Net Market Positive

Based on certain transactions we did on Friday for some of our more aggressive strategies we will move our short term rating to Net Market Positive.  You can click here  for a definition of this term.

In & Out This Week

Light week of posting this week and next.  Combine the lightened trading as Wall Street gears down for the last weekend of the summer, a couple of company out of office events and a few client meetings, means commentary is going to be spotty until for the next two weeks.

I did want to point out though that take-over activity both friendly and hostile is heating up as are corporate buy-backs.  This further supports the cheap market thesis we are developing.


Sanofi- Aventis goes After Genzyme

Intel already has committed to buying Mcafee now they are buying Infineon Wireless

Dell, HP and 3Par

BHP & Potash

No positions in any stocks listed above.

September

From Chart Of The Day:

"Except for a brief counter-trend rally in July, the stock market has struggled since peaking in late April. Investors are concerned. For some perspective, today's chart presents the Dow's average performance for each calendar month since 1950. As today's chart illustrates, it is not unusual for the stock market to underperform during the May to October time frame with a brief counter-trend rally occurring in July. It is worth noting that the worst calendar month for stock market performance (i.e. September) is fast approaching."

My Comment: There is a statistical period of weakness that typically runs somewhere between mid-August-through early to mid-October. There are all sorts of theories on why this occurs. These are my principle reasons for this.

The first is that the investment business essentially shuts down from about August 15-to Labor Day.  Volumes tend to be weaker during this time, allowing for negative trends to take hold. Many institutions such as mutual funds also have September 30 fiscal year ends. Typically they are adjusting their books for that date which also  may include tax loss selling.

A second reason is that late summer early fall means that we are much closer to the end of the year and corporations begin to fess up whether they are going to make their numbers.

Finally for whatever reason bad things just seem to happen this time of year. We've had hurricanes {Katrina} and wars {both World Wars started during this time, as did Iraq's invasion of Kuwait which led to the 1st Gulf War} and other calamities {9/11} seem to begin during this period.

Finally it should be noted that while this late summer/early autumn period is seasonally weak, it doesn't have to mean stocks have a precipitous decline. Last year for instance stocks posted over a 3% gain in September.

Link: Chart of the Day. September

*Long ETFs related to the S&P 500 in certain client accounts.

an tSionna {8.26.10}

*Long ETFs related to the S&P 500 in client and personal accounts.

Investors Flee Stocks.

Article in Sunday's New York Times.  Excerpt with my highlights.  I'm going to have much more to say on this subject in the coming weeks. 

In Striking Shift, Small Investors Flee Stock Market

By GRAHAM BOWLEY, Published: August 21, 2010

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.  If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

.....As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.

"At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”

The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security. It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.

For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession. “For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”.....

.....To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.  Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.

Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.  And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.

On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.

According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group......

.....Investors’ nerves were also frayed by the “flash crash” on May 6, when the Dow Jones industrial index fell 600 points in a matter of minutes. The authorities still do not know why.  Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.

Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.....A big beneficiary has been bond funds, which offer regular fixed interest payments.

As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009......

Link:  Small Investors Flee Stock Market!

an tSionna {Boxed In}

Chart showing trading range stocks have traced in the last year. 

SPY closed today at 107.13.  Based on 80 of estimated earnings for the underlying index, it trades at roughly 13.50 times this year's estimates and 12 times the numbers we are currently using for year end 2011.

The earnings yield {inverse of the PE} for this year is roughly 7.5%.  These valuations say to me that either we are in fact going to have that double-dip recession that everybody is afraid of right now or stocks are absurdly cheap!

Stay tuned.

*Long ETFs related to the S&P 500 in client and personal accounts.

2nd Quarter Earnings Report

From Chart of The Day {Link: Earnings }:

With second-quarter earnings largely in the books (95% of S&P 500 companies have reported for Q2 2010), today's chart provides some long-term perspective to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low which brought inflation-adjusted earnings to near Great Depression lows. Since its Q1 2009 low, S&P 500 earnings have surged (up over 800%) and currently come in at a level that occurred at the peak of the dot-com bubble. It is interesting to note that the original run-up in real earnings from Great Depression lows to dot-com highs took over 67 years. The current spike has taken 13 months.

*Long ETFs related to the S&P 500 in personal and client accounts.

Bonds

CNBC has a section on right now called "If You Had A Million Dollars?" In essence they're asking a few guests where to put a million bucks between treasuries, commodities and large cap stocks. Since I have the TV on mute I don't know what time period they're talking about.

However if their horizon is anything longer than about three months, I'm pretty sure that treasuries will finish dead last on a return basis.

We've discussed bonds before when we noted in the spring that Individuals were not bullish on equities. We also commented last winter regarding massive mutual fund inflows into bonds. These inflows into bonds, fixed income mutual funds and ETFs has only increased in the past few months as investors have become more risk adverse over the summer.

Yesterday for the first time since 1962 the dividend yield on the Dow Jones Industrial Average eclipsed the dividend yield on the 10 year Treasury. This is an astounding statistic as it basically says investors have so little confidence in the future that they are willing to take a real rate of return that will likely be less than the rate of inflation for the next 10 years!

Gun to my head stocks significantly outperform bonds over the next 1, 3, 5 and 10 year horizon! There I said it. Now we'll have to see if I'm right!

*Long certain fixed income ETFs in certain client accounts. Long ETFs related to the Dow Jones Industrial Average in certain client accounts.

Demographics: Older People Working Longer!

In the same vein as our posts from a week or so ago regarding Greenspan and unemployment, here is another interesting piece from a while back over at the Big Picture regarding demographics. Simply put there are more people unable to enjoy their golden years in retirement.

From Invictus:

(Invictus here, ladies and gents):

Shortly after the minimum wage was raised last year, the right-wing chorus rose up and began to assert that the rise in teen unemployment was directly attributable to the more generous pay scale. To my eye, and based on numbers I’d crunched, I thought demographics were much more at play (note: that’s “much more,” not “exclusively”), and said so here last September:

There is evidence – real, actual evidence! – that it’s the 55+ age cohort staying in – or re-entering – the job market that is much more at play than the minimum wage…Where there had been less than 2.5 workers 55+ per teen worker in the year 2000, that number has now jumped to a record 5.5…As a percent of the workforce, the 55+ age cohort has now reached a new record of 19.4%, clear evidence that older workers are squeezing younger workers from the workforce.

and here last November:

…simple demographics coupled with the damage wrought by this recession on the Baby Boom generation — in terms of both real estate and investment portfolios (particularly retirement portfolios) — is so great that many Boomers have realized they’re going to have to postpone retirement (see one story on that here, there are thousands on “postponing retirement” out there on The Google).

I reiterated that position here at TBP last month when illegal immigrants became the target of choice for stealing teen employment:

What about demographics — an aging boomer population — and a crappy economy that has the 55+ cohort postponing retirement and consequently crowding out the younger generation (parents keeping their own kids/grandkids out of the job market, as I put it a while back). The data is there for all who choose to explore it.

Well, now comes Bloomberg news with this:

Workers Over 65 Vie With Teens in Labor Market for First Time Since Truman

U.S. employees old enough to retire are outnumbering their teenage counterparts for the first time since at least 1948 when Harry Truman was president, a sign of how generations are now having to compete for jobs.....

Link: Demographic Story Coming To The Fore.

Comment: In my town of River Forest there are many jobs traditionally done by teens {specifically lawn mowing, bagging groceries and newspaper routes} that are today done in the main by adults. As a kid I did all three of these mentioned above. Today a kid probably couldn't get most of these around here.

an tSionna {8.17.09}

On August 5th I posted that I wouldn't be surprised to see stocks at least pause in their rally and possibly give back some of July's gains. I thought there were a variety of reasons why stocks might do so and the link above will give you the reasons I thought that might occur.

What I did not list in that post was that there's been all sorts of evidence in the past few weeks that economic activity has slowed. This was made even more apparent last week when the Federal Reserve issued a less than glowing forward economic outlook. Stocks took one look at that, also digested some weaker economic forecasts from certain technology companies, and printed a 3% decline on Wednesday.

That decline has likely broken the forward momentum for stocks now. That doesn't mean we can't have a snap back rally given the magnitude of last week's decline. Stocks sold off too far too fast and the likelihood will be that traders will attempt some sort of rally to at least see if they can get some positive traction going. However, probability suggests that it will fail at some point along the blue downward sloping trend line I've shown in the chart above.

I've also shown the next levels of support should we continue to see some weakness. I think absent some additional news not already factored into the market the current valuation metrics likely means there is a decent floor underneath stocks. But I think we'll see some listless nontraditional activity now until at least after Labor Day when Wall Street traditionally comes back to work.  This would allow us to work through the over bought situation that we're currently in.

Valuation's basic metrics say that the longer term risk return for stocks, given what we know today, is still attractive. However after taking into account the forward economic estimates and adjusting earnings to what a slower growth environment could mean, I think it's prudent to take down my end of the year market target as well as 2011 numbers. I've already lowered my S&P 500 target estimate for 2010 back on July 19th. to a range of 1225-1300 for year end. I'm going to lower that estimate another notch to 1160-1260 and will use a 1215 midpoint for year end. I will use 1300-1350 as a going forward estimate for year end 2011 at this point.

This is an end of the year reduction in E&P estimates of about 3.5%. I would note that from where stocks closed today {roughly 1080 on S&P 500} I still believe that they are undervalued with price potential on an estimate basis of approximately 12-20% over the next 18 months. No changes in the game plan right now and no change to our market view although I am inching closer to making a short term change, especially if I see some signs that stocks might try to rally up to that blue trend line described above in the chart.

I'm not there yet, may not get there, and would emphasise that would only be for some of our shortest term strategies.

*Long SPY in certain client accounts. Long ETFs related to the S&P 500 in client and personal accounts.

Please note that what is posted here is solely our market opinion and not a recommendation to buy or sell securities or a recommendation on where the market might be headed. I post for the benefit of clients and friends of my firm, Lumen Capital Management, LLC. You should not act on any articles posted here without consulting your own invetment advisor or doing your own homework. Better yet, hire us and we'll show you how we use our investment disciplines.

Back Home!

and summer's lease hath all to short a date  :-{

Stock Market Talking Points {Conclusion}

Today is the conclusion of our Stock Market Talking points series. These posts are based on a Wall Street Journal article published a few weeks ago which we are featuring in serialized form. In the series the author, Brett Arends, takes what I will term 10 very common market talking points from both brokers and financial advisors and posts a rebuttal to each. My comments are in response to each section of the article.


8 "We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

For various reasons discussed in the past I prefer to build diversified portfolios mostly with ETFs. I have clients who own mutual funds as legacy positions but all things considered I believe that ETFs are a better and more efficient investment vehicle.


9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

I agree with this comment.  Study after study has shown that something like 70% of a stock's return comes from market or sector moves. 



10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."

This is similar to point two published last week here.  I think the author ran out of different myths when he came to point number nine!  See my comments posted there.

Link: Stock Market Myths

Stock Market Talking Points {Part Four}

Today is part four of our Stock Market Talking points series. These posts are based on a Wall Street Journal article published a few weeks ago which we are featuring in serialized form. In the series the author, Brett Arends, takes what I will term 10 very common market talking points from both brokers and financial advisors and posts a rebuttal to each. My comments are in response to each section of the article.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

In my opinion the best way to determine the relative attractiveness of stocks is to apply the inverse of the PE ratio which is the earnings yield and compare that to the rate of return on the 10 year treasury which is as of this writing trading just under 3%. So for example if you think as I do that S&P 500 earnings will come in a midpoint of about $80 per share this year that gives the market, currently trading around 1122 an earnings yield of just over 7%. {$80 of earnings / 1122 S&P 500 market price as of this writing}

At 400 basis points to the 10 year, that is still an attractive level of valuation by the way I set parameters for clients. If we use a midpoint range next year $85 for the S&P {which would indicate corporate earnings growth slightly higher than 6%} then we come up with a current earnings yield of around 7.5%.

Now it's possible that earnings, that's the E in the equation, will be higher or lower as we proceed through the year. That's where fundamental analysis needs to kick in. Earnings yield has a pretty good track record as well forecasting future growth.


7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

I agree with the author's statements here. While valuation means different things in different environments This is why it must be the fourth leg of the investment chair along with overall market metrics, fundamental analysis and money flow analysis.




Link :Stock Market Myths.

We'll conclude this series next week.

*Long ETFs related to the S&P 500 in client and personal accounts.

Stock Market Talking Points {Part Three}

Today is part three of our Stock Market Talking points series. These posts are based on a Wall Street Journal article published a few weeks ago which we are featuring in serialized form. In the series the author, Brett Arends, takes what I will term 10 very common market talking points from both brokers and financial advisors and posts a rebuttal to each. My comments are in response to each section of the article.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

The author's retort is the common response to the bullish longer term prognosticators. The author is essentially correct if one looks at static time periods. There have been three periods of time in since the 1920's when stocks have significantly underperformed. These are called secular bear markets These were periods roughly corresponding to 1929-1946, 1969-1983 and 2000 until now.

Each of these periods were marked by these factors.

1) A significant and longer term uninterrupted prior period of growth {think "Roaring 20's", "Post-War Boom" and "Technology Boom" monikers that labeled these times}.

2) An external shock to the economic system such as war or depression.

3) Subsequent government policies in response that stifled economic growth.

Most of the time the rebuttal to stocks as long term growth vehicles simply makes the assertion based on fact that investors who put money in the market for example in 1929, 1969 or 2000 had to wait years to get their money back. The other side, investors who put money to work in 1933, 1972 or perhaps as we may in the future see March of 2009, when market's bottomed made out pretty well.

The short is again as we said yesterday, look at rolling periods of investment.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

Someday I'm going to do a whole series on risk. The subject is too complex and time consuming to simply cover in one post. I think the author is wrong here on several counts because there are more types of risk than losing principal. Investors putting money in bonds today for retirement for example risk not only principal but also the possibility of not having enough money for retirement as well as inflation risk. Buffett's investments are not exactly riskless either. Warren has had plenty of investments that have lost money for him. I think the difference between Buffett and many others is that he seems to have an investment plan which allows him to define his risk.

Tomorrow we'll post part four!

Link:  Stock Market Myths.

*Long ETFS related to the Dow Jones Industrial Average in certain client accounts.  Long ETFs related to the S&P 500 in client and personal accounts.

Stock Market Talking Points {Part Two}

Today is part two of our Stock Market Talking points series. These posts are based on a Wall Street Journal article published a few weeks ago which we are featuring in serialized form. In the series the author, Brett Arends, takes what I will term 10 very common market talking points from both brokers and financial advisors and posts a rebuttal to each. My comments are in response to each section of the article.

2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

I believe the author is correct in his assessment. While there is pretty good data from the 20th century on the rate of return of equities, relying on data any earlier than that is suspect. There have been many studies trying to figure out what the true rate of investment return was for companies prior to 1900. Most come up with different conclusionsm, usually to support the argument of whatever side the author of said study is arguing. Each era is also different so trying to draw some conclusion using 19th century data in a 21st century world will not likely help most of today's investors retire wealthy.

Probably a better way to look at historical data is take a 10 or 20 year rolling average and seeing whether those rates of return are higher or lower than some historical average for the 20th century. Investors can play with these numbers if they want. We often use a series of historical averages between 6-10% to compare previous rolling periods. If the current period return is higher our historic range then it suggests a period of under performance is in order. The opposite when current period returns are comparative much lower can also be applied for suggestive comparisons.

Currently for example you take a 10 year rolling average of the S&P 500 {2000-2010, which is also one of the worst 10 year periods ever recorded} then the data suggests that the next 10 years should be a better period for stocks.

3 "Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when. The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

Economists look at past data to try and forecast future trends. The stock market is a forward looking mechanism that votes everyday with investor's money. Markets bottom months before the economy and stocks usually peak in a cycle when everything looks fine.  Economic data since it is generally backward looking does a poor job when trying to forecast future returns.

Link: Stock Market Myths

Tomorrow we'll publish part three!

*Long ETFs related to the S&P 500 in client and personal accounts.

Stock Market Talking Points {Part One}

Wall Street Journal Article on investment myths. Probably a better title for the article would be Stock Market Talking Points so that's what I'm going to call a new series that I'm beginning today, there's simply too much here worth discussing to try and cram it all in one event. I'm going to post substantially the whole article in serial form over the next week. My comments are in dark blue after each section. Here is part one.

Ten Stock-Market Myths That Just Won't Die.

By BRETT ARENDS

.....At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut.

It is unlikely that most brokers or financial advisors told clients to take all their money and put it into cash at either of these periods. Regarding the future the chrystal ball that marks our profession is as cloudy as the next persons in even the best of times. A good advisor likely recognized that storm clouds were drawing near and may have taken some defensive measures but it is unlikely that going 100% to cash was one of these things. {I might cover this in terms of something called "game theory" in some future post.}

2000 is perhaps the easier case to defend. Back then most investors recognized that the market was high by historical measures of valuation. However the same could have been said about the markets in both 1998 and 1999 {Alan Greenspan gave his famous "Irrational Exuberance" speech at the end of 1996}. Advisors that counseled a more conservative stance back then had to explain to their clients how they missed out on one of the greatest bull markets in history. Often they didn't get that opportunity because their clients simply fired them, looking for more aggressive investors and willing to take more risk at that time. {Grumpy is perhaps the lone exception to that rule. He became really bearish in the summer of 1999. Yet even he did not take either all of his or all of his clients out of stocks. He was something like 50% invested back then.}

Also the pullback seen by stocks in the Spring of 2000 at that time wasn't seen by most as anything other than a normal retracement similar to those which had characterized the great bull market of the 1990's from time to time. The shellacking taken by internet and tech stocks in March, 2000 was seen as a correction of speculative excess in a very hot sector of the market.

It wasn't until much later in the year that we had evidence that the economy had slowed a bit. That's when the decline caught up with the rest of the market. I'd also note that in February, 2000 it was impossible to foresee that year's contested Presidential election, 9/11 with the subsequent war in Afghanistan or the Iraq War.

2007 is perhaps a slightly different story because evidence began to pile up that year of an economic slowdown and problems with the housing market. But the events that overtook the world by mid-year were almost impossible to predict and it is still my opinion that if the Government had taken the same actions with Lehman Brothers as it did with AIG, perhaps the crisis could have been averted or mitigated.

Finally I would note that having seen now financial Armageddon three times in my investment career {1987, 2000-2003, and 2007-09}, I will say with confidence that it is almost impossible to predict and almost impossible to protect portfolios 100%. I will also say with confidence that it will happen again at some point in time.

In my opinion the true worth of an investment advisor when the world goes dark is whether they have any defensive strategies in place, what is their investment plan for times like that {which is why we have developed the game plan and the playbook } and whether their portfolios are designed so that when Armageddon occurs that clients have a reasonable opportunity of surviving the event with the ability to put the pieces back in place when it ends.

Link: 10 Market Myths

Part Two will be posted tomorrow.

Rhode Island

Time for some sand in the shoes!  I will be working out of the Narragansett, Rhode Island  office next week.  I'm leaving you with a series on market myths while I'm away!!

an tSionna 8.05.10

Chart of the S&P 500 spyder {SPY}. We've had a nice rally off the bottom that we put in in recent weeks. The SPY is up over 10% since then. Given what we've seen this summer, the playbook suggests we have to start considering the possibility that we'll see some sort of pause in this rally over the next few weeks or so. As always we take a weight of the evidence approach. Here's why that sort of analysis suggests we could see the "pause that refreshes" going into the fall:

1. Entering the most seasonally weak period for the stock market. Forget monthly returns! Data suggests that the period from roughly late August to early-mid-October is seasonably and historically the worst investment period for stocks. I could write forever on why this often happens. One of the main reasons I think is that between now and Labor Day most of Wall Street is on vacation. I've always thought that plays a big part in getting the bearish ball rolling in most years. Wars, pestilence and market crises also seems to arrive during this time. This doesn't mean stocks have to go down. It does mean that we need to be aware of where we are in the calendar.

2. Great return since July. As I've already mentioned stocks are up big in a relative short period of time. At some point profit taking is going to kick in.

3. By and large economic data has started to skew more negative. While I don't think that derails the bigger picture {stocks in my opinion higher by the end of the year, economy growing at a slower pace than is normal post most recessions} I do think it could be seen as a headwind and give investors a reason to lock in profits if the data continues to point towards more weakness in the months ahead.

4. News cycle will increasingly focus on the fall elections. Investors hate uncertainty. This will hang out there until the market decides who will be the winners and losers.

5. Becoming over bought in all three of the time frames we follow. I should have said exactly this sentence in the chart captions above instead of implying we are already there. We are approaching levels in terms of money flows into and out of stocks that has historically suggested caution.

The game plan's response to where we are right now is to take a wait and see approach. While the evidence suggests we could take a pause in the market's advance there is no current evidence that this is happening. Markets have shown resilience to bad economic news recently, suggesting that much of what we might see in the coming weeks may already be priced into stocks. The markets may also be sniffing out some very positive scenario that investors don't see yet and could confound all of us by heading higher into the fall.

In general though the game plan suggests at least we become a bit more defensive shorter term in our thinking and attitude of where we are right now with stocks. Broadly speaking that means that for the most part we are not buyers of securities for growth accounts at this time {exception to this is some new money that has come to us of which part of the accounts need to be invested}. I am also defining levels where I would become more defensive for clients based on their investment strategy and risk return parameters should markets take a turn for the worse.

I have been Net Market Neutral  recently in the shortest term we follow. I will keep that rating although to be fair I have been, and plan to be, a bit more aggressive regarding some shorter term trades in one of our more aggressive strategies regarding protecting short term trading profits we have in those accounts. I am leaving the net market positive ratings for both longer and middle term periods. I still think stocks are attractively valued longer term and nothing here changes my thought process that stocks could still be higher from here {1220-1300 by year end, 1260 possible mid-point year end valuation }. But I think it is possible that sellers could begin emerging soon. I want to alert you to that possibility.

One final thing. I always follow the consigliere 's  maxim that "market's will do what they need to do to prove the most amount of people wrong". I define his definition down to "what would cause the most hurt to the majority of market traders". I think the most hurt would be this. Market moves up to around 1150 taking out that next resistance level we've shown above. That would force all sorts of people to feel like they are missing a major move-forcing them into stocks. Then I think a sell-off from there would cause the most amount of pain. We'll see!

*Long SPY in certain client accounts. Long ETFs related to the S&P 500 in client and personal accounts.

Please note that what is posted here is solely our market opinion and not a recommendation to buy or sell securities or a recommendation on where the market might be headed.  I post for the benefit of clients and friends of my firm, Lumen Capital Management, LLC.  You should not act on any articles posted here without consulting your own invetment advisor or doing your own homework.  Better yet, hire us and we'll show you how we use our investment disciplines.

Two Economies

We've discussed in the past my thinking about how America has devolved into two economies and here is a place where I've discussed that in more depth. Barry Ritholtz over at The Big Picture commented yesterday on Alan Greenspan's Meet The Press interview on the same subject.

BTW I think the households under my $60,000 income threshold are in worse shape now than a year ago. Excerpt with my highlights. The italicised portion is the transcript of Greenspan's comments.

“Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the–and everyone’s pointing out, are in excellent shape.

The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.”

-former Fed Chair Alan Greenspan, Meet the Press

Here are Ritholtz' comments:

Fascinating quote from Easy Al on Meet the Press via Bloomberg. It has 3 subtexts that might not be readily apparent — until we break it down:

1) Extend the Bush tax cuts on highest bracket earners: Since its the 401(k) crowd that are carrying the recovery, Greenspan suggests, then we best not crimp the income of these big spenders

2) Two Americas: Greenspan seems to be channeling John Edwards when he discusses two economies. The bailouts reduced competition. They extended the life of badly structured financial firms, and forced smaller firms to scramble.

3) Greenspan’s Legacy: It seems that Easy Al can figure out precisely what he has wrought. The secret to getting such candor out of the former Fed chief is to trick him into discussing the broader economy. That way, he does not realize that he is discussing the effects of his tenure as FOMC chair

Of course, Greenspan is still wrong on Housing. Recall that he failed to recognize the impending housing correction (collapse more accurately) and made claims that the worst was behind us — just as housing was accelerating downwards:.....

....One last thing: {Ritholtz} gives Greenspan credit for this touch of tax cut honesty:

“Look, I’m very much in favor of tax cuts, but not with borrowed money. And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous.”

Link: Ritholtz: Two Economies.

Happy Anniversary

Happy Anniversary to the Belle of the Ball!  26 years and counting!  Whoda thunk that way back when!

S&P Inflation Adjusted

From Chart of the Day:

For some long-term stock market perspective, today's chart illustrates the inflation-adjusted S&P 500 since 1900. It is of interest that, when adjusted for inflation, massive bear markets similar in magnitude to what occurred in the early stages of the Great Depression (i.e. early 1930s) are actually not all that uncommon. For example, the secular bear markets that concluded in the early 1920s and early 1980s were of similar magnitude. It is also of interest that the inflation-adjusted S&P 500 is up 550% since 1900. This equates to an average annual return of 1.7%. Currently, with the S&P 500 trading 41% off its inflation-adjusted year 2000 peak, the S&P 500 trades very much near the center of its century-plus upward sloping trend channel.

Link: Stocks Inflation Adjusted.

Comment: Market looks to be at some sort of mid-level value based on this analysis. In particular it is disconcerting that the slope of this chart is still moving lower. However I would note that if we do start to see a better environment for stocks and if the economy starts to recover, then based on this inflation adjusted chart stocks would seem to have more room to move to the upside before they would be overvalued.

*Long ETFs related to the S&P 500 in client and personal accounts.