Middle East-Keep This on Your Radar.

"What would likely knock the market off its axis is a major event coming over the transom that is unforeseeable and considered a lasting event with a large economic impact. I will list what some of these are that I can see with a brief comment where necessary. If such an event should occur though it will likely be one that I haven't thought of here."

This was part of my introduction when we ran our series about whether stocks were cheap in our post on market risk. Today there is grim news out of Egypt as that country convulses and demands regime change. {See this New York Times Article. The events there are similar to what has already taken place in Tunisia . So far the market has shrugged this off as neither of these countries has large quanta ties of oil.

But a revolutionary spasm that embraces the whole region will be something that markets can't ignore, especially if these events also threaten regimes in the oil producing countries such as Saudi Arabia. Stay tuned and pay attention to this.

Sentiment

From BeSpoke Investment Group:  Bullish sentiment above 50% for 11th straight week.

The Investors Intelligence weekly survey of advisor sentiment showed that bullish sentiment declined modestly for the second straight week. Since its high of 58.8% in late December, bullish sentiment is currently at 55.5% and has now been above 50% for eleven straight weeks. The last time bullish sentiment was above 50% for eleven or more weeks was back in the Spring of 2007.

My thoughts:  This is just another example of how overbought the market is right now.  Keep in mind though that markets can stay overbought and oversold much longer than most investors expect.

Link:  Bullish Sentiment

Are Stocks Cheap? {Links to Previous Articles}

You can use these links below to ascess all of the articles in this series.

Are Stocks Cheap Part I  {December 3, 2010}

Are Stocks Cheap? Part II  {December 13, 2010}

Are Stocks Cheap? Part III  {December 15, 2010}

Are Stocks Cheap? Part IV   {January 12, 2011}

A Follow-Up  {January 13, 2011}

Are Stocks Cheap? Part V   {January 18, 2011}

Are Stocks Cheap? Part VI  {January 19, 2011}

Are Stocks Cheap? Conclusion.  {January 25, 2011}

Are Stocks Cheap {Playbook, Game Plan & Conclusion}

Every investor should have a long term investment strategy. For the clients of Lumen Capital Management, LLC this strategy comes from our understanding of their unique risk/reward criteria and then incorporating that into one of our six investment disciplines. I attempt to 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 many 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.

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 then further refined to the specific risk/reward parameters of our various clients.

Much of the historical aspects of seasonality and the playbook we have discussed previously in this post. Friday of last week we discussed the reasons for a more guarded tactical position in the short term. While historical probability has shown that stocks tend to have a positive bias in the first quarter of the year, we are prepared in case that does not occur. In that instance we will bring out the more defensive aspects of the playbook. In certain cases this can mean perhaps writing options versus some of our ETF positions or hedging versus downside risk. The easiest way to become more defensive is to simply raise cash and that is what the game plan calls for in the weaker seasons of the year when the market is overbought. As always we will let our indicators be our guide.

Probability indicates that a favorable presidential cycle, robust corporate earnings, low interest rates coupled with a benign inflation environment and finally a growing economy will be positive for stocks on a year forward basis and we have adjusted the game plan accordingly. Areas of sector concentration include: Technology, Biotechnology, Financials and Energy.

An Audible

We were all set to finish our series on stocks being cheap today.  Instead we're going to call an audible.  Irregardless of our longer term thinking we have become a little more defensive as this week has progressed.  Market chatter has turned a bit negative in the past week. Apple's news regarding Steve Jobs and a "sell on the news" response to earnings season has also kept us a little busy. Remember that we are short term Net Market Negative on stocks, having been so since mid-December. You can go as always here for a definition of this term.

Now let's stress a few things.

1. My thinking here does nothing at this moment to change the point I've been making through-out our current series on stocks. That point states that the evidence as we currently understand it indicates equities are cheap and the potential exists for a 6-10% rise from current levels to a target price level of 1350-1400 on the S&P 500 by year's end. This more defensive posture only reflects our thinking regarding our shortest time frame, reflecting two key indicators which are that stocks are very overbought and sentiment has turned short term negative. We started our latest series back on December 3rd of 2010. The S&P 500 has rallied almost 5% since then. That's an awful lot of gain in a relatively short period of time.

2. Recall that our definition of Net Market Negative simply means that we in the main have recently been net sellers of certain equity assets.  This means that on balance we have sold more than we have bought. We have been, or are in the process of raising certain cash levels given client risk/reward and strategy mandates. In many cases this raises these cash positions only slightly. We have had very little cash for most of the Autumn in many accounts and prudence dictates a bit of pruning at this point. It is very possible that this move is just a head fake and that stocks could turn on a dime in the next couple of days {just as they have for most of the fall} and head higher. If that is the case we have plenty of exposure to participate in an upwards move. If not and markets move lower than we have a bit more cash to cushion that move lower and cash to redeploy when the market gets in a more positive frame of mind.

3. Since this is nothing more than a short term read of the markets. It is possible that we could redeploy these assets sooner than later if the market gives us the opportunity by pulling back more than a few percentage points in a shorter period of time.

4. This is part of the process of money flow analysis. In situations such as this the playbook calls for a defensive adjustment to this year's game plan. We have or are in the process of adjusting portfolios accordingly and stand ready to make other changes if the market dictates we do so.

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

**Please note that the above reflects solely the opinions of Lumen Capital Management, LLC. As such it is designed solely for the clients and friends of our firm. Since we do not know the investment parameters of casual readers of this blog, they are advised to consult their own investment advisors or do their own homework. Nothing in this posting should be construed as a recommendation or a guarantee of any sort. Better yet, hire us and we'll show you how our work is done!!!

Gasoline

From Chart of the Day:

The price of a barrel of crude oil has traded sharply higher over the past 4 1/2 months and currently trades above $91 as a result of continued geopolitical tensions and oil suppliers struggling to keep up with demand. With oil prices trending higher, it is not all that surprising to find that gasoline prices are following suit. Since the financial crisis lows at the end of 2008, the average US price for a gallon of unleaded has risen $1.42 per gallon. When adjusted for inflation, gasoline prices are once again above three dollars per gallon -- a level not often seen over the past three decades.

My comment: I know I've said this before and I'll repeat that oil, which is the prime component in gasoline never managed to crack below the $60 per barrel range during what many consider the worst recession since the Great Depression. If oil can't go lower than that during some of the worst economic times on memory then where is it going as the world's economies pick up and demand improves. Expect to see gasoline above $4.00 a gallon in the next 12 months!

The increase in gasoline prices is one of the reasons I'm bullish on "Green Technologies". People will become more interested in conserving energy the more higher prices affect their pocketbooks.

*Long ETFs related to oil, clean energy, oil drillers and oil exploration in client and personal accounts. Also many of these companies are components of major indices that we own for clients and personal accounts.

Link: gasoline.

Are Stocks Cheap {Part VI-To The Charts}

We gave a rough outline of seasonality in how markets trade in our follow-up regarding volatility. We'll begin our discussion about what the charts say by showing the seasonal cycles between bullish and bearish phases as measured by money flow analysis going back to 2004. This is a weekly chart pictured above so it is more compressed. Red boxes are bearish periods and green are bullish. We only went back to 2004 for this example because that's all the room we could fit on the chart.

While there is no set time for each phase to kick in you can notice the seasonal tendencies that we discussed last week in the follow-up mentioned above and on our discussion of volatility. Bear markets by and large negate these patterns but you can see how these seasonals have reasserted themselves since the market bottomed in 2009. While markets can experience some weakness at the beginning of the year, there is a strong tendency for stocks to experience a bullish trend during the first quarter of the year. This pattern looks as if it is currently repeating itself although an outside event could negate this at any time.

The next chart posted above is a daily view dating back to the beginning of the most recent bullish phase. We are currently still trading in this phase by our work. The market is over bought but that condition can exist for a longer period of time than most investors might expect. What an over bought condition says is that the probability for success of gain is lower at that level and prudence should be used when placing new investments in the market. Depending on the time frame there might be better opportunities down the road. It also says have the defensive pages from the playbook available in case things change.

Right now the seasonal patterns and the money flow analysis suggests a market that might continue to quietly trade higher over the next several months. Of course there is no law that says that this must happen as events can overtake these patterns. Friday we'll finish up this series by wrapping up each section by going through what the playbook and game plan say we ought to be thinking about given where we are in all facets of the investment cycle.

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

Are Stocks Cheap Part V {Market Risk in 2011}

This week we are going to conclude our series on whether stocks are cheap. In our last installment we discussed the impact of volatility on markets. Today we are going to discuss what are the things that could possibly impact stocks to the negative and the probability that they could do so.

First we should mention that the investment community is much more uniformly bullish than they were a year ago at this time. Most are doing some of the same basic math as us me and so you see most brokerage price targets in the 1,350-1,40 range on the S&P 500. That by itself is cause for concern in some quarters as many view the herd mentality of the investment business often as a contrary indicator.

The most important thing that could go wrong with stocks would be an economy that begins to falter. The first warning sign of this will be when we see four quarter forward looking earnings estimates begin to flatten out or decline. This was one reason for the market's decline last spring. The European debt crisis seemed to come forward out of nowhere to most investors. Economists slashed their forecasts on world growth and stock analysts cut their earnings estimates. Fears of a double dip in the economy rushed to the forefront which weakened investor sentiment. Investors pulled money off the table and stocks declined till their reached a level of fair value. Markets picked up as those fears versus economic growth proved unfounded and earnings estimates began to increase.

So far there is no indication the process of declining earnings revisions is occurring. In fact the opposite has been happening as evidence of a world-wide pick up in growth continues to come in. It is not that investors have no worries. For example there is concern that China may overshoot in trying to curb its economic growth, concern over the US housing market, the slow pace of our job improvement and the European debt crisis continues to fester. But it strikes me that these issues {as well as a few others which space prevents me from discussing} are currently discounted by stocks. Stocks are currently trading at about a 13.5 PE to their forward looking averages. This is historically cheap in a low interest rate environment and likely reflects most of these ongoing concerns. Unless earnings begin to decline again, that sort of PE should also put a floor under most declines.

What would likely knock the market off its axis is a major event coming over the transom that is unforseeable and considered a lasting event with a large economic impact. I will list what some of these are that I can see with a brief comment where necessary. If such an event should occur though it will likely be one that I haven't thought of here.

1. Default of one of our states or a major municipality. This recession has hit governments hard at all levels. Analyst Meredith Whitney-She's the one who accurately predicted the 2008 financial crisis- went on the television show 60 Minutes last year and brought this issue to the forefront. While I won't dismiss this as a possibility, I think it is a much lower risk event at least for this year than perhaps she believes. Nobody wants to be shut out of the bond markets and such an event would all but slam that door closed for a long period of time. Look for some smaller cities to maybe file for bankruptcy. It has happened before the most notable being Orange County back in the 1990's, but I think a spillover event is unlikely. Most states will do what Illinois just did, raise taxes.

2. Terrorist event. It would have to be as big as 9/11 or have a much broader economic impact. So far nobody has demonstrated the ability to do that anywhere in the world. Events like the Tuscon massacre last week didn't move the needle a dime in the markets. In any event one cannot manage money anticipating this sort of thing. It could happen tomorrow or it could happen never. Better to have a plan for how to react in the event this occurs instead.

3. Natural disaster. This is the thing I worry about the most. The United States is a country covering a broad landmass with different geographic features. A massive natural disaster; major hurricane hitting in New England {we covered this years ago here } or an earthquake in LA or along the New Madrid fault could be such a profound economic shock that it could send the market into a tailspin. Again you can't manage money for such an event. But it is the one I think with the highest probability that could occur.

4. Major war. The only real place this could happen is in Korea and that looks contained for now. The other place is between Israel and Hezbollah and that kind of event probably won't move the needle.

Finally while some of these events may be unknowable. Part of the playbook is to have a game plan in place for what we would do for clients in the event something along these lines would occur. In our next post we'll use charts to discuss a likely glide path for this year. We'll end this series with a discussion on what the playbook says we ought to do.

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

Steve Jobs Stepping Down At Apple

Just a quick note that Steve Jobs posted today that he is taking an indefinite leave of absence from Apple due to health concerns. Here's one blogger's perspective.

I think that tomorrow is going to be a bad day for Apple and probably for the NASDAQ. In an ETF such as the QQQQ's*, Apple is close to 20% of the index. I'm not convinced that this is the sort of exogenous event that we're going to post about tomorrow or the big bad event that will knock the market off of its axis for anything more than a short period of time. For one thing this news is specific to Apple. It doesn't change the overall trajectory of the economy or probably the short term trajectory of Apple for that matter. Jobs decision to step down for example will not effect how many cars Ford or GM sell this year.

"The cemeteries of the world are full of indispensable people" is a quote attributed to Charles de Gaulle. Everybody says Jobs is indispensable to Apple and it is too bad on a personal level that a man with that much to offer to society has become ill again. The news may be an excuse for traders to take some profits and I expect an awful lot of chatter about Apple's future. My guess is that Apple has been preparing for this moment since Jobs came back and the transition will be a whole lot smoother than most people expect.

Expect some rockiness now to the beginning of the week, with traders hitting the sell switch early tomorrow. But unless I miss my guess, the event that will ultimately move this market to more of a bearish phase will need more teeth than this unfortunate announcement for Mr. Jobs.

God speed to him though. Our prayers will be with him.

**Long ETFs related to the NASDAQ 100 {QQQQ} in client and personal accounts. Certain legacy accounts are owners of Apple common. Long Ford in certain personal accounts.

Some Articles To Read.

Have to be out today but I think you should read this Fortune Magazine article: The Danger In Bonds.

It is well written and explains many of the perils investors looking for yield will encounter particularly as they head further out the yield curve in terms of years.

While I'm recommending articles I'd also take a look at this: Our political rhetoric isn't too violent, it's too dumb!

Monday is Martin Luther King Day so there will be no posts. We're back in the saddle on Tuesday and we're going to finish our series on "Are Stocks Cheap" next week.

A Follow-Up To Yesterday.

I thought a follow-up was in order after yesterday's post, particularly regarding the discussion of seasonal volatility. Here is a very crude illustration of the bullish and bearish phases that markets often experience during the investment year. Please treat time periods as approximate. Please note that markets do not always work this way, especially regarding the timing of each phase. Also there are years that some or none of these phases comes into play.

With that being said, here are a few things that have been statistically verified about market seasonality:

1. The period roughly from mid-March to sometime in early October is generally considered a weaker investment period. Stocks tend to experience most of their corrective phases during this time.

2. The inverse of that is that October through some time in the Spring is statistically the best time to be invested in the markets. This will often be negated during structural bear markets.

3. The month of September is statistically the worst trading month of the year.

4. The fourth quarter of each year typically is the best performing investment quarter {All us Wall Streeters want to get paid!}.

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

Are Stocks Cheap? {Part IV-Market Volatility}

Today I'm going to continue the series I started back in December regarding the markets and valuation. If you remember back then we started discussing market valuation. We started off discussing our basic philosophy regarding valuation. From there we gave an update on our outlook for 2011. We also introduced in that post an S&P 500 target price of 1,375 for 2011. In part III we discussed the positive effects of the 3rd year "Presidential Cycle" on equities and why I think an inevitable rise in interest rates this year may be ultimately construed as a good thing.

Today and in the next few days I want to step back and take a look at the risks in the market. Investors need to balance out both positives and negatives in the investment matrix and risk {to the extent it is known} needs to be factored into the market analysis.

Today though I want to separate market risk with market volatility. Market volatility can be defined as the relative rate in which a security moves up or down. Now if I had more time and you were more interested we could go off into a tangent about standard deviations and regressions to the mean. Instead I'll keep it brief and tell you how I view market volatility.

Much of how markets move on a day by day basis is random with short term players looking to make money using a variety of strategies that can place markets in very short term over bought or over sold levels. There are strategies that can be used to take advantage of this but frankly most investors don't have the time, inclination or mental discipline for it. However there are seasonal variations or patterns that come into play in most years that investors should know about and use to their advantage. Understanding the seasonal aspects of stocks is one of the principal tenants of our money flow analysis.

The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows.

Typically what happens is that at some point stocks become over bought enough that the supply of buyers is exhausted. Stocks fall under their own weight when that happens. This is true in bull markets as well as bearish trading periods. Statistically stocks are most prone to sell offs in between March and October of the year. The chart we've shown below is a daily chart of the S&P 500 for 2010. It shows what I like to think of as a typical trading pattern for markets. Of course this can vary and it does not occur every year in such a neat pattern. But if you study market patterns from 1900 to today as I have you will notice that these same tendencies occur again and again.

In 2010 stocks began the year advancing and building on what was perceived as decent economic prospects, especially in the US. Stocks stalled in late April as data began to call into question whether the economy would indeed recover and as investors tried to price in the negative aspects of policies coming out of Washington such as the healthcare bill. A crisis over European debt prompted a sell off in May exacerbated by the one day flash crash.

Stocks spent the next four months building a base and began to rally later in the year. They were helped by the fact that the European problem seemed contained and that economic growth was indeed better than originally feared. The kindling that really stoked the flame was the Republican landslide in November and the prospects of more pro-business and pro-growth economic policies from the capital. This lead to the astounding better than 5% rise of the markets between Thanksgiving and the end of the year.

It is important to note that while the events of last spring are used to explain why stocks were so weak at that time, it is likely that some other event would have prompted a sell off if these things had not occurred. The markets had reached a point both in terms of valuation and in terms of money flows that meant we needed a perfect scenario for them to keep advancing at that point. Disappointment was met with sellers stampeding towards the exits.

Stocks are currently headed or are already over bought by many of the systems we use to measure such things. In the jargon of the business stocks are acting "tired". That is why I think probability indicates stocks could rest here. I'll repeat what I said on Monday that if we look for what market action would cause the most pain then I think a market that does nothing for awhile would fit the bill. Seems to be to many people talking rather loud about how stocks are going to correct big or go up big.

That is not to say that I think stocks won't rally at some point. If the normal year pattern holds {and it of course may not} than stocks should experience some sort of advance before finding a level of resistance/valuation that forces the buyers to pull back. I think the more serious pullback for the year is likely to occur later in the spring as that is the seasonal norm. As always we'll let our indicators be our guide in watching how money flows in the markets. We will react accordingly to that.

Stocks can correct by time {churning around and doing nothing}, by price {that is by declining} or by a bit of both but correct they will. It is part of the normal course of events and ultimately is healthy for stocks in that it keeps markets from becoming overheated.

In the next post of this series I'll look at events this year that could possibly derail the rosy forecasts that Wall Street has put in place.

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

Structural Unemployment

We've discussed the concept of higher structural unemployment in the United States several times over the past year.  Today I have a couple of thoughts on this.

1.  I'm linking an article on this from Time Magazine by Investment Manager, Zachary Karabell titled Where the Jobs Aren't. 

2.  Interesting view on long term job creation from the folks over at Chart of the Day {COD}discussing the low amount of jobs created in the last decade.  According to COD:

"Today's chart illustrates that up until this millennium, the number of jobs at the end of a decade has always been at least 20% greater than 10 years prior. During the last decade, not only was that 20% plus growth not achieved, the decade actually ended with less jobs than when it began. This negative job growth is particularly noteworthy due to the fact that the US population had increased by 10% in addition to a significant increase in global wealth during the same time frame. With one year down in the current decade (see gray column), today's chart illustrates that job growth is positive albeit only slightly so. If job growth during the current decade were to increase at the same pace as what occurred during the first year of this decade, the decade would end with an 8.7% gain in jobs (see gray dot). This is certainly better than the decade just passed, however, it is well off the 20% plus pace of decades past."

Link:  Current Decade Job Growth

an tSionna {01.10.11}

First charts of the new year.  It wouldn't surprise me if stocks do nothing for a couple of weeks or even correct slightly.  First there is some natural churning in the beginning of the year as portfolios are adjusted and gains that may have been deferred for tax reasons are taken. 2nd, that's an awfully big move we made in December and that, to my way of thinking, has to be consolidated at some point. 

Finally if we look for what market action would cause the most pain then I think a market that does nothing for awhile would fit the bill.  Seems to be to many people talking rather loud about how stocks are going to correct big or go up big.

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

P.S.  Look for us to finish up our series on whether stocks are cheap soon!

Stocks Long Term Growth {Part II}

Another Big Picture post looking at longer term stock market growth:

"{Regarding the longer term} secular periods of bull and bear markets. Holding onto a broad basket of stocks for 10 or even 20 years is not a guarantee of positive returns.

The matrix below was developed by Ed Easterling of Crestmont Research. It shows the outcome of your returns over fairly long periods of time.

Use the diagonal to select your start date; yous the horizontal axis to select your “withdrawal” date. Where the 2 meet shows your returns: Red means returns failed to keep up with inflation; gray red is slightly above (0-3%); gray is 4-7%’ light green is 7-10%, while green is 10% plus."

Link:  Stock market matrix the investment triangle

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

Stocks Long Term Growth {Part I}

From The Big Picture.  Interesting insights into long term growth rate of stocks:

The {above pictured chart} shows the long term growth of the US stock market, using a smoothed exponential trendline....a few things stand out....

• Mean Reversion cannot be denied;

• Growth Rates over very long periods of time are remarkably consistent;

• This consistency is likely controlled by a combination of numerous inputs, e.g., specific factors such as GDP, Population growth, Earnings, Interest rates, etc.;

• Stocks can remain above or below “Fair Value” for extended periods of time;• Reversion to the trend rarely occurs through sideways market action;

• Markets careen through their historical trend lines to levels far below and far above what seems “normal.”

Note that these are not the sort of charts that lead to an immediate trading decision; rather, they should color your long term expectations as what might occur in the intermediate future.

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

Link:  Long-term-stock-market-growth-1871-2010/

Gerry Rafferty, Winding His Way Home.

Gerry Rafferty composer and singer of one of the iconic songs of the 1970's "Baker Street" passed away yesterday.

And when you wake up it's a new mornin',

 the sun is shinin' it's a new morning,

  You're goin',

 You're goin' home.

Godspeed Gerry.

Optimism About Economy Higher

From 24/7 Wall Street:

Americans believe, by a wide margin, that the economy will be better in 2011 than it was in 2010. As a matter of fact, “Twice as many Americans think the U.S. economy will be better rather than worse in 2011,” according to Gallup. Forty-four percent of those asked believe that their financial situation will improve in 2011 compared with 16% who believe their situations will get worse.

It is much too early to say whether these figures are a “false positive.” Data about consumer sentiment from The Conference Board and the Thomson Reuters/University of Michigan numbers have moved both positive and negative without warning. These statistics surprise analysts more often than not.

The best explanation for the improvement in the Gallup numbers may be an extension of the Bush Tax Cuts. Most Americans believe this will give them more discretionary income this year. The higher price of gas and other commodities could take away all of those tax savings quickly. That, in turn, would take consumer confidence back down again.

Consumers watched their fellow Americans wander malls and stores as they spent more than they did last year or in 2008 during the holiday season. That caused some amount of optimism about how well the economy will be next year. Many of those purchase will build more consumer debt, some of it which carries 21% interest rates.

The end of the first quarter will be a better time to look at the way that Americans view their economic lives and that of the country. They will have gotten their credit card bills. They will see if a friend or family member gets a job after months of looking. They will see whether Congress is at all serious about legislation which should benefit the economy quickly.

There is little more than uncertainty about how the next three months will be for individuals and their finances. Three months can be a long time.

Survey method: Results for this USA Today/Gallup poll are based on telephone interviews conducted Dec. 10-12, 2010, with a random sample of 1,019 adults, aged 18 and older, living in the continental U.S., selected using random-digit-dial sampling.

Link:  Optimism About Economy Higher

Pre-Election Year Cycle

From Chart of The Day:

Today's chart illustrates how the stock market has performed during the average pre-election year. Since 1900, the stock market has tended to outperform during the first six to seven months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be choppy and slightly subpar. In the end, however, the stock market has tended to outperform during the entirety of the pre-election year. One theory to support this behavior is that the party in power will make difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.

Link:  Pre-election year cycle.

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

10 Things Investment Pros Do That Amateurs Don't! {Repeat}

Ran this last year. I think it also bears repeating at least annually.

1. Pros always have cash

2. Pros tend to worry less about the day to day with stocks and try to focus longer term.

3. Pros try not to invest in things they don't know.

4. Pros recognise that not everything is analyzable.

5. Pros are as concerned with the downside as the upside.

6. Pros always look; they never avert their eyes from a downturn.

7. Pros accept that not everything works or is going to work at once.

8. Amateurs are worried that they aren't making enough but pros are worried that they are making to much money.

9. Pros do their homework.

10. Pros know things go wrong. They are more likely to cut losses and let profits run.

Bogle Editorial {Repeat}

We ran this editorial article written by John Bogle a few years ago in the Wall Street Journal here is a link to the original article.  I think this bears repeating about once a year as it's advise is classic. {Highlights are mine!}

Six Lessons for Investors

Be diversified and don't assume past performance will continue.

There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:

1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street's 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor's 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.

Reality: the S&P closed the year at 903, with reported earnings estimated at $50. Strategists aren't always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003. Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street's payroll don't survive for long.

2) Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some "dry powder" in their portfolios.....With all the focus on historical returns that greatly favor stocks, don't ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong.

3) Mutual funds with superior performance records often falter. Last year was an extreme example. With the S&P 500 off 37% for the year, Legg Mason Value Trust fell by 55%. Fidelity Magellan Fund, after a good 2007, was off 49%. Funds managed by proven long-term pros felt the pain -- Dodge and Cox Stock down 43%; Third Avenue Value down 46%; CGM Focus down 48%; Clipper down 50%; Longleaf Partners down 51%. (Full disclosure: Four of Vanguard's actively-managed equity funds also lagged the market by wide margins.) Only time will tell whether the disappointing shortfalls experienced by these and other funds will be recovered in the future, whether the skills of their managers have atrophied, or whether their luck has run out. Whatever the case, chasing past performance is all too often a loser's game. Managers of funds seeking market-beating returns should make it clear to investors that they must be prepared to trail the market -- perhaps substantially -- in at least one year of every three.

4) Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually.....As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%. Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks.

5) Look before you leap into alternative asset classes. During 2006-07, equity mutual funds focused on developed international markets and emerging markets provided strong relative returns to U.S. stocks. During that period, U.S. investors made net purchases of $285 billion in mutual funds investing in non-U.S. stocks, and liquidated on balance some $35 billion from funds focused on U.S. stocks. This extreme example of "performance chasing" at its worst is hardly defensible. But, disingenuously, it was touted by fund marketers as adding "non-correlated assets," or "reducing volatility risk." In 2008 -- with non-U.S. developed market funds falling by 45% and emerging market funds tumbling by 55%, we learned once again that, just when we need it the most, international diversification lets us down. Commodities were no different. As the global recession developed, commodity funds sank, the largest such fund tumbled 50%. Always keep in mind: When the investment grass looks greener on the other side of the fence, look twice before you leap.

6) Beware of financial innovation. Why? Because most of it is designed to enrich the innovators, not investors.....Our financial system is driven by a giant marketing machine in which the interests of sellers directly conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win. ....While the events of 2008 reinforced that message, perhaps these stern and oft-repeated lessons of experience will help investors avoid similar mistakes in 2009 and beyond.

My Note: I'm not sure I completely agree with Bogle on point six. After all it was financial innovation that gave us index funds of which his Vanguard group is a huge investor. I think I'd rather say beware of financial innovation that has not been around long enough to withstand the test of bull, bear and sideways markets.

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