Thoughts Going Forward
This post will be a follow up to my "End of Quarter Market Thoughts" . Below I've listed some of the principle themes we'll be watching as we move towards year's end. Here we also discuss what the playbook says we ought to do in situations like this and our game plan for doing so.
The upcoming corporate reporting period may be the most important earnings season that we've witnessed since 2008. The next 2-3 weeks will likely be critical in determining market direction for the rest of the year. Market's are worried that the slow patch the economy entered this summer will turn into a recession. So far economic data is not showing that to be the case. Corporations will soon start reporting how they did in the 3rd quarter and will give some insight into future business. A bad earnings season could lend credit to the recessionary argument. Corporate reports that in general paint a picture of economic growth could lead to a market rally. If we are not entering a recession then there is a greater probability that investors will bid stocks higher into the year's end.
What are the Europeans willing to do regarding their debt issues? Stocks rallied sharply higher yesterday afternoon on news of a possible plan for recapitalization of European banks. This indicates to us that investors overriding concern is financial collapse overseas, mirroring what happened here in 2008. Any real coordinated plan of attack on debt issues could lead to a US stock rally. As an aside the Europeans really have no choice in somehow finding a solution to this issue. They can pick a plan of their own choosing or be forced to accept the one that the markets will dictate to them if they continue to do nothing.
Will there be any solid bipartisan deficit plan from the super committee appointed by Congress this summer? Recall that what started the major portion of our slide in August was the inability of our politicians to come to grips with our debt issues. This led to a downgrade of our credit rating. Markets have basically been in a correction mode since that time. The committee is scheduled to deliver its report to Congress sometime in late November. Failure by Congress to approve the committee's plan results in harsh automatic cuts in both military and discretionary spending. The committee is charged with finding over a trillion dollars of either spending cuts, tax increases or a combination thereof. Passage of a reasonable bipartisan plan is most likely positive for stocks.
How much lower will the price of gasoline go? Gas here in Chicago is something like twenty-five cents lower since Labor Day. {We still pay too much and more than almost any other place in the country!} There are some experts who suggest that every ten cent decrease in gas puts nearly 14 billion dollars annually back in the pockets of consumers. This is a quiet benefit that hasn't perhaps been as acknowledged as it should have been. It of course works both ways. Right now lower gas prices are helping the economy. We'll be watching to see which way prices go and if any further decline helps discretionary spending.
What the playbook and game plan are telling us. 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.
The playbook gives us a set of metrics that we regularly use to gage economic activity. These are currently not indicative of a recession, although they have suggested a slowdown in the expansion. If there is no 2012 recession and if Europe somehow avoids a credit conflagration, then by most of our investment indicators stocks look cheap. These investment metrics leads us to believe that the US will narrowly avoid a recession in the first half of 2012 and that we will see better indications of economic growth as 2012 progresses. This could obviously change, but for now that's how our indicators read. Again we think we'll know more about the state of the economy as we progress through this earnings season. The playbook also tells us what to look for in terms of market phases by our measurement of money flows. Many of these indicators are now close to flashing positive signals. For example, the number of stocks trading below their 200 day moving average has reached oversold levels that historically has led to a positive move for stocks.
Money flow indicators that begin issuing positive market signals suggests a higher probability of positive returns on a 12-18 month basis. Now no system is foolproof and our indicators can flash these signals and then continue to sell off for a while. For example these indicators flashed positive in November, 2008. Market rallied through early January of 2009 and then sold off to retest the previous October's lows. But ultimately purchases made during that time period gave us fairly substantial returns. We will monitor these systems in the week's ahead. In general we have carried above average cash balances this year and we believe we are getting close to the time when it will be necessary to put some of that money back to work according to our strategies and our client's mandates.
The game plan calls for us to look for what we believe are undervalued sectors of the economy. It also tells us what to do in the event we are wrong with our analysis. Areas of likely investment concentration include technology, energy and certain health care sectors. International sectors and higher dividend paying exchange traded funds are also attracting interest at this time.
*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 adviser's 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!!!
What the playbook and game plan are telling us. 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.
The playbook gives us a set of metrics that we regularly use to gage economic activity. These are currently not indicative of a recession, although they have suggested a slowdown in the expansion. If there is no 2012 recession and if Europe somehow avoids a credit conflagration, then by most of our investment indicators stocks look cheap. These investment metrics leads us to believe that the US will narrowly avoid a recession in the first half of 2012 and that we will see better indications of economic growth as 2012 progresses. This could obviously change, but for now that's how our indicators read. Again we think we'll know more about the state of the economy as we progress through this earnings season. The playbook also tells us what to look for in terms of market phases by our measurement of money flows. Many of these indicators are now close to flashing positive signals. For example, the number of stocks trading below their 200 day moving average has reached oversold levels that historically has led to a positive move for stocks.
Money flow indicators that begin issuing positive market signals suggests a higher probability of positive returns on a 12-18 month basis. Now no system is foolproof and our indicators can flash these signals and then continue to sell off for a while. For example these indicators flashed positive in November, 2008. Market rallied through early January of 2009 and then sold off to retest the previous October's lows. But ultimately purchases made during that time period gave us fairly substantial returns. We will monitor these systems in the week's ahead. In general we have carried above average cash balances this year and we believe we are getting close to the time when it will be necessary to put some of that money back to work according to our strategies and our client's mandates.
The game plan calls for us to look for what we believe are undervalued sectors of the economy. It also tells us what to do in the event we are wrong with our analysis. Areas of likely investment concentration include technology, energy and certain health care sectors. International sectors and higher dividend paying exchange traded funds are also attracting interest at this time.
*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 adviser's 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!!!
posted by CR English at 9:25 AM
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