inventories have peaked and will continue to move downward in the time ahead, on the basis of this very bankable top-down theme. At least 500,000 and probably closer to 700,000 homes will be removed from the inventory problem by year's end".

According to Crescenzi "People will fill up empty space one way or another, whether through renting or buying. Sales needn't increase to fix the inventory problem, although sales are obviously needed to let the inventory dynamic take power over forced sales from a price perspective. Still, ultimately, supply will win out, and it is shrinking for both new and existing homes, despite the very factors that skeptics will say will stymie future declines".

Link: http://www.thestreet.com/b/rmoney/tcrescenziblog/10466400.html {Subscription may be required to view this link.}

What's Coming Up @ Solas

-I'm working on a longer "Game Plan" piece which I hope to publish over the weekend.

-I also have a longer horizon investment piece which will be published and also sent to you when completed.

an tSionna 2.27.09

More of the same while I was away. Sentiment amongst investors is horrid and the Administration isn't doing much currently to combat that feeling. Click on the chart to see my comments.

Market Caps: Then & Now

As of 12/31/08, the market capitalization of the US stock market was $10.6 trillion, a total equal to 74% of the $14.3 trillion US economy. When the stock market peaked in March 2000 before the beginning of a 2 ½ year bear market that lasted until October 2002, the total market capitalization of stocks was equal to 190% of the size of the US economy, an all-time high for the "stock-to-economy" ratio (source: Wilshire, Commerce Department, Fortune).

Speaking Of Cars

"Millennial" drivers crave iPods over horsepower.

Excerpt from a Reuters Article last week. Here is it's link. http://www.reuters.com/article/GCA-autos/idUSTRE51C5NJ20090213
Fri Feb 13, 2009 2:00pm EST "By Bob Burgdorfer CHICAGO (Reuters)

Tech-savvy teenagers and 20-somethings may have more control over the future of the U.S. auto industry than they realize. Detroit's automakers, for all their woes, recognize a big potential audience when they see one. Some estimates show that the 16-to-31 age group will constitute the largest class of drivers in the United States by next year. By loading their vehicles with electronic plug-ins and ports, automakers have started to aim their marketing and design efforts at the younger types whom they hope will improve the long-term viability of the struggling industry.

At this week's Chicago Auto Show, carmakers said that to appeal to these consumers, their new entry-level or small-car models are emphasizing such features as email capabilities, hookups for iPods (AAPL.O), laptop computers and other gizmos, many with easy-to-use controls.....That is a drastic change from aging Baby Boomers, who although increasingly graying still hold considerable sway in terms of automobile buying power. When the Boomers, now in their 50s and 60s, bought their first cars in the 1960s and '70s, the features that mattered to them were horsepower, wide tires and dual exhausts.

In the Age of Obama, however, electronics rule.....The Ford Motor Co (F.N) estimates that by 2010 the 16-to-31 demographic will make up the largest chunk of the car-buying public with a 28 percent share. Many of those drivers fall into the so-called Millennial Generation, a term some commentators use to describe people born roughly between 1982 and 2000. In 2010, Ford will launch Fiesta, an entry-level subcompact loaded with the technical features that young drivers crave.....According to Ford, about 11,000 Millennials reach legal driving age every day, and by next year about 70 million of them could be driving. To pull these youthful drivers to Ford, the company sponsors television's "American Idol" and uses online social networking sites to push products. It also designs cars to accommodate the electronic devices....

...In addition to Fiesta, other carmakers at the Chicago show touted such entry-level, youth-oriented cars as Caliber and Cobalt. "Entry-level," however, can mean other things besides "small inexpensive car."
Geography and utility can determine an entry-level vehicle, according to Chevrolet's Settlemire. A teenager or 20-something in Texas may want a pickup truck, while in Chicago that same youthful driver would prefer a fuel-efficient car or small van. As a result, Chevrolet is equipping a variety of vehicles with the technology hookups that young drivers appreciate.
"The Millennial Group is a force that has to be reckoned with," said Ford's Hall. "It is a growing segment that may even be bigger than the Baby Boom generation."

Repeat: What If There Are A Lot More Of Us?

I'm repeating this column because I'm out still and because I want to revisit certain themes I've touched on in the past. One of which is that census data has consistently under reported the actual number of people living in the US. I think this under count has skewed everything from retail sails to city populations. I first published this in 2006

What IF There Are A Lot More Of Us (Fun With Census Data).

With President Bush set to give a major speech on immigration on Monday I thought we should take a quick look at some census trends & data to see what themes might arise out of this debate.To start the US Census Bureau says that there are roughly 300 million Americans. I have not been able to find a number that states how many illegal immigrants this includes but I will assume that it includes a large percentage of the 11 million or so that are deemed to be in the country at this time. When you try to look at numbers of illegals in this country you see estimates all over the map. I've seen as low as 5 million and as high as 20 million.Based on anecdotal evidence here in Chicago I'm reasonably confident that 5 million is way too low and 20 million may not be high enough. We'll cover this in more detail in later posts but for now lets just say for the sake of argument that the real population of this country is between 305-311 million people. In other words we are under counting right now anywhere between 5 and 11 million people that supposedly don't exist but in the real world work and spend money and who have to eat and live somewhere. Now what should we start to think about?

1) All our assumptions about retail spending may be wrong. That is retail store analysis is done based on an economy that is severely under counting its population. That means that the reason for the strong retail economy could be because there are more people than we think spending money that we don't know about. Most of this would also be cash something harder to trace and analyze.

2) It would explain the paradox of how for example a city like Chicago supposedly has lost population in the past 10 years but is (along with this whole region) experiencing a building boom unlike any that I have seen in the almost 20 years that I have lived here.This is one of those issues that irregardless of one's feelings it is just better to follow the money. Doing that can tell you what is ultimately going to happen in spite of the current political rhetoric.

Let's say there are 15 million illegal immigrants here. They are mostly young and mostly doing menial day labor and service industry type jobs which most Americans do not want to do. The US needs younger people in order to make up the monetary deficit that is being created by social security and has a entry level employee vacuum. Even at minimum wage a day laborer earns more in a day than he can in a week in many places like Mexico. Perfect Adam Smith as supply is meeting demand and this will continue until the demand side of the equation goes away.They will continue to come and we will continue to employ them. We are not going to deport what would amount to the equivalent population of some small countries. Instead we will have to figure out how to assimilate them into proud American citizens (which by the way many would clearly like to be). As I mentioned above I will have more to say on the investment themes regarding immigration. However, each of these themes is best left to future posts where we can explore them in more detail.

Solas! Republishing the Introduction

Solas! Republishing Introduction.

Solas!

Hello and Welcome! Every few months I will republish the introduction and disclaimer to this blog so new readers can find it.

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 claims i.e. "XYZ is worth 50 dollars!" If & when we do discuss valuations (as in our previous GE article it will be in terms of giving a range that a stock might trade within. That will be an opinion and nothing there should be construed as a guarantee of return or a guarantee that a stock will ever trade to an actual price.

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. Any person who reads this blog and is not a client of Lumen Capital Management, LLC should either do their own research, give us a call or talk to their own investment advisor before making any investment based on anything written within the confines of this blog.

Why China Needs US Debt: Part Two

Stratfor Geopolitical Diary: Why China Needs U.S. Debt: Part Two.
February 13, 2009 0252 GMT

U.S. Treasuries remain the primary vehicle for investing surpluses, and for Chinese surpluses in particular Chinese. The reasons are many. For one thing, few other countries have debt markets large enough to support the level of investment China needs to make. The U.S. debt market is larger than the three next largest combined. In fact, only Japan has a debt market larger than that of the United States — but because Japan's debt represents some 170 percent of its GDP, it has a credit rating no better than that of the better-run states in sub-Saharan Africa. The U.S. Treasury debt market, while large, represents only about half of U.S. GDP — a much more manageable fraction.
Of the top ten largest debt markets, the four that are in the eurozone — Germany, France, Italy and Spain — could provide viable alternatives for China. But these also pose problems. Much like Middle Eastern oil states, China not only receives most of its income in dollars, but also effectively pegs its own currency on the dollar. This means that for the Chinese, savings and investments held in dollar-denominated assets are relatively safe, stable and accessible. From Beijing's perspective, it makes little sense to convert surplus dollars into euros, only to grow more exposed to currency fluctuations. (And even that assumes that one trusts the financial governance of other states – for example, Italy.)
If Beijing does not view euro-based debt as a viable alternative to the United States because of currency stability, it has even less confidence in other Top Ten debt markets, which are denominated in even less stable currencies. The markets for the Brazilian real, the South Korean won, and even the Canadian dollar and British pound are simply too small, fractured and volatile to provide the level of safety that the U.S. dollar does. And in any case, all of these markets are much too small to absorb Chinese trade surpluses month after month. Only the regular issuance of multibillion-dollar debt tranches by the United States, fueled by U.S. budget and trade deficits, can suffice.
If government paper cannot fill its needs, China could turn to commodities — if anything, perhaps gold could provide a viable store of value without subjecting China to the fiscal swashbuckling of a foreign government. But even here, the size of the gold market could not support Beijing's investment needs. Even if China were somehow able to absorb the total annual output of the world's gold mines — roughly 80 million troy ounces — doing so would both collapse global debt markets and send gold prices to stratospheric heights. (Not exactly a welcome scenario for a country utterly dependent upon international trade.) And for all that, China could sock away the same amount of value after only about three months of trading with the United States.
Ultimately, steering funds clear of American debt markets is not desirable — or even possible — for the Chinese. Luo, the CBRC official (who is known for his colloquial style), stated Beijing's viewpoint about as plainly as it can be put during his speech in New York, saying: "We hate you guys, but there is nothing much we can do."

Why China Needs US Debt: Part One

A follow up to a brief piece we posted on China last week. This is a longer piece published by Stratfor last week. I have put part one here and will publish part two tomorrow.

Weekend Reading Geopolitical Diary: Why China Needs U.S. Debt

Stratfor Geopolitical Analysis
February 13, 2009 0252 GMT
China does not see any choice but to keep buying U.S. government debt, Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), told a New York risk-managers conference on Thursday. The Financial Times quoted him as saying: "Except for U.S. Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe-haven. For everyone, including China, it is the only option." Even if the dollar depreciates because of Washington's financial bailouts, he added, China has no other options.
Luo is acknowledging something of an open secret. Despite occasional hints (or threats) that China might attempt to bankrupt the United States by suddenly selling all of the U.S. debt it holds, that really is not an option. China would be economically destroyed in the process, unless there was some alternative place for Beijing to invest. For a number of reasons, there is none.
Over the past two decades, the United States and China have developed a special relationship based on the safety of U.S. debt. In essence, the United States gives China access to the wealthiest consumer market in the world, which in turn soaks up China's massive output of consumer goods. This not only provides income for Chinese exporters, but also helps ensure social stability in China by providing employment — which is Beijing's primary economic policy goal. China in turn invests its large trade surpluses, earned in U.S. dollars, into U.S. Treasury debt (e.g., 30-year bonds or 10-year notes). This allows China to store its earnings in one of the largest and most liquid financial markets in the world, without needing to convert between currencies. Meanwhile, the recycling of surpluses into Treasury instruments helps to bankroll continued U.S. spending. It is vendor financing on a global scale.
This relationship has fueled unprecedented booms in both U.S. consumer spending and Chinese industrialization. Even in the midst of recession, China continues to sock away savings — but now, because of the financial crisis, questions are being raised as to whether U.S. Treasury debt is the best vehicle for storing those funds.
Simply put, it costs a lot to buttress a collapsing financial market. As the cost of U.S. financial bailouts piles up, Washington's balance sheet is deteriorating. Since the credit crisis began in the fourth quarter of 2007, bailouts have put U.S. government commitments at nearly $9 trillion. To be sure, this is more akin to a line of credit than a tally of real spending — though the actual federal outlays to date, around $3 trillion, represent roughly 20 percent of U.S. gross domestic product (GDP). At any rate, the stakes are high and investors are nervous.
China is the largest holder of U.S. government debt, so it is no wonder that Yu Yongding, the head of China's World Economics and Politics Institute and a former adviser to the central bank, on Wednesday said that because of its "reckless policies" the United States should "make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way." His remarks were meant to impress upon Washington that, as the primary financier of U.S. debt, China holds considerable power in the relationship.
In general, as a country's balance sheet comes under increasing strain, investors tend to sell that country's assets and move their funds to places with more attractive fundamentals (such as a trade or budget surplus). But the notion that U.S. debt is becoming a questionable asset and is about to be dumped by investors has not proved true. Instead, money from all over the world has been flooding into American markets, sending the dollar to its highest levels — and bond yields to their lowest — in years.

Tomorrow: Part Two

Off To Florida

Off to the Florida leg of this trip. Looking forward to seeing some clients & some old friends. Since Florida is one of the epicenters of the real estate collapse, I'll report anything new I hear or see on that front in the coming days.

Owning Up to Market Downturns.

More thoughts from Jim Cramer's "Stay Mad For Life." This time on market downturns.

"Pros always look; they never avert their eyes from a downturn. Amateurs turn off their computers, stop watching CNBC, and don't even read their statements. Pros look at the market as a place where there is always mismarked merchandise, always something cheaper than it should be and they shrug off the losses as part of the game. You can't make big money unless you are willing to lose big money and the time to buy is exactly when the amateurs choose to run."

My comment-This last sentence is so true. March of 2000 at the exact top of the 80-90's bull run saw the largest influx of money ever into the stock market. March of 2003 and October 1987 saw the two largest exits ever from stocks as investors pulled out in the wake of the market crash in 1987 and the beginning of the 2nd Gulf War in 2003. March of 2000 was the top. We've never been back above that level but people who invested in 1987 and 2003 were handsomely rewarded for their efforts.

Picture of an Earnings Collapse

Chart via the Big Picture & Bob Bronson Capital Management

http://www.ritholtz.com/blog/

Off To See The Outlying Banks.

I will be out visiting clients until Wednesday of next week. Well I'm also off over the weekend to see my son @ Providence College. Going to see Providence play Notre Dame in Basketball. Expect posting to be on the light side until I get back.

On Diversification.

I'm reposting this because not only do I think it's important but for some reason others have told me they could not read the original.

To the extent it fits into a client's own unique profile we strongly advocate and try to practice diversification in our client portfolios. Understand though that means that at some point, a portion of a portfolio will be underperforming the market. Here is what Jim Cramer says about diversification. From Jim Cramer's "Stay Mad For Life".

"The price of diversification is owning loser-they can't all go up at once. If you are running a diversified portfolio-and I insist on that-you are going to have some loser stocks on up days. In fact, if they all go up at once, you probably aren't diversified enough, and when the down days occur, you are going to get clocked something awful. Something won't be working fi you are doing things right."

Harvard's Portfolio.

More Kudos to Paul Kedrosky in analysing Harvard's endowment portfolio. I've excerpted with comments and a link @ the end.

"There has been lots of chatter about Harvard Management letting go a significant chunk of its staff, as well as winding down much of its equity portfolio, as a filing this week showed. I thought it would be interesting to take a little closer look at what Harvard has done.
From September 30th to today, Harvard has cut the public equity portion... of its $28.8-billion portfolio from $2.8-billion and 174 positions, to $571-million and 57 positions. That is a remarkable change in such a short period.
Things are equally interesting when you go down to individual holdings. Here (table to the top left) are the top ten Harvard positions back in September, and what has happened to them since. As you can see, while the top September position has stayed the same, there has otherwise been big changes. Four of the top ten Harvard holdings are gone, and two of the other positions have vaulted to prominence from deep in the portfolio.

Now, here is a table of the top ten Harvard positions today versus where they were back in September (table to the top right):

While Harvard dumped many of its top holdings from September, its current top ten positions are all ones it held back in September. Nothing is new. There were, however, some big jumps, with positions increasing significantly in prominence given all the liquidations. More striking is the changed role of ETFs, with five of the top ten September 08 positions having been exchange-traded funds, but nine (!) of its top ten positions being exchanged-traded funds now. With this new fondness for ETFs, is it any surprise that Harvard is shrinking the size of its investing team?"

My comment:-ETFs are a game changer. We are only in about inning two of where they are taking us. More and more professionals are concluding that the single stock risk continues to outweigh the rewards. Harvard is at the vanguard of changes that will significantly impact how money will be invested over the course of the next decade.

Link: http://paul.kedrosky.com/archives/2009/02/12/a_closer_look_a_1.html

GE: Immelt To Skip Bonus

This post over @ 24/7 Wall Street today. http://247wallst.com/2009/02/18/at-ge-ge-immelt-skips-his-bonus/#more-24546

GE (GE) CEO Jeff Immelt voluntarily gave up a $12 million bonus. His salary was also frozen at $3.3 million.
While the announcement may play well with shareholders, the question is whether Immelt’s action is an admission that he managed the company poorly over the last year or a symbolic move to offset the resentment that the fall of GE’s stock has caused.
Immelt has been and will be criticized for keeping GE as a large conglomerate of unrelated businesses. NBCU, which has almost nothing in common with the rest of the firm has done fairly well.
Immelt has been slow in dumping some under-performing assets, particularly in the industrial segment of the firm. It is hard to blame him for the recession taking the wind out of the sails of GE’s health care and infrastructure operations. The company’s trouble in financial services may represent poor risk management, but that would put GE in the same club as a number of other firms including bank holding companies and brokerages.
What Immelt may be blamed for, and not unfairly, is that he continued to set expectations for the company at a relatively high level , even as the first waves of the economic downturn were beginning, in his conversations with the press and investors. Better to talk conservative and outperform than talk big and disappoint.

Paul Kedrosky On China "We Hate You".

China to U.S.: "We Hate You Guys"Paul Kedrosky

"And you thought Treasury Secretary Tim Geithner was being unsubtle in accusing China of currency manipulation:"
"We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] …we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
-- Lueo Ping, China Regulatory Commission (02/11/09)

Grumpy was right.

Grumpy was right about there being another Madoff. This time its Stanford Financial Group. Here's the link:

http://www.reuters.com/article/domesticNews/idUSN1736672620090217?feedType=RSS&feedName=domesticNews&rpc=22&sp=true

Barry Ritholz Explains the Stimulus Package.

Stimulus Package Explained (Q&A) {Tongue in Cheek}

By Barry Ritholtz - February 13th, 2009, 4:00PM
Sometime this year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?

A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?

A. From taxpayers.
Q. So the government is giving me back my own money?

A. No, they are borrowing it from China. Your children are expected to repay the Chinese.
Q. What is the purpose of this payment?

A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China ?

A. Shut up.

Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:

If you spend that money at Wal-Mart, all the money will go to China.If you spend it on gasoline it will go to Hugo Chavez, the Arabs and Al QuedaIf you purchase a computer it will go to Taiwan.If you purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala (unless you buy organic).If you buy a car it will go to Japan and Korea.If you purchase prescription drugs it will go to IndiaIf you purchase heroin it will go to the Taliban in AfghanistanIf you give it to a charitable cause, it will go to Nigeria.
And none of it will help the American economy. We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic only), or tattoos, since those are the only businesses still in the US.

A Conversation with Grumpy

I first introduced you to my muses last fall. Here is a link to that post:http://lumencapital.blogspot.com/2008/11/my-muses.html

For the most part they all have been lying low. Gracie had a client who lost a lot of money with Madoff and some of the original Boston Boys are now out of jobs. However I did have a long conversation last week with Grumpy. Grumpy is a portfolio manager with over 40 years in the business. He has seen it all and in fact called the 2000 market top but was nine months early. Anyway here is my take away from that call.

1. Thinks Obama Administration blew the stimulus package. Thinks they let Pelosi run all over them.

2. Thinks there is at least one more large Madoff out in the system that has not come public yet.

3. Thinks Obama Administration will try to raise tax rates before 2010 elections.

4. Thinks the greed on Wall Street is much more apparent and at a much higher level than it was 20 years ago.

5. Thinks stocks have discounted much of the negative news out to the end of the year.

6. Is "Wildly Bullish". That's his term. He thinks stocks will be much much higher a year from now. {Remember one thing-Grumpy tends to be six-nine months early in his calls!}

A Great Time To Buy A Car?

January Reported Auto Sales. Probably a great time to buy a car if you have any money!

• Ford Jan vehicle sales were down a greater than expected 42.1%.Ford’s fleet sales tumbled 65%,
• GM vehicle sales fell 49%, greater than the consensus of a decline of 39%.
• Toyota reported a 32% drop;
• Honda sales fell 27.9%
• Nissan reported a 30% decline;
• Mercedes-Benz division dropped 43%;
• Porsche sales skid 36%
• Volkswagen AG reported its U.S. unit’s sales fell 12%;

As an aside I might go to the Chicago autoshow tomorrow for the 1st time in about six years.

Jim Cramer on Retirement Funds.

From Jim Cramer's "Stay Mad For Life" regarding retirement funds:

"Without a big retirment fund, you'll never come close to getting rich. (Actually 'retirement fund' is a misnomer, implying that you pull money out of it from time to time to support yourself. From now on let's call it 'retirment capital,' because you can use it to generate more money even after you retire.)

The same tools and the same rules apply to building retirment money as apply to building any other kind of wealth. Your investments in retirement accounts and your investments in discretionary accounts will both take advantage of the fact that the future is cheap." --My comment. The size of retirement accounts depends on the needs of the individuals owning them. To some $100,000 in today's dollars might be adequate while to others a million might not be enough. Retirment accounts are tiered here at Lumen Capital. That is they are designed to be the last capital used for retirees since they continue to grow tax deferred. Note as well that in December Congress passed the Worker, Retiree and Employer Recovery Act of 2008 which effectively grants retirees a reprieve from making required minimum distributions in 2009.

Thought For The Week

From Richard Russell of Dow Theory Letters:

“What I think we’ve seen, so far, is the end of forced selling. At this point, professionals are trying to gauge whether the huge market collapse of 2007-2008 has discounted the worst to come or whether ‘the worst’ still lies ahead,” The drama should be played out over the next week or so.”

Source: http://www.ritholtz.com/blog/2009/02/words-from-the-investment-wise-21509/ My thoughts: He is referring to the bottom of that trend channel we have been discussing over the past few months. Right now that line is being watched almost more than anything else by most market pros.

Cramer on Diversification

Jim Cramer in "Stay Mad For Life" makes what I think is a very important point about diversification.

"The price of diversification is owning losers-they can't all go up at once. If you are running a diversified portfolio, you are going to have some losers on up days. In fact if they all go up at once, you probably aren't diversified enough, and when down days occur, you are going to get clocked something awful. Something won't be working if you are doing things right. Don't kick yourself; take it as a badge of prudence."

My take-diversification is a must in modern markets. Too often I've seen too many people put too many eggs in one basket. I have clients that still do this today and try as I will I can't talk them out of backing away from one particular stock or fund. Investments don't love you and the great wheel of fortune turns quicker in today's economy than most of us might think. We diversify by asset class and sectors depending on each client's unique profile within our system. One caveat to what Cramer says though. In a rip roaring bull market (anybody remember one of those?) a rising tide sometimes lifts all boats. That however is a signal to take an extra look at a portfolio because nobody is that smart or right all the time. At least nobody is that smart or right for those longer periods of time that a bull market can provide.

an tSionna 2.13.09 Friday the 13th

Well we are almost back to where we started at the beginning of the week. No sooner did stocks break through this trend line then they were thrown back almost to where they started on Monday. The good news is that we are still slightly above the red trend line. The bad news is that we are now also back in the trading range and also scrapping along its bottom. Going much lower would not be considered a good thing by many market observers.

*Long S&P 500 related ETF's.

Barron's On Earnings Revisions.

Excerpted article from yesterday's Barron's Online on S&P 500 earnings revisions. Link & my comments follow at the end.

More Earnings Setbacks Ahead in '09
By JOHANNA BENNETT

As long as the real numbers continue to trail optimistic analyst estimates, it's hard to imagine a sustained stock rally.

DISMAL FOURTH-QUARTER FINANCIAL results, grim corporate guidance and a powerful recession have finally forced Wall Street analysts to get real about future earnings and ratchet down expectations for a comeback this year. But here's the bad news: Their recent downward revisions have probably not gone far enough.....Still, estimates have not dropped enough, and until they do, companies will keep missing expectations, making a sustained stock-market rally near impossible.
"Things will get a lot worse before they get better," says Dirk Van Dijk, research director for Zacks Investment Research.

Profits generated by big U.S. companies plunged 42% year over year in the fourth quarter of 2008, causing a 12% decline for the entire year. And that follows a 3.5% profit drop in 2007 from a year earlier.....Now, profits are expected to tumble 13.8% to $64.02 a share for 2009, the index's worse profit performance since 2003, according to a Thomson Reuters First Call tally of analyst estimates. Still, strategists -- the top-down thinker's on Wall Street -- think even that number remains 10% to 20% too high.....Zacks' Van Dijk says "it's a fantasy" to think that the S&P 500 will earn in the mid-$60s a share this year, as the sell-side analysts currently believe. "Around $50 is far more reasonable," he says.

Corporate profits have fallen year over year for six consecutive quarters.
The Street expects that streak to end in the fourth quarter of 2009 when the financial and consumer-discretionary sectors post huge gains fueled largely by easy comparisons to dismal performances last year. Not everyone is that optimistic. Sell-side analysts don't always consider economic trends when predicting earnings and tend to rely too much on corporate guidance.
But as more large companies forgo estimates amid an uncertain economic environment, analysts are left flying blind.Meanwhile, companies that do issue projections are increasingly warning that earnings could fall short of expectations.

Bright spots will be hard to find in 2009. If you exclude financial and consumer discretionary -- the two sectors expected to rebound most robustly in 2009 from last year's travails -- then profits will fall almost 18% this year, according to Ashwani Kaul, Thomson Reuters' director of research. Health care, utilities and consumer staples are the farthest removed from financial and economic turmoil. But estimates for 2009 have dimmed considerably in recent weeks.
Meanwhile, retailers, technology, home builders, energy, industrials, materials, automobile manufacturers and financials all face considerable headwinds.

Hope runs high that the $789 billion economic stimulus plan moving through Congress, a multitrillion-dollar bailout of financial institutions, and other government policies will stabilize the financial system and rejuvenate economic growth.....{M}any economists seem to be pushing back the timing of the next economic recovery as evidence mounts that this recession is deeper than previously imagined.....It's no wonder that strategists remain circumspect.....

...."Investors believe we have already taken stock prices down enough," to reflect plunging earnings," says Ed Yardeni, chief investment strategist for Yardeni Research. "Investors are saying that they figured things out long before the analysts did."....
...Of course, profound uncertainty continues to pervade financial markets and the economy following the historic upheavals of 2008. A lot hinges on whether the government's massive efforts to stimulate the economy, rescue the banking industry and unfreeze credit eventually work, and how long it will take. Will oil prices spike again or the U.S. dollar resume its decline, both of which will help S&P earnings? In view of these questions, consensus Wall Street estimates calling for an almost 14% drop in corporate profits this year may not be grisly enough.
And with some strategists looking for $55 or less a share in S&P 500 earnings for 2009, the resulting price-to-earnings multiple of 15 times that forecast doesn't look very cheap.

None of this bodes well for stock investors.

My comment: While I think earnings still need to come down it is unclear to me that this hasn't already been reflected in the 50+% decline in stock prices. Stocks will likely sniff out a recovery months before it is reflected in the real world. Stocks will likely start to rise when investors believe markets have troughed. That is when investors believe things aren't getting worse. Waiting completely for things to get better will likely mean chasing stock market performance at some point. A big clue for this trough will be when analysts stop taking these numbers down.

Link: http://online.barrons.com/article/SB123439576910774875.html {Subscription may be required.}

*Long ETFs related to the S*P 500.

The Dow Vs. Gold

From the folks @ Chart of the Day (This is their push e-mail product so I do not have a link.)

"How significant is this bear market? It all depends on how you measure. When measured in US dollars, the Dow currently trades 44% off its October 2007 record high. However, when measured with that other world currency (gold), the bear market is much more significant. To help illustrate the point, today's chart (above) presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 8.4 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the Dow from 1999 to today is down 81%!"

Notes from the publisher:- Where's the market headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

Note we are long GLD and ETFs representing the Dow Jones Industrial Average in certain client accounts.

GE Analysis {Disclaimer }

Disclaimer:

This report on GE is for the primary benefit of clients and friends of Lumen Capital Management, LLC. Its information has been taken from sources deemed to be reliable but cannot be guaranteed. The research done for this report has generated an opinion on GE . Opinion is not fact. It is based on the information we know as of the writing of this document and could change at any time. There is no guarantee that any of the events mentioned above shall occur. While we do not think it is likely, there is no guarantee either real or implied in this report that GE could not significantly decline from these levels or even see its common shares become worthless. Persons other than clients of Lumen Capital Management, LLC who might receive this report should either do their own research or consult their own advisors before taking action based on anything written above. Lumen Capital Management, LLC received no compensation for the preparation of this document. Mr. English does not currently beneficially own shares in GE although positions can change at any time.

GE Analysis {Part VI }

Final Thoughts:

I do not know if GE will cut its dividend or lose its AAA credit rating. GE will likely remain under pressure or its stock price depressed until this issue is resolved. It’s other businesses are unlikely to rebound until there begins to be some pick up in the world economy. However I think that its current price discounts many of these issues. Here are reasons GE could go continue to decline: It would likely head lower if the market heads lower, if investors react less favorably than I consider likely if either the dividend is cut or the AAA rating is cut, the world economy continues to worsen or some other unforeseen event rises from the company. I would note that Warren Buffett got to look at GE’s books last fall and that did not prevent him from putting money in the firm, albeit at highly favorable terms to him. Terms that you or I could not get and actually diluted your interest in the company. But it was a vote of confidence that the company was not going out of business.

While I do not know whether we are at GE’s ultimate low price I am of the opinion that the company has likely discounted much of these concerns. Thus unless something comes forward to change what I see today, I do not think I would be a seller of its shares. Most firms on Wall Street rate GE as a current hold which means they think it will perform in line with the market. I would tend to agree with that analysis. However, I would also not say that it is time to buy shares in the company unless it was a shorter term trade or speculation. For longer term investors, I would prefer to see if GE can quit its longer term decline and enter a period where the stock trades sideways for awhile. If it can do that then it is likely the stock could trade north towards at least $20 at some time in the next 12-18 months.

However, it is my opinion that GE is not the company that it once was. It is now apparent that there has been more risk on its balance sheet through GE Capital than investors once thought. This is likely over time to compress its stock market multiple. I therefore believe that should GE get back to those $20 levels, investors should reevaluate their long term commitments. We will again review the stock for you should it at some point in the near future advance to those levels.

Game Plan: Trades 2.12.09

Game Plan: I re-entered some of the same trading longs for risk appropriate accounts today. I plan to expand this list over the next couple of days unless the market opens up much higher tomorrow.

I have been asked why I don't mention specific names or let you know if I've made or lost money on these transactions. Here is why:

1. These trades are not appropriate for all investors and I don't want to imply that they are.

2. It becomes tricky from a compliance standpoint when you try to document these sort of transactions in terms of gains/loss or return and I do not want to imply that each of these will always work. There is no guarantee that any of these transactions will make clients money and I don't want to imply that in any manner possible.

3. These posts like the blog itself are primarily meant for clients, prospects and friends of Lumen Capital Management, LLC. They are designed solely to let you understand our disciplines and our mindset. Because we do not know other's investment profile we feel the best way to protect ourselves is to speak generally.

4. Finally I am only interested in making money for my clients and myself. I'm not about to let the casual reader or investor make money off of my ideas. If you want me to work for you then pay me!

GE Analysis {Part V }

Valuation:

Current earnings per share estimates for this year and next are trending between $1.20-1.30 for 2009 and $1.25-1.40 for 2010. These numbers are subject to revision. These estimates have continued to trend down and the company has suspended earnings guidance for the balance of the year. Assuming though that these number do not change, fair value for the company could be calculated somewhere in a range between $9.60-16.00 for this year and $10.00-20.00 for 2010. Please note I am not saying where the company will trade but rather giving you an idea of where it COULD trade if conditions do not deteriorate further.

Coming Tomorrow....My thoughts on the Company.

More On Treasuries

This was published last week @ Barrons on line. I've exerpted it here and will provide a link after the article. It makes my arguement about Treasuries but in a more understandable manner.

HULBERT ON MARKETS

Stay Away From Long-Term Treasuries
By MARK HULBERT

"The quintessentially safe U.S. investment is overpriced and won't outpace inflation. Consider an inflation-protected alternative.

IT'S ALWAYS DANGEROUS TO THINK that we know more than the market. One doesn't have to be a fanatical believer in the markets' efficiency to nevertheless recognize that markets reflect a lot more information than any one of us can possibly incorporate into our analysis. The graveyards on Wall Street are filled with those who had the arrogance to believe otherwise.
So it is with no small dose of trepidation that I explore the possibility that U.S. Treasuries are incredibly overpriced, which of course is just another way of saying that their yields are way too low. But if they are, then investors should run, not walk, away from placing any long-term bets in U.S. Treasuries.

Instead, consider the alternative investments that I describe below.

Right now the yield on the 10-year Treasury note stands at 2.89%. On an after-tax basis for an investor in the highest tax bracket, that translates into an effective yield of 1.88%. In order for such an investor to show any real (after-inflation) return over the next 10 years, inflation therefore would have to average less than 1.88% for the next decade.
What are the chances of that? Even if you are investing in a tax-free account, what are the odds that inflation for the next decade will average less than 2.89%?

While you're mulling over your answer to these questions, consider the following: In July 2007, the 10-year Treasury note was yielding 5.2%. In other words, despite the federal government injecting trillions of new dollars into the financial system over the last 18 months, in a textbook illustration of the monetary inflation for which Federal Reserve Chairman Ben Bernanke earned his nickname of "Helicopter Ben," the markets are nevertheless discounting a much lower inflation rate today than then.

Or consider this mathematical truth about the power of compounding. Let's assume that the inflation is negative for the next two years, at a rate of (negative) 2% a year. That's deflation, in other words. That's a big assumption, since Helicopter Ben has dedicated himself to never allow the economy to slip into deflation.

But let's nevertheless assume that we get a 2% deflation for each of the next two years. Let's further assume that for the eight years thereafter that consumer prices actually grow and the inflation rate is 5% a year. That seems reasonable given how much money would be injected into the economy if we actually get a sustained deflation -- money that presumably will eventually translate into higher inflation. Given these assumptions, the inflation rate over the next 10 years will still average 3.6% a year. That's more or less twice the 1.88% after-tax current yield of the 10-year Treasury note.

To be sure, we can endlessly play around with these assumptions. But the general idea is clear: Locking in Treasuries' current yields provides a long-term real return only if inflation is a whole lot lower than what it seems quite clear it will be.
How did the markets get into this situation? The obvious answer: panicked investors' flight to quality over the last 18 months. Investors have been so concerned about the credit quality of any borrower other than Uncle Sam that they have been willing to forfeit much, if not all, of their yield. It's not that investors during this flight to quality reduced their expectations of future inflation. It's instead that in their panic they became preoccupied with the safety of their principal. Unless the world comes to an end, however, this credit and liquidity crisis won't last forever. And when it does dissipate, Treasury yields will once again reflect investors' expectations of future inflation. You don't have to be a market timer and try to predict when this will begin to happen to know that -- absent the end of the world -- it will take place eventually.

In many ways, the current situation is just the inverse of what prevailed in 1981, when the yield on the 10-year Treasury climbed above the 15% level. That meant that investors were betting that average inflation for the subsequent decade would be close to double digits. That in effect meant that investors were betting on the financial equivalent of the end of the world, since double-digit inflation for 10 years in a row would have been nothing short of devastating.
It took courage at that time to follow the contrarian conclusion and buy Treasuries. But there were at least some who did: The editor of one of the investment newsletters I monitor, who asked that I not use his name, told me that he put his daughter through Yale on the profits he earned from buying Treasuries at that time. And, it's probably needless to say, Yale's tuition is not cheap."

Hulbert then lists some ETF's that might be profitable if what he describes comes to pass. They are Barclays 10-20 Year Treasury Bond Fund (ticker: TLH), TIPS- the Treasury securities that are indexed against the consumer-price index and which therefore provide a guaranteed return above and beyond inflation and an ETF that invests in TIPS, the iShares Barclays TIPS Bond Fund (TIP).
Here is a link to the article. A subscription may be required. http://online.barrons.com/article/SB123377146295048587.html.

Treasury Refinancing

I saw this note at the end of last week. I've exerpted it to its relevent parts.

U.S. Treasury to Sell $67 Billion in Long-Term Debt Next Week, 2009-02-04 14:02:44.320 GMT

By Rebecca Christie and Vincent Del GiudiceFeb. 4 (Bloomberg)

The U.S. Treasury said it plans to sell a record $67 billion in long-term debt {this}week and bring back auctions of seven-year notes as a slowing economy and the bank bailout widen the budget deficit.

In its quarterly refunding statement today, the Treasury said it will sell seven-year notes for the first time since1993, and also will increase the frequency of 30-year bonds....The debt sales, which Treasury officials signaled last month after Congress passed a $700 billion bank rescue plan, are the government's response to the surging budget shortfall. Bond trading firms told the Treasury this week that they expect a $1.6 trillion shortfall in 2009 -- more than triple the record set last year." The fiscal outlook remained challenging," Karthik Ramanathan, head of the Treasury's debt management, told the Treasury's Borrowing Advisory Committee Feb. 3, according to minutes of the meeting released today. He told the panel that the Treasury will seek to extend average maturity and duration of its portfolio to reduce its dependence on short-term debt.... The Treasury is announcing a move from four 30-year bond auctions a year to eight.

The department said it would sell a new bond every quarter with a reopening a month later. The Treasury said it is also considering adding a second reopening of 30-year bonds and weighing "reintroduction orestablishment" of other securities....The seven-year note and more 30-year bonds will "provide some breathing room" for the Treasury, Stephen Stanley, chief economist at RBS Greenwich Capital Markets, said before the report. He's predicting a budget gap this year of $1.7 trillion. Government borrowing will probably reach $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. The Treasury said today it expects to reach the country's debt limit of $11.3 trillion in the first half of this year.

My take-the last great asset bubbles are likely in US Government Debt. Bonds have experienced an unprecedented flight to quality as risk aversion has left all other asset classes. Yields inevitably will go up which is why we continue to be interested in scaling into these kind of assets. Double short ETF on treasuries has rallied huge since the beginning of the year.

GE Analysis {Part IV }

Money Flow Analysis {Continued}

This is a daily chart of the company back to last summer. It again illustrates the oversold nature of the stock and shows in the pink down trending line the first level of resistance that the stock must penetrate. It is more likely that the stock will at some point enter into a period of consolidation in the areas shown on the chart. Currently that ranges looks like it could be between $11 & 16 per share. Please note that there is nothing to indicate from these charts that the stock could not continue to head lower before they rebound and start a consolidating phase. It again assumes no new issue arises from the company.

Coming Thursday....Valuation.

Trading Longs 2.10.08

Trade plan: I have sold many of my trading longs that I mentioned on 1.16.09 today. I will look to re-enter these when the meet my current trade parameters. This was done @ approximately 10:00 am today. Time at the bottom of post is incorrect.

GE Analysis {Part III }

Money Flow Analysis.

Above is a weekly chart of GE going back to 2000. GE decisively penetrated a band of support going back to its lows of 2002 last fall. Eventually it is likely that GE will rebound towards that line which is currently around $20.00. GE should have trouble initially penetrating this area of resistance. However that price is almost 80% higher than where the stock is currently trading. The stock is currently significantly oversold meaning sellers across many time frames are likely to at least pause from taking this stock lower. This part of this analysis assumes that there is no new issue that comes from the company.

GE Analysis {Part II }

Market Structure:

Global markets are engulfed in their worst bear market since the Great Depression. GE would have declined significantly irregardless of it's own issues. However the stock has significantly underperformed the market, declining over 70% versus the market's current 45% decline. My analysis is that the company could perform better on a relative basis to the stock market if investors felt more comfortable with the situation at GE Capital.

Charts Don't Lie.

Why I use Stock Charts.?

I use charts as part of an investment metric that also includes fundamental analysis, valuation and certain market cycle metrics. I'm going to go into this more in the future but simply put the reason that I like charts is that Charts don't lie. Management at companies lie all the time. So do some of our elected leaders and some of the people you see on TV. But a chart chronicling the daily price movements of a company or index reflects the daily & longer term views of all market participants and it delivers the naked view of all buyers and sellers. We'll talk more on this as the year goes forward. But the first lesson of charting is:

People Lie But Charts Never Do!

Barrons on Preferred Stock

Barron's Article on preferred stock. Here is an excerpt. My comment & a link follows.

It Only Looks Like a Wipeout
By ANDREW BARY
Preferred stocks may harbor fewer risks, more rewards.

THE $400 BILLION PREFERRED-STOCK market rallied smartly in late 2008 on the implementation of the government's Troubled Asset Relief Program (TARP). But now it's gotten slammed, amid concerns that Citigroup and Bank of America could be nationalized, potentially impairing preferred shareholders..... The market is discounting a scenario that exceeds the Great Depression," says one fund manager....
....It's tough to predict what will happen to the embattled Citi and B of A; both may be forced to stop paying dividends on preferred shares if their finances deteriorate further. But plenty of bad news already is discounted in their shares......NOTWITHSTANDING THE RISKS, these preferred stocks appear to offer an attractive alternative to the banks' common shares, owing to super-high yields and a higher standing in their capital structures.
....Throughout the preferred market, many issues yield 10%-plus. "The market is discounting a default scenario that greatly exceeds the Great Depression," says Don Crumrine, the chairman of Flaherty & Crumrine, a Pasadena, Calif. investment firm that manages more than $2 billion in preferred investments. "While this may turn out to be true, it seems highly unlikely in view of actions already taken by U.S. and foreign governments.".....
......The preferred market was badly shaken in September by the bankruptcy of Lehman Brothers, which appears to have wiped out preferred-stock holders, and by the government's decision to take control of Freddie Mac and Fannie Mae in a way that left preferred holders facing scant recovery on their investments. Fannie and Freddie preferreds now trade for under five cents on the dollar.......
....In October, preferred investors applauded the government's move to invest $350 billion of TARP money in banks via preferred stock that was equal in standing to the banks' investor-owned preferred, and junior to hybrid securities like trust preferred. Bill Gross, a managing director at bond giant Pimco, wrote in November, "With Uncle Sam as your partner, default seems remote."
The fear now is of a Fannie/Freddie-type nationalization of Citi and Bank of America that similarly would impair preferred holders, not to mention owners of common stock. But the Obama administration has resisted the idea, with Treasury Secretary Tim Geithner saying recently, "We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."
Bank of America CEO Ken Lewis said Friday that the nationalization notion isn't even "a remote possibility" and that the bank doesn't need any more government money.
PREFERRED STOCK COMES IN two flavors: Traditional preferred shares are a senior form of equity that ranks above common shares but below corporate debt. Trust preferred technically is debt, ranking above the regular variety.
Until recently, investors didn't make much distinction between the two. One benefit of regular preferreds is that dividends are taxed at the preferential 15% rate for individuals, while trust preferreds' dividends are taxed like ordinary income. Trust preferreds now trade at higher prices than regular preferreds of the same company, because investors want to own securities that rank above the government's TARP investments.
The Bottom Line:
The outlook for financial companies admittedly is uncertain, but many preferred stocks offer sufficiently high yields that investors may profit. That's especially true now that Uncle Sam holds similar investments.

My comment. One area that hurt my client accounts last year was owning preferred stocks. They have also been hit badly through January of this year. However, none of the preferred's that I own for clients has skipped a dividend payment and the preferred market has been rallying these past few days. While I think there is a possibility that some preferreds could default, I think that risk is becoming less likely. Still my preference would be to buy a preferred stock ETF at this point. We are currently long for clients the Powershares Preferred Portfolio Fund {Symbol PGX}. Its current SEC yield is is 11.45%. I currently think this is a better way to spread diversification and risk than purchasing individual preferred stock. Note however that except for tax harvesting purposes I have also not been a seller of my client's preferreds.

Please note that this is not a recommendation for investors to go purchase this fund as I do not know your investment parameters. You should simply use this as a point of reference in which to go out and do some additional research or speak to your own investment advisor. Nothing in this commentary should likewise be construed as anything other than opinion as preferred stocks and the PGX could decline in value and some preferred stocks could in fact default. There is no guarantee in this report of investment return. Likewise all information in this report has been taken from sources deemed to be reliable but cannot be guaranteed.

* Long BAC as an inherited legacy position for one client. Long C personally and for certain clients. Long PGX in client accounts. Long certain BAC preferreds for some client accounts. Please note these positions could change at any time. Information regarding PGX taken from Powershares.

Here is its link: http://www.invescopowershares.com/products/overview.aspx?ticker=PGX

http://online.barrons.com/article/SB123397130260259379.html (subscription may be required.)