Quarterly Letter to Clients-Conclusion.

What the playbook and game plan are telling us: 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.

After having established a fundamental argument for why stocks could advance this year we must look and see what valuation tells us. Our research base case for the S&P 500 given what we know today suggests that it’s underlying stocks could earn between 102 and 107 dollars a share in 2012. Should these estimates come about then historical valuation places the market’s potential year end value between 1,350 and 1,550. For now, we will use as midpoint price target 1475 for the market. That is a potential increase of nearly 12% from current prices and about an 18% from where we started the year, not including dividends. A market that would hit that target would also have an expected earnings yield of roughly 7% and would still be attractive based on historically low interest rates. Also keep in mind that there have been many occasions, particularly in low interest rate periods where stocks have traded at higher PEs than what we project here. We will also introduce a rough 2013 valuation cone of 1500-1700 and use 1625 as a midpoint on that estimate. We realize that 2013 is a long way off but we forecast in general two years out on a rolling basis and adjust those estimates as events come forth. Please note that there is no guarantee that any of these estimates will be met.

We must temper what is admittedly an optimistic scenario for 2012 with the fact that the market has had a fairly substantial rally of almost 5% so far this year and is up about 20% since early October. Statistically as we measure such things, stocks are in the short term overbought and it would not surprise us if the markets experienced a short term corrective phase or spent some time backing and filling while investors consolidated these recent gains. While we think stocks have the possibility of moving higher, it will unlikely be in a straight line. We should also note that while we have our opinions of what might happen this year, the markets are the final arbitrators of such events. We will have the defensive pages of the playbook nearby in case things don’t turn out as planned.

We had raised our cash levels in the summer months consistent with our different investment strategies, client mandates and client risk profiles. We were thus in a position to add strategically to asset classes that looked attractive to us in the fall. In particular we were attracted to ETFs that represented areas of longer term growth and also had been beaten down to levels where their dividend yields had become too attractive to ignore. That strategy may have hurt portfolio performance slightly in the last six weeks of the year but it has paid off so far in 2012. Our preferred investment vehicles are ETFs. Areas of strategic concentration include technology, energy, multinational large cap ETFs with higher dividends and certain international ETFs that experienced such substantial declines last year that we believe on a total return basis have made both them and their markets attractively valued.

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

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.