Happy Xmas (War Is Over)

We'll conclude our look at holiday songs with a tune a bit more somber than the rest.  However since this year is the 30th anniversary of John Lennon's death, it seemed appropriate to look at the one original Christmas song that John recorded, which by the way was also a protest song over the Vietnam War.

Happy Xmas (War Is Over) is a song written by John Lennon, released as a single in 1971 by John Lennon, Yoko Ono, and the Plastic Ono Band on Apple Records.....It peaked at #3 on the Billboard Hot 100 and #2 on the British singles chart. The song's first appearance on album was the 1975 compilation Shaved Fish. Although ostensibly a protest song about the Vietnam War, it has become a Christmas standard and has appeared on several Christmas albums.

The lyric is based on a campaign in late 1969 by Lennon and Ono, who rented billboards and posters in eleven cities around the world that read: "WAR IS OVER! (If You Want It) Happy Christmas from John and Yoko". The cities included New York, Los Angeles, Toronto, Rome, Athens, Amsterdam, Berlin, Paris, London, Tokyo, Hong Kong and Helsinki. At the time of the song's release, the US was deeply entrenched in the unpopular Vietnam War. The line "War is over, if you want it, war is over, now!", as sung by the background vocals, was taken directly from the billboards.

The record starts with a barely-audible whisper of Christmas greetings to their children: Yoko whispers "Happy Christmas, Kyoko", then John whispers "Happy Christmas, Julian". The lyric sheet from the 1982 release The John Lennon Collection erroneously gives this introduction as "Happy Christmas, Yoko. Happy Christmas, John".

It was recorded at Record Plant Studios in New York City in late October 1971, with the help of producer Phil Spector. It features heavily echoed vocals, and a sing-along chorus. The children singing in the background were from the Harlem Community Choir and are credited on the song's single. The lyrics were written by Lennon and Ono, and the melody and chord structure quote the folk standard known as "Stewball."[1] However, Lennon deviates harmonically in crucial ways from the original tune at the beginning of each major section, modulating through secondary keys before arriving back at the main key. This results in a more expansive harmonic progression, while it also lifts the melody higher each time, ultimately into the soprano range where it is passed upward to Yoko Ono and the children's chorus. The striking sense of forward movement and magnification with each modulation and registral change, neither of which is present in the original folk tune, is a key part of the song's expressive appeal. The single was released in the US in December of 1971, but the UK release was delayed until the following November due to a publishing dispute. The song was re-released in the UK on December 20, 1980, shortly after John Lennon's assassination on December 8, peaking at #2.  Source Wikipedia

Here is John Lennon singing Happy Xmas (War Is Over)

And on behalf of the entire staff of Lumen Capital Management we wish you a prosperous 2011!

PS.  Edh Tess, ce-theyan emaenomye!

All I Want For Christmas Is You.

A holiday bonus!  Few Christmas songs from the modern era seem to be withstanding the test of time.  However, a few years back pop singer Mariah Carey recorded All I want for Christmas is You.  It seems to be on the verge of making it into the Holiday Pantheon.  Below is the story of how this song came to be.

"All I Want for Christmas Is You" is a song by American singer-songwriter Mariah Carey from her fourth studio album, Merry Christmas. It was released by Columbia Records on November 1, 1994, as the lead single from the album. The song was written by Carey and Walter Afanasieff, who also served as producer. An uptempo, pop love song, it incorporates bell chimes and heavy back-up vocals. Its lyrics describe a woman's declaration that she does not care about Christmas presents or lights; all she desires for Christmas is to spend time with her lover.

The song's music video was filmed during the Christmas season of 1993. It presents scenes of Carey decorating a Christmas tree, spending time in the snow, and performing other festive activities. .......Music critics have universally lauded "All I Want for Christmas Is You". According to The New Yorker, the song is "one of the few worthy modern additions to the holiday canon."[1]

In order for Carey to be perceived as an entertainer by the public, and not just a pop singer, she was pressured to record a Christmas album. Carey, having grown up in a religious Catholic family, agreed to record the album.[4] In an interview, Carey explained the inspiration and reasoning behind the song:

"I'm a very festive person and I love the holidays. I've sung Christmas songs since I was a little girl. I used to go Christmas caroling. When it came to the album, we had to have a nice balance between standard Christian hymns and fun songs. It was definitely a priority for me to write at least a few new songs, but for the most part people really want to hear the standards at Christmas time, no matter how good a new song is.[4]"

While recording the album during the summer of 1994, Carey wrote the song. Author Chris Nickson described the song as "fun and mellow," and felt its energy level contrasted with the album's strong religious theme, assisting Merry Christmas cross demographic barriers.[5] The song's inspiration came from Carey's sentiments toward then husband, Tommy Mottola.[5]....

....Carey performing live in las Vegas in 2009"All Want for Christmas Is You" has become "one of the essential musical hallmarks of the holiday season and continues to set records each year," according to Legacy Recordings....Every December from 2005-2008, the song has topped the Billboard Hot 100 Re-currents chart and has become the best-selling holiday ringtone. Additionally, it is the first holiday ringtone to be certified double-platinum by the Recording Industry Association of America (RIAA).[3] Additionally, the song is the nineteenth best-selling digital single prior to the 2000s decade; the highest charting female and holiday entry on the list.[2] As of December 2010, Nielsen SoundScan estimates the sales of the digital track at over 1,772,000 downloads.[19]

Here is Mariah Carey performing All I Want for Christmas is You!

Source:  Wikipedia.  Link

Jingle Bells

Today we'll revisit the timeless classic that is  Jingle Bells!

Rudolph

No Christmas season is complete without the story of Rudolph the Red-Nosed Reindeer.  Here is how ole Rudolph came into creation!

White Christmas

Here is how White Christmas came to be!

Merry Christmas

It is our fervent hope that each and every one of you who reads this has a wonderful holiday season. Whether you are about to celebrate Christmas or have already celebrated Hanukkah, it is our hope that peace and joy are with you during this season. We also hope that 2011 is a year of prosperity for each and every one of you. Finally from all of us we wish you a Merry Christmas and a Happy New Year!

Beannachtaí na Nollag

              Beannachtaí an tSéasúir agus 

        Athbhliain faoi mhaise duit!

Silent Night!

Below is the story of "Silent Night!"

Stille Nacht

I'll Be Home For Christmas

Below is the Story of I'll Be Home For Christmas

I'll Be Home For Christmas!

The Holiday Season

Well it's that time of the year again!!! The holidays have rolled around and we're going to take a bit of a hiatus until early 2011. At this time of the year the markets will largely be on cruise control until January.  We as a family will be headed to warmer climes for about a week.  Don't worry though!   Lumen Capital Managment travels well and the wonders of the modern world mean that I can be connected almost any place I choose to go.  If there is some important development. I'll be on it.  But seeing as  not much happens this time of year, I thought I would do a repeat look look at the origins of some of the most lasting and beloved images of Christmas between now and year end. While this is a repeat, I've found it interesting that this series has garnered more comments & compliments than almost any other series I've run.  That must mean most of you are more interested in the holidays this time of the year than the stock market.  That's the way it ought to be!!! Simply click on the links and they will take you to the story.  

Today  The Christmas Song!

an tSionna {end of year}

Final chart session of the year.  This is a longer term view using weekly charts.  You can double click on it to make it bigger.

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

Letter To A Friend. {Conclusion}

Finally I’d like to briefly elaborate on what we discussed regarding risk the other night. I think that insurance, investing and speculation are similar concepts. All three deal with an unknown variable which is the future. All three to some extent deal with odds. All three deal with risk of economic loss. The difference though is that investing, if done properly, let's you work when the odds are in your favor with less risk of catastrophic loss. Let me explain.

Insurance of any sort seeks to mitigate economic loss. Life insurance seeks to compensate your heirs should something happen to you. {I often use the example of getting hit by a dark bus}. Similarly health insurance helps protect against the cost of catastrophic illness.

Gambling however is a binary event. Strategies can be developed based on probabilities in different games but at the end of each turn gamblers either win or lose. Further each loss is a catastrophic loss in that you lose 100% of what you have on the table. There is no game in a casino where the odds are in the customer's favor. Since every bet in gambling involves potentially a 100% loss and with the odds stacked against gamblers, it should be no wonder that casinos are very profitable enterprises.

This same concept also applies to cards. Card games like Texas Hold-em have similarities to investing in that players are looking to make strategic decisions based on mathematics and psychology. Card games also remove the issue of the “house”. However each loss is still a 100% loss. You can develop strategies to minimize this risk but you can never take it completely out of the equation. Not playing all of your chips for example still does not take away from the fact that each bet is a potential catastrophic loss. Only one person wins a Texas Hold-em tournament.

Investing, particularly if it is pursued along a longer term, well executed strategy does not have to be that binary event. Warren Buffett who we discussed earlier once said, “The stock market is a no called strike game. You don’t have to swing at everything-you can wait for your pitch.” That is you can wait for when the odds are in your favor. Investing with the odds and with a sound strategy also gives you the opportunity to cut your losses when things go bad. This is often without it being a 100% loss of principal that happens with a gambling bet.

To put it another way, think of this example. You are playing black jack. You have an ace down and a face card. The dealer is showing a queen. In my example the dealer only will get one more card. He then gives you this option. You can double your bet on the table. If you do and the bet ends as a tie {meaning he deals an ace} then the worst you can do is lose 10% of what you have put on the table. Gamblers would take that bet any day! These kinds of opportunities appear time and time again in the markets particularly if investors use disciplined risk/reward investment strategies.

Anyway I hope this helps and answers your questions better than I could back a few weeks ago.

Chris

Letter To A Friend {Part III}

Every investor should have a long term investment strategy. For my clients this is strategy comes by understanding their unique risk/reward criteria and then incorporating that into one of our six investment disciplines. Each of these strategies is based on something I call the playbook. The playbook is situational analysis based on historical market results. We study money flows along with the disciplines of fundamental and valuation analysis to see how markets have responded to similar historical events. The playbook gives us different scenarios regarding current market activity. We use it to then formulate our game plan. The game plan is a tactical and strategic allocation of assets based on what the playbook tells us has historically occurred. It is further refined to the specific risk/reward parameters of our various clients.

I want develop investment strategies that reduce and control client portfolio risk while attempting to give clients returns based on their specific investment goals and concerns. Risk can never be completely eliminated from a portfolio. However I believe that most types of risks can be defined and to a certain extent mitigated. I primarily invest client assets by using Exchange Traded Funds {ETFs}. In fact I believe that I have created value by our investment research on how ETFs trade while also developing strategies for investing in this relatively new and exciting asset class.

Tomorrow:  Conclusion.

Weekend Extra Rallies After Bear Markets

From Chart of The Day.

"Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. The current Dow rally has followed a path that is fairly similar to that of post-massive bear market rallies. The initial surge of the current rally lasted nearly 300 trading days and has been trading flat/choppy ever since. It is worth noting that the current rally just made new rally highs. However, both the 1932 Dow rally and the 2002 Nasdaq rally briefly made new highs during their flat/choppy phases. If the current rally were to continue to follow the post-massive bear market rally pattern, the current choppy phase would continue for another 150+ trading days (i.e. 7+ months)."

Link:   Bear Market Rallies

Letter To A Friend. {Part II}

Having an investment strategy seems less important when markets are advancing. It becomes paramount to investor’s thinking when markets decline. That’s when they should be asking advisors; what is the plan for when things go wrong? Most of the time when “things go wrong” it is during a market decline.

I believe you define market declines in two ways. One is a secular decline or bear market decline similar to what we experienced in 2000-2003 and 2007-2009. That is a series of fundamental or geopolitical events that causes investors to withdraw liquidity {that is they are net sellers of securities} from the market in question. The other type of decline comes from market volatility. Most years stocks will experience a pullback that can be anywhere from 10-20% from high's to lows. Take this year as an example. Stocks are currently up about 10% this year. But between April and mid-June, high to low stocks declined close to 20%. I study how money flows into and out of equities to look at bullish and bearish cycles in short, intermediate and longer term time periods and my analysis shows that so far in 2010 we have experienced four bearish phases and four bullish phases.

It is important that investors understand that markets will decline and that at some point a decline is inevitable. Unless your focus is almost 100% devoted to very short term trading, your assets invested in equities will decline at some percentage rate of the market when it goes lower. Warren Buffett is regarded by many as one of the most successful investors of all time. You can invest along with Buffett by buying his holding company Berkshire Hathaway {Symbol BRK.A}. Investing along with Buffett would not have protected you from market declines. Berkshire lost over 50% during the last bear market.

While a few investors may have managed to avoid the losses that occurred in 2007-2009, I think that if people like Buffett lose money in these times than so will the vast majority of investors. The trick in market declines is to devise strategies that fit investor’s unique risk/reward criteria. In short investors should have a plan to deal with these periods. Such a plan will hopefully mitigate losses during downturns. If your assets decline less than the market and have performance that at least matches it when stocks go up you will over time do not only better than the markets but probably better than most investors

Part III coming Monday.
 
*No position in BRK.A but it may be a component of various ETFs we own in client accounts.

Solas! Republishing Introduction. {Revised}

Solas! Republishing Introduction.

Solas!

Hello and Welcome! At least once a year I will republish the introduction to this blog and my general disclaimer..

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 or ETFs). We do not make recommendations on this blog! If we do discuss individual sectors or securities it will be solely in the context of a learning experience. You should understand that any individual sector or security that may be discussed here has the possibility of loss of principal.

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, 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.

Oh and a final disclaimer!!! I write principally for the clients and friends of my firm, Lumen Capital Management, LLC. It is a way for them to get a quick read on my thoughts about the markets and any other subject I might cover. I do so after understanding to the best of my ability their unique risk/reward criteria. As such any casual or outside reader of this blog should understand that I am not writing for them! Therefore I or my firm takes no responsibility for any actions overt or otherwise a casual reader of this blog might take based on our discussions here. Casual or outside readers should do their own homework, discuss our articles with their own investment advisors or better yet hire us.

In short if you're not a client and you read this you're on your own.

Net Market Negative {Short Term}

Reflecting that the markets have had a pretty good run of it since the first of the month and that our short term readings are very over bought we are moving the short term market rating down to Net Market Negative.  Note this reflects only our thinking and actions in the shortest of time frames we follow.  It should also not be seen as a change from the series we have started on stocks being cheap.    That deals with a much longer time frame than what we are talking about today.  This should It should also not be seen as a recommendation to buy or sell any securities. You can click here  for a definition of this term.

Are Stocks Cheap? {Part III}

We've been doing a series on whether stocks are cheap based on what we see going forward. You can see part I of this series here. You can see part II a bit lower here  the blog as it was published two days ago.

One thing that ought to be mentioned is that if you are not enamoured of this man pictured above than you had better root against a good economy next year. An economy that is perking along by the summer of 2012 greatly enhances his chances for reelection. By the way the President all but told you that he will be running again when he announced his compromise plan with House Republicans last week on taxes and unemployment compensation.

Then there is the theory of the Presidential Cycle. According to an Article in Forbes Magazine last summer, the theory states:

"{In} Years one and two {of a President's term}, the White House chief executive “fixes” various excesses and inefficiencies of their predecessor. In year one, the new president can blame a downturn of the other guys. Year two gives him the political luxury of taking all blame for whatever continues to drag economic output downward.

By year three, through monetary easing and cheap money, courtesy of the federal reserve chairman (appointed by the president), stimulus kicks into gear. Markets rejoice, voters are pacified, and happy days are here again…just in time for re-election in year four. Every president who has failed to correctly play this four year cycle has not earned a second term." {Story linked above}

If the theory is correct than this is another reason why stocks could rally into 2011. In case you were wondering the market went up in both of the third years of President Bush and President Clinton's terms.

I also wanted to say something about interest rates which have been rising in the past few weeks. It is likely that interest rates will trend higher to some extent in 2011. They have been at such historically low levels that at some point they will be forced up as demand for money grows when the economy begins to move again. Initially this may be seen as a negative. A higher risk free rate of return in government bonds could be seen by some as competition to stocks. Yet I don't think that is how this will be viewed.

First I think that while interest rates rising next year could initially be construed as a negative, I think that ultimately investors will view that as a sign of economic improvement. Since rates are so low this will be seen as an indicator of market health and could have a positive effect on stocks.

Second as of this writing a two year treasury is yielding .62% (62 basis points}. Even if that rate would more than double in the next year to around 1.5%, I still don't see such an anemic rate as competition to stocks.

Finally all that cash on the sidelines in money markets and short term bonds {estimates say maybe up to two trillion dollars!} may be induced by better market conditions and a better economy to look for higher rates of return. In that regard I will refer you to a post I wrote back in February regarding mutual fund money flows. In that post I noted where Treasury yields were back in the 1980s {around 17%} and noted the anemic rates of return investors were receiving at that point for safety. I ended that column this way.

"....this mindless drive by investors to still scramble for yield will likely end poorly as I think stocks should out perform bonds substantially over the next decade. Time will tell but it often pays to lean against the public when they make such a substantive bet with their assets. "

Stocks are up over 12% since the time of that column. Investors in short term bonds are lucky to have made anything at all this year. All that money hiding in little to no yield returning assets could be the kindling to set fire to the markets next year. In that regard I'll republish what Tony Dwyer said a few weeks ago in the shortest research report ever written! "The guys printing the money want you to buy stocks."

Next in this series we'll take a look at some opposing views on what might occur next year.  Then we'll go to the charts to see what money flow analysis can tell us about the year ahead.

Letter To A Friend. {Part I}

I had drinks with a friend a few weeks ago.  He asked me some questions on picking advisors and we had a bit of a debate on the concept of risk.  What is following over the next several days is my response to him.  Since I spent some time working on this I thought I would share it with you as well.

Dear XXXXX:

I thought this would be the best way for me to answer some of the basic questions you asked me when we went out. Here I’ll address how when given multiple advisors can you tell which one has performed the best and the concept of risk as I see it.

When judging advisors, most investors simply compare returns. Asset manager A, who returned 10% last year, will in this example beat out manager B who returned 6% in the same period. The problem with this approach is that it usually ignores an investor’s risk and return objectives. When comparing how different advisors or mutual funds etc have done, the first thing you need to know is how they have done based on your own unique investment criteria and goals.

Understanding a client’s goals usually comes about by formulating an investment plan. I think of this as different from a financial plan. A financial plan is a blueprint that should take into account much of a client’s financial landscape. This should include among other things, income projections, estate planning, insurance needs as well as retirement planning and investments.

I believe that an investment plan should at least answer the following questions: What are my risk/return criteria? How will my portfolio be constructed based on my criteria? What is my plan for when things go wrong? The investment plan is a baseline from which to judge how a portfolio is performing and upon which your investment strategy is based. We work with our clients to help them formulate their unique risk/return assumptions. Based on what we discover we then have six individualized portfolio strategies where we put our client's assets based on these assumptions.

Tomorrow:  Part II

Are Stocks Cheap?{ Part II}

This is the 2nd article in a series we are going to do between now and the beginning of next year discussing what might be in store for us in 2011. In our first article I reviewed our previous earnings projections and discussed our basic methodology on how we derive our forecasts for the year ahead. We've also started discussing here a few weeks ago earnings possibilities for the markets in 2011. In that post we brought up the possibility of the S&P 500 trading between 1,350 and 1,400 by the end of 2011. I think there is a greater likelihood of that occurring now than I did a few weeks ago and today I'll explain why I think that is possible.....

......But first the lay of the land:

Both the US and world economies have been mired in a very tepid jobless economic recovery that has for the most part been dependant on massive aid from governmental authorities. Europe has the issues of of sovereign countries such as Ireland, Greece and Portugal. Here we have the issues of among other things stagnant economic growth affecting local and state governments. Both economic zones have been savaged by the ongoing housing crisis. Unemployment is high in both regions. Furthermore it is unclear how much of the ongoing problem with unemployment is structural {technology led enhancements to productivity for example} versus cyclical.

The economic situation hasn't been helped here by the perception by business leaders that the current Obama Administration and the current Congress have pursued policies that are at best confusing towards business and at worst are biased against that community. However it is important to point out that these issues have now been well discounted in the markets.

In the past few weeks we have seen a few positive developments. As noted here on Friday, consumers continue to delever their personal balance sheets. Many indicators of future growth {capacity utilization rate, ISM and Federal regional growth indices for example} have also shown improvement recently. The jobless picture continues to improve somewhat {albeit still at very high levels}. Also the tax compromise announced last week between Congressional Republicans and the President remove fiscal uncertainty until after the 2012 elections. Finally the Government last week announced that they would divest themselves of the last of their Citigroup stock.. This is further evidence that financial institutions have significantly repaired their balance sheets which is a precursor to a better lending environment and ultimately economic growth.

Economic surprise to the upside?

If anything I think it is possible that the economy will do better in 2011 and again in 2012 than most look for today. This view is starting to be recognized in the financial community. GDP growth is now forecast by many to be somewhere between 2.5%-3% for 2011 and at least one firm {Goldman Sachs} thinks GDP growth could near an annualized 4% level by 2012. As such brokerage firms are ratcheting up their year end estimates for the S&P 500.

Right now consensus estimates for year end 2010 are between $84-86. Assuming a year end PE {price to earnings ratio} of somewhere between 13-15 times these earnings, this implies fair value for 2010 is somewhere between roughly 1100-1290. If we use a median of $85 and a year end multiple of around 15 then fair value for the S&P 500 is somewhere between 1,250 & 1,275. The index on Wednesday {the time of this writing} at 1223.75. That implies potential upside of 2-4% by year's end. 

Our friends at Chart of the Day have picked up on this as well.  According to them, "the recent rise in earnings as well as the recent stock market correction has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the recent spike in corporate earnings, however, the PE ratio currently resides at a level not often seen over the past two decades."  {Link:  Earnings & PE Ratios}

Consensus estimates for earnings in 2011 have accordingly been moving higher as evidence of a strengthening world economy continues to emerge. Current S&P estimates for 2011 seem to reside between $93 and $96 a share. Analysts are consistently told they are too optimistic when making such forecasts twelve months in advance. Given what we've discussed above it is possible that these numbers could prove conservative for the next year.

If these estimates prove to be accurate then fair value for next year on the S&P 500 has the potential to be somewhere in the range of 1,250 {roughly 13.5 times a $93 S&P earnings estimate} and 1,450 {a bit more than 15 times that $96 S&P number}. I will use as a starting point for next year at this time of 1,375 by year end. That is halfway between my own internal  2011 fair value estimate of 1,350 and 1,400. This is a PE of roughly 14.5 times a midpoint estimate of 94.50. I think these numbers have the possibility of moving higher as the new year unfolds.

Note that a market that trades somewhere next year between 1,350 and 1,450 would only get us back to where stocks first traded in 1999 and were last seen in January of 2008!

But wait there's more!

One final thought. If we assume that the economy continues to grow at these projected rates then you are looking at 2012 estimates of potentially $100 and $104. Should these numbers come to pass then you are looking at fair value estimates out there of $1,350-1,550 by year's end 2012. That's a long way out and there are many reasons why that might not occur. However, that is what the math tells us is possible if the economy stays on its current glide path.

There are many reasons why this may not come to fruition of course. Some of these {war in Korea for instance} are known. It is more likely however that the event that could potentially keep this scenario from occurring is not today known. Yet absent some unexpected development these estimates are possible based on the economic numbers.

Next in this series will discuss interest rates and the presidential cycle. After that in future articles we'll take a long term look at the technical picture, we'll discuss what could go wrong with this analysis and finally take a look at what both the playbook and game plan tells us to do.

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

The above article is not meant to be construed as a recommendation, guarantee or prediction of any sort. It is one of many possibilities that could occur in the next year. I write solely for the clients and friends of Lumen Capital Management, LLC. As such I write with a basic understanding of the risk/reward criteria of my audience. An outside or casual reader of this blog needs to consult with their own investment advisor or do their own homework before responding to anything written on this blog. Better yet hire us and let us show you how we do our work for clients.

Consumer Balance Sheets

From The Big Picture: 

The Fed released its report on consumer credit, and it comes as no surprise that revolving credit eased for the 26th consecutive month as consumers continue to shed credit — either by paying it down or, in some cases, walking away from it. From a high of $973.6 billion in August 2008, revolving credit has contracted by $173.1 billion to $800.5 billion (a level last seen six years ago, in December 2004). It is an annualized rate of decline of about 17.75%. Nonrevolving credit has been flatlining over the same period:

Comment:  Consumer balance sheetsw continue to improve.  Some of this is by choice {people choosing to get out of debt by paying down their credit cards}.  A lot of this comes from the fact that credit has been cut off for many households and is unlikely to be available to them on the same terms as it was before.

Link:  Consumer Deleveraging Continues.

End of Obamanomics?

Wall Street Journal editoral on the tax deal announced by the President a few days ago.  {Excerpt with my highlights.}

Does President Obama like or loathe the two-year tax deal he has struck with Republicans? It was hard to tell from his grudging, testy remarks Monday and yesterday, but perhaps that's because he realizes he is repudiating the heart and soul of Obamanomics as the price of giving himself a chance at a second term.

In accepting the deal to cut payroll and business taxes and extend all of the Bush-era tax rates through 2012, Mr. Obama has implicitly admitted that his economic strategy has flopped. He is acknowledging that tax rates matter to growth, that treating business like robber barons has hurt investment and hiring, and that tax cuts are superior to spending as stimulus. It took 9.8% unemployment and a loss of 63 House seats for this education to sink in, but the country will benefit.

In this sense, the political symbolism is as important as the policy. Mr. Obama is signaling that businesses must be encouraged to make profits again so they can hire more workers, that "the rich" he so maligns should be able to keep more of what they earn, and even that wealth built up over a lifetime shouldn't be confiscated wholesale at death. In policy if not in Presidential rhetoric, class war and income redistribution are taking a two-year holiday....

....This is not to say the deal is optimal for economic growth, and Republicans should not pretend it is. A two-year reprieve is far better than an immediate tax increase amid a still fragile recovery, but it also means that the policy uncertainty is carried forward

....In the real world, businesses make investments based on the estimated return on capital over time, including the expected tax rate. What matters is the overall cost of, and return on, capital. The temporary nature of the tax cuts will provide less incentive to invest than would permanent reductions in the cost of capital.

The provision to allow business a 100% expensing deduction for 2011, and 50% in 2012, will help growth in those years. But it will do so in part by pulling investment forward from 2013. This is good for President Obama's re-election chances, but not so good for increasing the permanent level of business investment.

The same goes for the temporary cut in the payroll tax in the name of encouraging more hiring. The one-year cut to 4.2% from 6.2% in the employee portion of the Social Security tax increases the incentive to work. Because it doesn't favor some workers over others, it is also superior to the tax credits that Democrats wanted. But the proposal does nothing to reduce employer costs, even as ObamaCare is raising those costs as its mandates and regulations take effect.

This incentive to work also conflicts with the disincentive to work provided by another extension in jobless benefits. The deal's 13-month extension will cost taxpayers about $56 billion......

....Another half-victory is the provision to set the estate tax at 35%, with an exclusion of $5 million. The rate was set to return to 55% with a $1 million exclusion on January 1, and Mr. Obama had wanted 45%. While the 35% rate also lasts only two years, the level of bipartisan support will make this rate politically difficult to increase even if Mr. Obama wins re-election......

....Yet this deal is superior to anything we could have imagined six months ago. Much credit goes to Mitch McConnell and Senate Republicans for holding together against the class war attacks of Chuck Schumer and other Democrats. By holding firm, they divided the opposition. This proves again that Republicans win the economic debate when they make the case for lower taxes for everyone in the name of faster growth and job creation.

They should nonetheless not advertise this deal as an economic panacea. It is at best a transition from the failure of Obamanomics to what we hope is a better growth agenda when it expires in two years......

...As for Democrats, many and perhaps most in Congress will oppose this deal as an ideological betrayal by Mr. Obama, but it is really an admission of reality. Democrats lost the election because their economic policies failed. Their caterwauling now is mostly short-attention-span theater for the MSNBC crowd. Mr. Obama's heart is still with the left, and he's making it very clear that he'll return to fighting to redistribute income in 2012, but for now he had to dump the Democrats to save his Presidency. As he likes to say, elections have consequences.

Link: Obamanomics takes a holiday.

Small & Mid-Cap Stocks

BeSpoke Investment Group pointed out on their blog last week how small & mid-cap stocks are doing versus the S&P 500. According to BeSpoke:

"Both the S&P Midcap 400 and Smallcap 600 made new bull market highs {last} week, while the largecap S&P 500 remains below its November closing high. Smallcaps and midcaps have both begun to distance themselves from their largecap brethren in terms of performance as the end of the year approaches. As shown below, the Midcap 400 is up 21.56% so far in 2010, while the Smallcap 600 is up slightly less at 20.19%. The S&P 500 is up just 9.34%. As shown in the two smaller charts below the big chart, the spreads between the YTD performance of the Smallcap 600 and Midcap 400 versus the S&P 500 are at their highest levels of the year."

Comment: I've always been a big fan of the mid-cap sector. It tends to be less volatile than smaller stocks and the companies that comprise these indices usually are survivors with lots of growth ahead. Of course our primary way to invest in these is through ETFs. We'll look at a couple of these charts in the days ahead before the end of the year.

Link: Small & Mid-caps pull away.

*Long ETFs related to the S&P 500, mid-cap index and small-cap index in client and personal accounts.

One final comment. I love the research that BeSpoke Investment Group does. It is fact based and the service is at a reasonable price. Take a look at what they do here. I am a subsciber and have not been compensated by them in any manner to recommend their service.

Told Ya!

So we finally go an extension of the Bush tax cuts last night along with an extension of unemployment benefits.  Here courtesy of The Big Picture is a digest of the deal.

Extend all Bush income tax cuts for two years

• Reduce worker payroll taxes for one year (4.2% in 2011, from the current 6.2% rate)

• More favorable treatment to business investments

• Temporary reinstatement of the estate tax at 35%; 5 million estates and under exempt from estate tax

• Extension of jobless benefits for the long-term unemployed.

Of course we first mentioned this possibility last summer here!

Stocks are set to ramp at the open!

Still At Sea

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea by the United States Navy.

Jobs Recovery

From Chart of the Day.

"{Friday}, the Labor Department reported that nonfarm payrolls (jobs) increased by 39,000 in November. Today's chart puts the latest data into perspective by comparing nonfarm payrolls following the the end of the latest economic recession (i.e. the Great Recession -- solid red line) to that of the prior recession (i.e. 2001 recession -- dashed gold line) to that of the average post-recession from 1954-2000 (dashed blue line). As today's chart illustrates, the current jobs recovery is much weaker than the average jobs recovery that follows the end of a recession. Today's chart also illustrates that the current jobs recovery is following a path that is similar although slightly stronger than what occurred following the recession of 2001. Another important point is that over the past 11 months (i.e. since the beginning of 2010) the trend in jobs is up -- slightly."

Comment:  This has a lot to do I'm afraid with the nature of this recession.  I think a lot of these jobs aren't coming back.  They've either been lost overseas, have been eaten away by productivity gains or companies will do without until they are forced to rehire.  I think it is going to be a rough go for the 40-50% of  the work force in the bottom end of the economy.  Note though that I don't think that will necessarily be a drag on economic growth next year.  More  on this later!

Link:  Jobs Recovery

Revisiting Financial Stocks.

We posted about a month ago that we were becoming more positive on financial stocks and by extension their ETFs.  Several brokerage firms made positive comments at the end of last week about the group so I thought it would be a good time to update their chart.  You can double click on it to make it larger.

Are Stocks Cheap? {Part I}

Today I'm beginning a series that will run between now and the end of the year which will take a look at certain projections for 2011. Today I'm going to start with the basic methodology and a review of some of our prior forecasts.

I've discovered over the years that the best way to think about the valuation of stocks is to ask two very simple questions. These are:

1. What is the status of the economy? {Improving, stagnant, declining}.

2. What are the end of year earnings projections of the S&P 500?

Being able to come up these two metrics gives us an idea of the basic environment we are in. It is not the total sum of all analysis. For example investors still need to understand what industries and sectors are poised to benefit in whatever is the current market environment. Investors must also factor in that unexpected and sometimes very bad events occur. Banks, for example fail, wars breakout and natural disasters happen with depressing frequency. These sort of things will affect over time how risk assets such as stocks are valued and perceived.

Never-the-less being able to answer my two questions has served me well over the course of my investment career. In particular this analysis has helped me navigate the investment environment we have found ourselves in post the 2008 crash. Let's review how we've used this analysis in the past several years.

We first broached the subject of what could go right by partially taking valuation and applying it to the markets back in November, 2008-Mr. Positive . In March of 2009 with a variant thought we briefly touched on the possibility that stocks could rise substantially from their then very depressed levels. At both of these times such analysis was very much a minority view. We further refined those numbers in the investment letter we sent to clients in May of 2009. At the time we wrote that letter stocks were trading around 900 on the S&P 500. We felt valuation levels would end the year between 900 {assuming lots of things went wrong} and 1,100. The S&P ended the year at. 1,115.10. In that letter we also introduced a 2010 year end trading range of 1,100 to 1,250.

We gave a bit more depth to analysing valuation back in February of this year when we discussed how we value the stock market. In that post we discussed how we were deriving a 2010 year end valuation target of 1,250-1,350 on the S&P 500. We revised that estimate somewhat lower here and here over the summer as the economy slowed down a bit. That revised lower number is now beginning to look conservative.

This is not a post where I am trying to tout my own record. This is a very humbling business and while we may have used our tools to client's advantage it is not a foolproof method of analysis. Using this analysis for example did not help us invest client assets into retail stocks which have been on fire this fall. Nor did this analysis help us with our bank stock ETF investments. While I think financials are finally going to move higher, we have been early in our views on how they might trade. Valuation for instance did not predict the 2008 crash. Nor does it tell us for instance what might happen to stocks if the Korea's continue taking pot shots at each other.

However I have found it to be a pretty accurate tool in my career for framing the basic forward looking outline as we develop the game plan for the year ahead. Next in this series I'll give you my basic framework for looking at 2011.

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

Net Market Positive

Housekeeping item: Over the past seven trading days we have gone Net Market Positive now in all three of the time frames we follow in client accounts across all of our equity strategies.

You can click here to see a definition of this term.

Please also note that this is simply an indication of what we are doing for our client accounts and comes about based on an understanding of their unique risk/reward criteria.  Casual readers of this blog should consult with their own investment advisor or do their own homework before acting on any of the opinions or thoughts expressed on this blog.  Better yet hire us and let us do this work for you!

CNBC-Stocks Could Rally into Year End

Click on link to see an interesting exchange last night on CNBC.

http://www.cnbc.com/id/15840232?play=1&video=1676793668

an tSionna {12.02.10}

We've hit the top of the resistance range.  Tomorrow I'll outline why I think its now possible for stocks to rally into year's end.

For Sale By Owner!!!

For Sale By Owner!!!