Jobs

Good jobs article in the current edition of Fortune Magazine.  {Excerpt with my highlights}

Washington needs to wake up to the jobs crisis:  Politicians from both sides of the fence have some harsh truths to face about the true state of the nation's unemployment.

August 24, 2011: 5:00 AM ET

By Nina Easton, senior editor-at-large

FORTUNE -- If Obama's fall campaign to tackle the jobs crisis sounds familiar, that's because it is. This President has talked about jobs more than 200 times since taking office. He signed an $820 billion stimulus package to buy (mostly public sector) jobs, followed by an $18 billion jobs package lumping construction funds with hiring incentives for small business...... 

There's not much to show for all that. In the 26 months after the nation's unemployment rate first breached 9%, it slid back under only twice. Long-term joblessness is especially sinister: Minneapolis Fed chief Narayana Kocherlakota says it is unprecedented in post-World War II U.S. history to have this portion of the population unemployed for more than a year. Meanwhile a quiet cultural crisis brews as one out of five American men stop collecting paychecks -- getting by instead on unemployment or disability checks, the incomes of friends and family, and in some cases illicit activity.

The Obama team resists a pro-growth tax and regulation agenda that business leaders insist would give them the confidence to invest their growing profits in an expanded U.S. workforce. But that's just part of the problem. In any conversation about getting Americans back to work, there are hard -- and often politically unpalatable -- truths that leaders from both parties first need to face about the state of the nation's bruised and battered workforce:

• Getting the unemployed re-employed isn't just about economic growth. There are now 6.2 million Americans (more than 44% of the unemployed) who have been out of work for more than a year -- and are dead last on any list of employers seeking to fill positions. These are people whose skills have rusted in a fast-paced global economy, along with twentysomethings who haven't even developed the habit of work. We risk losing a generation of men and women who won't be able find meaningful employment ever again.

• Washington spends more than $18 billion a year on 47 different training programs -- spread across nine agencies. What has all that bureaucracy and money bought? Employers who complain that they can't find qualified workers -- even in this market (one out of three employers, according to a recent McKinsey Global Institute survey). As many as 3 million jobs in this country are sitting unfilled. There is a sharp disconnect between the skills employers need and what unemployed workers have to offer -- and business isn't doing nearly enough to provide training to close that gap.....

• Safety nets, built to protect people in trouble, are actually contributing to their long-term unemployment -- and thereby hurting their job prospects. A study by the Chicago Fed suggests people go back to work -- and unemployment drops -- when unemployment insurance is set to run out. In fact, some studies indicate that a full percentage point of today's jobless rate can be attributed to folks who are taking advantage of benefits that enable them to collect checks for nearly two years. The Social Security disability program -- intended for the chronically ill -- is morphing into a new form of welfare dependency discouraging nonelderly adults from finding jobs.

• This isn't 1982, when unemployment topped out at 10.8% -- a bit higher than the Great Recession's October 2009 peak. There is no "Morning in America" on the horizon. All signs point to a continued struggle for people who don't have jobs for long periods of time -- leaving a deeper, more indelible mark on our nation's psyche. Recent studies show that U.S. companies will actually face a talent shortage in 10 years, even as growing numbers of teens drop out of school and millions of once-talented adults fall idle.....

This article is from the September 5, 2011 issue of Fortune. Link:  Fortune: Jobs.

an tSionna {08.30.11}

Daily chart of the SPY.  As a reminder you can double click on the chart to make it larger.  Nice 7% rally off of the bottom.  We'll see if institutions try to goose this a bit more into month's end these next couple of days.

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

an tSionna {Gold}

From Chart of the Day:

"Today's chart provides some long-term perspective in regards to the gold market. As today's chart illustrates, gold has been in an extremely strong bull market since 2001. The pace of that upward trend has increased over time. There was a slight increase in slope both in 2001 and 2005. Following the financial crisis of late 2008, however, gold significantly increased the pace of its ascent. Recently, gold made new rally highs but has pulled back after approaching long-standing resistance (red line) of its current accelerated trend channel. Despite the pullback, gold currently trades for over six times what it did when the rally began back in 2001."

Link:  Chart of the Day: Gold

*Long the Gold ETF GLD in certain client accounts although I will note that I have sold down parts of this position in the last week.

PreMarks: Buffett and Jobs

Stocks are ripping on the open this morning. Bank of America {BAC} is selling 50,000 preferred shares to Berkshire Hathaway for $100,000, a $5 Billion dollar investment in BAC. BAC is a bank rumoured to be in trouble by continued exposure to the housing market. The Buffett investment is seen as vote of confidence in the long term prospects of the bank.

This news is offsetting the news announced late last night that Steve Jobs is stepping down at Apple. Before the Buffett news broke Jobs resignation was the news of the day. I don't own Apple directly {it is however a major component of several of the ETFs I own for clients}. However, I would say that I think that Apple has been preparing for at least several years for the day when Jobs is no longer at the helm. In regards to Jobs being irreplaceable one has to feel on a personal level sadness as this has to be viewed as a sign that his pancreatic cancer has worsened. In regards to what will happen to Apple the company I am reminded of the old de Gaulle comment, "Cemeteries are full of irreplaceable people". Again this is not intended to make light of Jobs' illness but my guess is that Apples next few years are already mapped out while much of the day to day blocking and tackling at the firm has already been handled by his successor Tim Cook.

*I hold as legacy or custodial positions for clients shares in BAC and Apple.  Each also is a major component in certain indices that I invest in for clients.

PreMarks: 8.24.11

Stocks look to open slightly down to mixed although they have rallied from their ealier lows.

As a heads up, I reinvested  money yesterday after a client specific review of portfolios.  This was a tranche buy.  That is I put a specific amount of dollars to work in those accounts that I felt could reduce their cash assets and also put money to work in what I perceive to be bargain prices on a 12-18 month time horizon.  I have a bit more of this program to put back to work in the next few days.  When I am finished my cash positions on average will be 12-15% versus the 20-30% I had about a month ago. 

As I mentioned this was a client by client review and while there is some uniformity to what I purchased, no two accounts would look the same yesterday in regards to what was purchased for them.  Stocks could obviously go lower, although I take some current comfort from the fact that the support level we discussed yesterday seems to be holding.  However, I think the risk reward level right now favors the bulls in the longer term.  This is especially true with ETFs that are in many cases yielding much more than bonds right now. 

I will publish before Labor Day why I am becoming more bullish in the longer term {12-18 months} in a post to you.

an tSionna {08.23.11}

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

Off To Butler

I mentioned back in June that one of our "employees" would be "relocating"  to the Indianapolis branch of the firm, soon to be opened at Butler University.  This is the weekend she moves in.  I'll be back on Tuesday with something new.

"Don't adventures ever have an end? I suppose not. Someone else always has to carry on the story.....There was only one Road; that it was like a great river: its springs were at every doorstep, and every path was its tributary. "It's a dangerous business, going out of your door. You step into the Road, and if you don't keep your feet, there is no knowing where you might be swept off to."  Bilbo Baggins.  "The Fellowship of the Ring."

"I will not say: do not weep; for not all tears are an evil."  Gandalf-"The Return of the King." 

Go raibh grásta Dé leat, mo chuisle mo stór!

PreMarks 08.19.11

Markets are set to open lower on continued banking worries out of Europe and recession concerns in the US.  Stocks at a minimum look like they are going to retest last week's lows.  I've tried to provide some longer term perspective on the importance of the 1100-1090 level on the S&P 500 in this weekly chart of the S&P 500 index ETF SPY*.  We're gonna get some idea of where the market might be headed by how we respond to this level. 

Note that there is an error in the chart.  The 110-109 level is labeled as resistance in the blue caption above.  You should substitute the word support there instead.

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

Sayin Again!

I've said this before both here and here bring back the uptick rule!

PreMarks: European Banks

European banks are down on average about 4% in our premarket trading.  This has sparked a worldwide decline in stocks.  Germany at one point was down almost 4%.  US futures are down  nearly 2%. 

Earnings

Bespoke published this chart and commentary yesterday.  {Note we have been using a year end earnings number of $93-95 and a year end price target of 1350-1400.}  Below is Bespoke's  commentary.

"{Published above} is a table highlighting the year-end 2011 S&P 500 price targets of major Wall Street strategists from Bloomberg's weekly survey. We also provide where the targets stood at the start of the year when the slate was clean. As shown, the average year-end price target is currently 1,383, which would be a gain of 16.2% from current levels. Price targets that are highlighted in green have been increased versus the start of the year, while targets highlighted in red have been lowered versus the start of the year. As shown, five firms have increased their targets while two have lowered them. The increases were done earlier in the year when the market was still in positive territory. It will be interesting to see how much these targets drop now that the market has turned decidedly negative.

We also provide the strategists' estimates for 2011 S&P 500 earnings. Just like the year-end price target, the average estimate is currently higher than it was versus the start of the year ($96.46 vs. $92.33). The average year-end price target and 2011 EPS estimate gives the S&P a P/E ratio of 14.34. At the moment, the S&P 500's P/E is just over 13.


It's going to be tough for the index to live up to strategist expectations at this point, but hey, stranger things have happened."

Link:  Bespoke: Year End Earnings.

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

Mutual Funds

Here's the mutual fund article I promised you yesterday.  {Excerpt with my highlights.}

The Mutual Fund Merry-Go-Round

By DAVID F. SWENSEN    Published: August 13, 2011

AS stock prices have gyrated wildly, many investors have behaved in a perverse fashion, selling low after having bought high. Individual investors bear some responsibility for ill-advised responses to the ups and downs in the market, but they are not the only ones to blame. For decades, the mutual fund industry, which manages more than $13 trillion for 90 million Americans, has employed market volatility to produce profits for itself far more reliably than it has produced returns for its investors.

Too often, investors believe that mutual funds provide a safe haven, placing a misguided trust in brokers, advisers and fund managers. In fact, the industry has a history of delivering inferior results to investors, and its regulators do not provide effective oversight.

The companies that manage for-profit mutual funds face a fundamental conflict between producing profits for their owners and generating superior returns for their investors. In general, these companies spend lavishly on marketing campaigns, gather copious amounts of assets — and invest poorly. For decades, investors suffered below-market returns even as mutual fund management company owners enjoyed market-beating results. Profits trumped the duty to serve investors.

Mutual fund companies, retail brokers and financial advisers aggressively market funds awarded four stars and five stars by Morningstar, the Chicago-based arbiter of investment performance. But the rating system merely identifies funds that performed well in the past; it provides no help in finding future winners. Nevertheless, investors respond to industry come-ons and load up on the most “stellar” offerings......Year in and year out, flows to four-star and five-star funds prove remarkably resilient and overshadow flows to the three bottom categories.

This churning of investor portfolios hurts investor returns. First, brokers and advisers use the pointless buying and selling to increase and to justify their all-too-rich compensation. Second, the mutual fund industry uses the star-rating system to encourage performance-chasing (selling funds that performed poorly and buying funds that performed well). In other words, investors sell low and buy high.....

....Why isn’t there more of an outcry? Investors naïvely trust their brokers and advisers. Most understand too little about financial markets to make informed decisions, intervene too frequently in counterproductive ways and gather too little information about portfolio holdings to evaluate results. Investors like to believe they are doing well, even when they are not.

Meanwhile, the mutual fund industry shouts through a megaphone, making campaign contributions to influence politicians and lobbying to avoid regulation. Without any offsetting pressure from the investing public, Wall Street crushes Main Street.

What should be done? First, individual investors should take control of their financial destinies, educate themselves, avoid sales pitches and invest in a well-diversified portfolio of low-cost index funds....(Even Morningstar concludes, in a remarkably frank study, that low costs do a better job of predicting superior performance than do the firm’s own five-star ratings.) Second, the Securities and Exchange Commission should employ its considerable regulatory and enforcement powers to encourage individual investors to embrace low-cost index funds and shun the broker-driven churning of high-cost, actively managed funds..... Third, the S.E.C. should hold the mutual fund industry to a “fiduciary standard,” one that puts clients’ interests first.....{S}trong fiduciary standards and investor-oriented regulatory oversight would subordinate the pecuniary interests of the fund purveyors to the interests of the individual investors that the industry purports to serve......

David F. Swensen is the chief investment officer at Yale University and the author of “Unconventional Success: A Fundamental Approach to Personal Investment.”  This article was originally published in the New York Times on August 13, 2011.

Link:  The Mutual Fund Merry-Go-Round

Investment disclosure note:  While we invest most of our client's assets in ETFs, certain clients of Lumen Capital Management, LLC own legacy positions in mutual funds at the time of this article due to considerations such as tax consequences and client preferences.

Short Notes:

I published over the last few days my latest letter to clients.  I put this in the system to be published while I was on vacation last week and part of this week.  Clients & friends of our firm received this at the end of July.  It is amazing to me how dated parts of this letter are by now.  The section on volatiliy & seasonality is, I believe, just as relevent as when I printed the letter back then.

I'm going to publish tomorrow an excerpt of an article on mutual funds that was in last weekend's New York Times.  I'll use this as a backdrop & reference when I publish a longer letter to clients and blog entry to you all after Labor Day.  I hope to post a chart update before the weekend as well.

Current Letter To Clients {Conclusion}

What the playbook and game plan are telling us: Assuming that this same yearly pattern we've chronicled continues through the rest of 2011, than look for stocks to trade within this same range until sometime late in the summer or fall. It would not even surprise me if we saw some kind of decline between now and then. Markets are showing more neutral readings right now in regards to money flows as both the bulls and bears are jockeying for position. Since we see nothing to change our earnings estimates at this point then we believe that {a price of} 1,350 to 1,400 is still possible by year end for the S&P 500. That implies three to seven percent potential total market return between now and then. Total market return refers to price appreciation plus any dividends received between now and then.

Every investor should have a long term investment strategy. For clients of our firm this strategy comes from our understanding of their unique risk/reward criteria and then incorporating that into our investment disciplines. All of our strategies are based on our 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. It gives us different scenarios regarding market activity. We use it to formulate our game plan. The game plan is a tactical and a 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 clients.

While the market seems to be sorting things out, we should remember that stocks are up significantly in the last twelve months. I would also note that the net yearly return for equities on Labor Day weekend last year was negative. Given the extent of that move it is not unknown for stocks to rest and regroup for a certain period of time. This is in fact healthy as it allows markets to digest their most recent gains and makes the likelihood of a blow off investment top and subsequent decline a lower probability event.

We have been the least active in client accounts in many years in terms of transaction activity. We have carried more of a defensive orientation this first half of the year. Depending on client mandates, account sizes and strategic orientation we have also carried some of our highest cash levels in several years going into the spring. Some of that money we opportunistically put back in the market in late June. We will look for other opportunities this summer if the market trades sideways as expected. In case stocks do decide to take a turn for the worst we will have the defensive pages of our game plan nearby. Areas of sector concentration currently include technology and energy. We have also added opportunistically to our dividend related ETFs on the recent pullback and we believe that certain international markets and sectors are beginning to look attractive as well.

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

Current Letter To Clients {Disclaimer}

Christopher R. English is the President and founder of Lumen Capital Management, LLC.-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for private investors and also manage a private investment partnership. The information derived in these reports is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate discloser is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clientele. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice. Mr. English may be reached at Lumencapital@hotmail.com.

Current Letter To Clients {Part II}

Market Seasonality: There are seasonal patterns to markets that exert themselves throughout the year. We discussed this back in a post on March 23rd at our blog Solas! If you are reading this online you can follow this link here to that post: Solas!: Where We May Be Going or readers of the printed version can type in this blog address: http://lumencapital.blogspot.com It will take you to the main page and you can access the archives if you want to review what we said back then. One of the prime points back then was this. “While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October…..of course there is also no law that says this has to occur. However we have to add this factor into the equation given the fact these seasonal patterns exist and given where we are in the calendar."

One of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out.

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.}

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

2011 so far is a good example of this process {though of course we don’t know how this year will end}. We discussed in December our expectations that stocks as represented by the S&P 500 had the potential to trade between 1,350 and 1,400 by year-end 2011. On May 2nd the S&P 500 printed a close of 1,361.22. By early May we had already reached the lower end of my price targets. Since the estimates I use are available to nearly everybody then it is likely that consensus expectations for most analysts were somewhere near my own levels. Stocks at this point, in order to rise, needed that extra push in the form of better economic news. That has been decidedly lacking these past few months. So share prices have stalled leading to the current listless random action.

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

Current Letter To Clients {Part I}

It's late Summer.  I will be taking some time off doing the yearly trek to the Rhode Island office.  During the rest of this week I am going to serially publish our latest investment letter that was recently sent to clients. Today is part I.  We'll be back to our regular assignment some time next week. 

 Solas!                                           Summer Doldrums!

July 22, 2011: Summer Edition:

Stocks roared out of the gate in 2011, tacking on nearly 7% into February. Since then markets have essentially gone nowhere. Through June, the S&P 500 has gained about 5%. The average NYSE listed stock had about a 4.5% return. Stocks also experienced two corrections that wiped out most of 2011s gains since those February highs. Each time though stocks rebounded back to positive territory. Currently markets are locked in a trading range between 1,250 and 1,350 on the S&P 500. An illustration of this is shown {below}.

Summer’s doldrums, that period of time when vacations and a lack of news lock the day to day movement of prices into that famous random walk seems to have arrived early this year. These patterns seem to make no sense until some event asserts itself into a new trend. The current news strikes me almost as a repeat from last summer. You could review my letter from last spring and see pretty much the same highlights. Then for example investors worried as they do now about a slowing economy, debt in the Euro-zone was also a major concern and the jobless rate was as intractable then as it is now.

Chart showing trading range, the gains from last year and our current money flow readings.

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

Stock Market Corrections

This from Chart of the Day.  I will have more to say about some of the data in this chart in a post I will publish sometime next week. 

"The stock market remains highly volatile and currently trades significantly lower than where it did three short weeks ago -- investors are concerned. For some perspective on the current correction, today's chart illustrates all major stock market corrections (15% loss or greater) of the last 111 years. Each dot represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined 45%. There are a few items of interest... Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.3 years. Second, most major corrections since 1900 (62%) have resulted in a drop of less than 40% while lasting less than 400 trading days. Since 1950, the percentage of major market corrections that were less than 40% and 400 trading days increased to 78%. As it stands right now, the current stock market correction (April 2011 peak to most recent low) would measure below average in both magnitude and duration."

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

Link:  Stock Market Corrections.



Short Notes: Uptick Rule.

I believe that one of the problems with this market has been the absence of the "uptick rule". This rule refers to trading restrictions that will not permit short selling of a security except on a price uptick. A short sale must either be at a price above the last traded price of the security, or at the last traded price if that price was higher than the price in the previous trade.

The uptick rule was eliminated in July of 2007. One year later the world went into free fall. Since it's elimination we have seen last year's "flash crash" and the current carnage which I believe owes part of the rapidity and violence of its decline to the fact that short sellers can lean on stocks and futures with virtual impunity while natural buyers step aware due to fear of what the shorts can do.

Now there were studies done over the years saying that the uptick rule didn't function as intended and perhaps it doesn't need to be applied in normal markets where liquidity is ample. But in situations such as now, I think it would be interesting to bring it back as part of a "circuit breaker" on free falling markets.

Premarks: All Over The Place

Futures are all over the place this AM as an overnight rally reversed on a Reuters report  that a major Asian bank was  reducing credit lines to a major French bank.  Markets then turned around on better than expected unemployment claims numbers.  Where we'll open or end up is anybody's guess but I think this is all part of a bottoming process.  Notice that yesterday the market didn't trade to new lows even when it was giving up most of Tuesday's gains.  Stay tuned!

Gross On The Economy

Excellent Washington Post column that I think succently describes our longer term economic problems.  {Excerpt with my highlights}

U.S. debt isn't its biggest problem
BY BILL GROSS   Wednesday, August 10, 2011; 05:48 PM

For a few days there it seemed like President Obama was the master of the bond market. This is a Triple-A nation, he intoned on Monday, and always will be a Triple-A nation no matter what some rating agency says. As if in applause, Treasury bonds rallied furiously in price and yields sunk to cyclical lows. Unfortunately, what they were applauding was the slow growth and perhaps recessionary future that an AA-plus nation faces with too much debt and too little fiscal flexibility to increase demand.

... Washington has been operating the past few months under the assumption that the United States and our euro-zone economic trading partners are experiencing a debt crisis that must be resolved by exorcising excessive spending in the near term. To Republicans, and even many co-opted Democrats, the debate starts with spending cuts and how much must be done to appease voters and the markets......

Revenue increases may be part of the solution, but even then, at some imbalanced ratio of spending cuts... the thesis assumes that markets and economic growth require what in essence is a fiscally contractionary step..... We must, the consensus goes, become like Argentina, Brazil and Mexico from the 1980s: Tighten the budget via spending cuts, reduce the deficit and voilá -- economic growth will blossom.

But while our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease -- it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease. Debt has been simply an abused sovereign and private market antidote to sustain it. We and our global market competitors are and have been experiencing a lack of aggregate demand for several decades. It is now only visibly coming to a head, as the magic elixir of leverage is drained and exhausted. This potentially fatal disease of capitalism is a result of several long-term secular phenomena:

(1) Aging demographics, where boomers everywhere spend less, in contrast to their youth, as they approach retirement; babies, houses and second cars shift to the scrapbook of memories as opposed to future spending power.

(2) Globalization, where 2 billion new competitive workers from Asia and elsewhere take jobs and paychecks from complacent and ill-trained 40-somethings in developed markets.

(3) Technological innovation, where machines and robots displace human labor, resulting in corporate profits but declining wages.

The debt crisis as it crests ultimately gives way to these growth-inhibiting, spending-contractionary secular forces. Having run up our credit card to keep on spending, we have reached market-enforced limits that force deleveraging. It is not the debt, however, but the lack of global aggregate demand that is at the heart of the crisis. As the entire world strives to put its own people to work before other nations do, policymakers constructively lower interest rates and delay sovereign, corporate and household defaults to provide breathing room. Fiscally, however, an anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.

The president and Congress must recognize that an AA-plus country, to remain AA-plus, must focus on growth, not debt reduction, in the short term. We have a debt problem -- but primarily a crisis of aggregate demand. A 21st-century Keynes would have recognized this and sounded the alarm, pointing out that policymakers from a fiscal perspective are pointing us toward recession and the destructive 1930s instead of a low-growth but still breathing U.S. economy of the 21st century.

The writer is founder and co-chief investment officer of the investment management firm Pimco.

Link:  Gross on debt.

Premarks: A Bottom?

Futures are down today, showing a likely 1% decline in prices at the open. This shouldn't be a surprise given yesterday's big move. Markets are in the process now of finding a bottom & we are likely in the backing & filling phase of this. Markets can likely now trade back to levels where they started the year over the next few weeks. This will likely be a process over time and not a "V" shaped rapid move back up. How we'll end the day is anybody's guess. A retracement of half yesterday's gains wouldn't surprise me much.

Premarks: The Day After.

Markets are set to open significantly higher, perhaps up 2%.   Markets are as oversold now as they were in October 2008 and March 2009 so some sort of snapback is to be expected.  Do not be surprised if this bounce gets sold over the next couple of days.  There will need to be some sort of bottoming process.  Now a few thoughts:

American companies and for what we can tell American banks are in much better condition now than they were in 2008-2009.  This is important because that means what we are going through right now in not a situation where the credit markets have locked up.  What we are experiencing is a loss of investor confidence due to Europe, the fall out from the debt situation along with the S&P downgrade and concerns that we may fall back into recession. 

From my perch and based on what we know right now I think the following regarding these issues.  I don't know about Europe.  I felt a few weeks ago that they had ring fenced their problem countries.  Now I'm not so sure.  I think the debt situation has become something of a farce in the fact that the S&P downgrade has nothing to do in the short run with how the government pays its bills.  Finally while I think we are going through a slow patch, I think the jury is still out about a recession.  I know I sound like a parrot but I keep falling back on the fact that corporate America's balance sheets are in pretty good shape.  In any case with a market down now approximately  16% from the highs, it is likely much of this is priced in.  

Stocks have now fallen about the same percentage amount as they did back last year when May's flash crash signaled a period of  market weakness.  In my eyes stocks have become cheap not only on a valuation basis {earnings yield of the S&P 500 for example is now 8.2%} and by our money flow work {stocks now very oversold by our work}, but also on the support basis of dividends.  The S&P 500 for example currently yields as much as the 10 year treasury.  Many individual companies and dividend ETFs have dividends in the 3-4% range. 

Look for markets to do some backing in filling in the days ahead.  Also as I mentioned the other day that 1260 resistance level will probably be a barrier that will be hard to breach at least on the first couple of attempts to move higher.  Yet I think stocks have the ability to move higher by year end.  We'll stick to our 1350-1400 price target area in the S&P 500 right now based on earnings.  That may seem like a pie in the sky number at this point.  But even if I am off in my valuation assessment and stocks can only manage to get back to say 1250-1300 by year end then that is still 8-15% by year end.  When measured by perhaps 3-4% downside from here, I think that makes this a pretty good risk/reward ratio.  That is especially true when we factor in the dividends which will accrue through the rest of the year.

One of the grim realities of the modern investment world is that stocks fall of their own weight much faster today than they used to.  Events that used to take weeks to play out now take a much shorter period of time.  That is just what we as investors must become used to.  The upshot of that is that when measured against all other investment possibilites, you are likely over time to be rewarded for understanding the volatility risk now inherent in stocks.  When measured against short term bond rates that are almost zero, I think the risks for longer term investors are acceptable.

Finally back at the end of June we discussed President Obama's re-election chances.  Back then we pegged his re-election chances at even money, down from 65-35% at the beginning of the year.  I think we'll lower that notch now to less than 40%.  The economy seems to be moving away from him and he is starting to run out of time to figure out how to fix it.  It will be hard from him next year to run away from the perception that he is anti-business and harder still to run away from being the President who lost the United States' AAA credit rating.

Debt Limits.

Bespoke Investment Group puts our current debt issues in chart form. They say, "If you feel like shaking your head sideways for awhile, have a look through some of the tables, two of which {Bespoke has}created charts for {above-these two charts show historical increases in the debt ceiling and the history and forward estimates of the federal debt}.

Link: Historical Debt Ceiling Increases

Stuck A Toe In

We bought small positions in a few things today. What we did depended on investment styles, positions already carried in accounts and the various risk/reward characteristics of our clients. I will today raise the status of all three of our time trams to NET MARKET POSITIVE. We may be early on these buys and there is no law that says we can't go lower from this juncture, but I think investors who have a time frame of anywhere from 6-18 months will be rewarded for putting some money to work either today or in the short term. You can click here to see a definition of these terms.

Premarks: Market Post S&P Downgrade

I spent some time yesterday thinking about what has occurred over the past few weeks {it helped that it rained} which culminated with Friday's S&P downgrade of US debt. As I'm trying to write this more or less on the fly please excuse if it's a bit more disjointed than normal.

Anyone who says they really know what is going to happen today is either naive or lying. I will take a stab at a guess though. As I'm writing this the market futures are pointing to a lower opening of somewhere between 1-2%. As I previously mentioned, I think the market would be down today even without the weekend downgrade. It is impossible to know how much more this will add to the decline. I think there is a high probability that stocks will experience some sort of rally either later today or tomorrow. It would not surprise me to see markets end this week either even from where they opened today or higher. I also think there could be a higher level of volatility this week as markets try to find some equilibrium. Then it wouldn't surprise me if we go to sleep (meander aimlessly for a few weeks}.

Markets are now down about 7% for the year and 13% since their most recent July highs. This-believe it or not-is within the normal volatility range that markets can expect during the year. Stocks are nearing a 12.4 Price/Earnings ratio which is near the trough experienced in March 2009. Stocks were a pretty good buy then and are looking cheap today. Markets are basically pricing in a recession at this point. However, economic conditions: labor, lower corporate inventory levels, and consumer confidence aren't at the elevated levels that are normally associated with a recession. Also the dividend yield on the S&P 500 is approaching levels near that of the 10 year U.S. Treasury. The last time that occurred was also in March, 2009.

What markets worldwide have experienced is a massive loss of confidence. This will take time to repair. I'll stand by what I said regarding trading on Friday. That post is the 2nd one below this, entitled "What is it About August Anyway?"

Regarding what we might do for clients, I believe markets have become very cheap based on what we currently know. I think there is a risk of perhaps 5% to the downside {from Friday's close} buttressed by the potential for a 10-15% gain, possibly by year end. I also think that from these prices stocks now have the possibility of rising 20-25% over the next 12-18 months. While it is possible that some event will cause us to change this outlook, current facts suggest that the risk reward ratio is becoming more attractive for equities. That being said I will look for markets to stabilize before putting to work more of the cash we have on the sidelines. Also I'm willing to change my mind in the event that I am wrong. In this regard we will let our indicators be our guide.

After reviewing our portfolios, I am comfortable with most of what is held. Depending on styles and client risk/reward parameters we are in general holding healthy levels of cash {again realizing that for many investors in these times no cash level is comfortable unless it is 100%}, higher yielding ETFs, certain other defensive ETFs as well as investments in basic index related ETFs. It is at times like these that I believe that investing in ETFs really shows its merits. Unless Armageddon occurs it is unlikely that these will go to zero. Depending on how events unfold it is likely that we will put a tranche of this money to work sometime this week. Again I would refer you to the post of Friday for how this might pan out.

Finally let us consider that much as friends might stage an intervention for somebody with a substance abuse problem, we must consider the possibility that the government debt downgrade could lead us as a nation to a series of steps that could put us on a sounder economic footing down the road. That road while likely painful and full of pitfalls. However it could place the U.S. in a better future economic position which would be very optimistic not just for equity investors but the American public. More on this possibility at a later time.

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

S&p Downgrades U.S. Credit Rating!

Last night the credit watch agency S&P downgraded the debt of the U.S. From it's highest rating {AAA} to it's next level{AA}. This was a rumored possibility throughout markets all day yesterday. I will think about what this means over the weekend. First reaction though is that it's likely in stocks for the time being. I think we may open up a bit weak though on Monday for reasons more of a technical nature. That being said, my initial impression is that this downgrade {an event that has anyway been telegraphed for weeks during the recent debt debate as a possibility} shouldn't add substantially to that decline if it occurs. That,s just an early guess though. Will want to think about this and will want to see how Asia opens on Sunday. Back before the open on Monday.

What Is It About August?

So what is it about August anyway? Once again the month brings us angst & misery, at least in the financial markets. Kids don't notice it though thankfully. To them it's that last fling of summer before school intrudes back into their lives. In most cases  schools today intrudes earlier in the summer and for longer periods each year!

Markets of course don't know or care about seasonal patterns. They will as the consigliere used to say, "Do what they have to do to prove the most amount of people wrong.". Markets did that this week by staging their worst daily & weekly performance of the year.

As of this writing {Friday}, stocks are down about 4% for the year and are down approximately 11% since starting to roll over around July 4th. There are three main factors that we think have contributed to this decline. The first was the messy and chaotic way the debt crisis was handled. That process unfolded mostly as we expected. {See here}. However, the final product was less than most investors wanted and reinforced the view among the public regarding Congress' ability to get anything of real productive value accomplished.

The 2nd issue has been the concern that the economy is slowing down to the point that a recession could be just around the corner. Yesterday's jobs report data which showed some upward revisions to job creation in the past few months and showed growth for the current period, would seem to lower this concern right now. However, it is likely that the economy will grow at a slower rate through the rest of the year than investors had previously assumed.  It is also likely that both business and consumer confidence has taken a hit during this period which could also help slow things a bit.

Finally the problems in Europe just seem to continue to get worse. Many of us assumed that the Europeans were on the way to fixing their issues of sovereign debt when they announced in July their debt program for Greece. Recent events in Portugal, Spain and now Italy suggest that if anything these problems have become worse.

The investment pictue using a longer term time horizon is perhaps not as dreary as the current outlook might suggest. Corporations are coming off a pretty good 2nd quarter earnings season. They are not only showing good profitability but also their balance sheets are collectively the best they have been since the 1970's. There is a sovereign nation debt issue in Europe but it so far doesn't seem to be morphing into the kind of banking crisis that we witnessed in 2008. Finally stock valuations are low based on midpoint earnings estimates going forward and finally investor expectations have declined to a point suggestive that much of what has occurred is likely baked into prices at this point.

I've said recently that we've had the defensive pages of the playbook handy.  Here's what it says and hence my thoughts regarding overall portfolio strategy. While nobody can say where for certain the bottom to this decline might be put in place, it is likely to be an event that occurs in fits and starts. That is there will likely be snapback rallies which should be ideal for repositioning portfolio assets or even raising cash. It is unlikely in my view that equities will form a "V" shaped bottom and march straight back to new highs. For one thing we have now fallen out of the trading range we were locked into since February and the 1260 level on the S&P 500 will now be resistance. So it is reasonable to expect a period of backing and filling between now and sometime in the fall. It is also possible that we could experience some further downside in stocks. While a lower probability event, we cannot dismiss the possibility that prices could fall another 5-7% based on current sentiment. However I think that for investors with intermediate time horizons (6-18 months) there are bargains being created by this current decline. We plan to review our portfolios and make changes accordingly in the coming weeks. In particular we will be interested in adding exposure to equities that are paying higher dividend amounts either by design or by accident because of this decline.

We have carried a fairly high cash position for clients both now and at various times during the year. While realizing that in this type of decline that no cash position under 100% is seen as enough, we think that we will be in an environment where we can constructively put some of that to work soon.

At this point we are leaving our 2011 target price on the S&P 500 unchanged at 1350-1400. If we had to guess however we would probably pick the lower end of that range as the likely target price for year end. That means that if stocks were to hit those targets then prices have the potential to rise 12-15% from where they are currently trading.  Accordingly and to reflect our thinking while we will leave the defensive pages of the playbook open and while we will leave our short term rating up to NET MARKET NEUTRAL. we are close to raising that short term rating a notch.  Not there yet but could be as early as next week if the markets respond the way we think they might.

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

Bear Market Rallies

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 somewhat middle of the road path and has most closely followed the post dot-com bust rally that began back in 2002. If the current rally were to continue to follow the post-massive bear market rally pattern, the market would have to resume its rally in relatively short order.

Link:  Chart of the Day: Bear Market Rallies

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

Economists Have Recession Recovery Wrong

Barry Ritholtz in Washington Post on investment bubbles and recoveries.  {Excerpt with my highlights}.

Wall Street analysts and economists have this recession recovery wrong

The recession is well behind us now, and Wall Street seems to think this recovery should be all wrapped up.  Consider this: The federal non-farm jobs report for June was pretty awful....We picked up a mere 18,000 net new jobs.....Let’s put the number into context: In a nation of 307 million people with about 145 million workers, we have to gain about 150,000 new hires a month to maintain steady employment rates. So 18,000 new monthly jobs misses the mark by a wide margin.

Why have analysts and economists on Wall Street gotten this so wrong? In a word: context. Most are looking at the wrong data set, using the post-World War II recession recoveries as their frame of reference. History suggests the correct frame of reference is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery. These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.

Fortunately, a few economists have figured this out and provide some insight into what we should expect. Among the most prescient are professors Carmen M. Reinhart and Kenneth S. Rogoff......Looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977) — the professors warned that we should expect a prolonged slump. These other crises had a number of surprisingly consistent elements:

First, asset market collapses were prolonged and deep.....Second, they’ve noted that the aftermaths of banking crises “are associated with profound declines in employment.” They found that following a crisis, the average increase in the unemployment rate was 7 percentage points over four years. Third, the professors warned that “government debt tends to explode, rising an average of 86 percent.” Surprisingly, the primary cause is not the costs of bailing out the banking system, but the “inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged contractions.” They also warned that “ambitious countercyclical fiscal policies aimed at mitigating the downturn” also tend to be costly.

Hmmm, plummeting tax revenues just as the government tries to stimulate the economy . . . does any of this sound familiar? It should.....As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.

Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities. Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.....

....In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts.....

In the not too distant past, the market might have been inclined to rally following a horrific data point such as June’s NFP report. The assumption was that the Fed, or perhaps Congress, would respond to economic distress with its usual largess....The Federal Reserve is in no position to do much more without great distress.....Even with the Fed out of the picture, investors should not expect any relief from Congress: The legislative body in charge of taxing and spending seems incapable of accomplishing much these days. We are more likely to see counterproductive austerity measures than anything else.

Investors, it looks like you are on your own this time.

*Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog, the Big Picture.

Link:  Wall Street Analysts & Economists Have This Recession Recovery Wrong

Samuelson on Debt & the Elderly

Why are we in this debt fix? It’s the elderly, stupid.  Samuelson's take.  {Excerpt & highlights}.

If leadership is the capacity to take people where they need to go — whether or not they realize it or want it — then we’ve had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There’s been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff.......{W}e’ve heard almost nothing of the main problem that makes the budget so intractable.....It’s the elderly, stupid.

By now, it’s obvious that we need to rewrite the social contract that, over the past half-century, has transformed the federal government’s main task into transferring income from workers to retirees. In 1960, national defense was the government’s main job; it constituted 52 percent of federal outlays. In 2011 — even with two wars — it is 20 percent and falling. Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending.

These transfers have become so huge that, unless checked, they will sabotage America’s future. The facts are known: By 2035, the 65-and-over population will nearly double, and health costs remain uncontrolled; the combination automatically expands federal spending (as a share of the economy) by about one-third from 2005 levels. This tidal wave of spending means one or all of the following: (a) much higher taxes; (b) the gutting of other government services, from the Weather Service to medical research; (c) a partial and dangerous disarmament; (d) large and unstable deficits.

Older Americans do not intend to ruin America, but as a group, that’s what they’re about. On average, the federal government supports each American 65 and over by about $26,000 a year....At 65, the average American will live almost 20 more years. 

....{President}Obama poses as one brave guy for even broaching “entitlement reform”...What he hasn’t done is to ask — in language that is clear and comprehensible to ordinary people — whether many healthy, reasonably well-off seniors deserve all the subsidies they receive. That would be leadership.....Tea Party advocates broadly deplore government spending without acknowledging that most of it goes for popular Social Security and Medicare.

{F}acts are no match for the self-interest of about 50 million Social Security and Medicare recipients and a natural sympathy for older people and for people who eagerly look forward to retirement....What sustains these contradictions is a mythology holding that, once people hit 65, most become poor......But the premise is wrong....The Kaiser Family Foundation reports the following for Medicare beneficiaries in 2010: 25 percent had savings and retirement accounts averaging $207,000 or more; among homeowners (four-fifths of those 65 and older), three-quarters had equity in their houses averaging $132,000; about 25 percent had incomes exceeding $47,000 (that’s for individuals, and couples would be higher).

The essential budget question is how much we allow federal spending on the elderly to crowd out other national priorities. All else is subordinate. Yet, our “leaders” don’t debate this question with candor or intelligence.....We need to ask how much today’s programs constitute a genuine “safety net” to protect the vulnerable (which is good) and how much they simply subsidize retirees’ private pleasures.

Our politicians make perfunctory bows to entitlement reform and consider that they’ve discharged their duty, even if nothing changes....We need to ask the hard questions: Who deserves help and who doesn’t? Because Social Security and Medicare are so intertwined in our social fabric, changing them could never be easy. But the fact that we’ve evaded the choices for so long is why the present budget impasse has been so tortuous and why, if we continue our avoidance, there will be others.

Link:  Why Are We In This Fix, It's The Elderly Stupid!

Premarks: Summer Blahs!

Futures down about a percent bringing averages down to nearly flat now for the year. Very many factors in the mix right now. Positives include a likely resolution to the deficit issue and possibly some entitlement reform down the line. Right now the negatives seem to be trumping this. The main concern is that evidence seems to be coming forward that the economy has slowed down much more significantly than had been expected a few weeks ago. This is going to gnaw at investors. Weekly seasonal factors not helping much right now either. Tactically have not done much recently as I try to navigate the currents like everybody else. Must say though that my thinking is colored slightly more bearish today than a week ago.