In The End.....

To be Irish {full or in part} means to understand that in the end the world will break your heart.

Good night Ian and sleep well.  Peace be with you.  God bless and Godspeed.

Ian, Oíche mhaith, codladh sámh.  Síochán leat agus  ar dheis Dé go raibh a anam.  

Store This Nugget Somewhere {And A Posting Note.}

Apple ($AAPL) is now 13% of Nasdaq market capitalization, roughly the same as Microsoft’s ($MSFT) decade-ago-peak.  

Apple is also now about 20% of the NASDAQ 100 {QQQ} any significant negative price movement in AAPL is bound to affect both of these indices as well.  Something to tuck away and another reason to remember that while we invest in indices via ETFs, the underlying components of those ETFs are important as well.

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Chart courtesy of Paul Kedrosky via Abnormalreturns.com.

*Long ETFs related to the Nasdaq 100 and the Nasdaq in client and personal accounts.  Long shares of Apple computer for certain clients at their own discretion.  Apple is a key component of several ETFs that we own both personally and for clients.  

Posting Schedule.  I  noted last week that at some point I would need to be out to attend a memorial service.  I will not be posting until next Tuesday unless events warrant.  

Market Thoughts

Here's my thoughts on where the market sits right now.

Fundamentals are mixed.  For every bad statistic investors want to throw out {high unemployment,  bad earnings releases, Europe, Apple etc.} others can point to statistics that show improvement {rising housing prices, rising business productivity improvement, rising tax collections, Europe, Apple etc}.  Let's call this a push with economic statistics consistent with an economy growing in the 1.5-2.0% range.  The Federal Reserve's new round of quantitative easing is being viewed by both investors and traders alike as a safety net at some point underneath stocks.

Longer term trends:  Markets are in a bull market and have been now for almost a year.  Stocks are up nearly 24% in the last twelve months.  Our long term money flow analysis on stocks is NET MARKET POSITIVE.  This reading has not changed for several years.  

Valuation:  At 1441 the S&P 500 trades at a 13.89 PE based on our 103.75 year end corporate earnings target. That is roughly a 7.2% earnings yield.  The current dividend yield on the S&P 500 is about 1.9%.  By comparison the US 2 year Treasury currently yields 0.266 {roughly 1/4%}.   Our price valuation cone for equities remains between S&P 500 1,300-1,525.  Stocks are roughly in the middle of that range.  

Money flows:  Stocks remain over bought in all three of the time frames we measure which was one of the reasons we moved our short and intermediate money flow analysis a notch lower back on 08.08.12 to NET MARKET NEUTRAL.  While these have pulled back a bit over the past few weeks as the market has churned around some these are still indicative of stocks that have out run their current rally.   The percentage of stocks trading above both their 50 and 200 day moving averages is still elevated and still at levels that have in the past signaled some type of correction.  Please remember that just because stocks are in a corrective mode does not necessarily mean they must decline much in value.  Stocks can correct by price {stocks decline} by time {stocks churn and go nowhere} or by both.

Seasonal patterns:  Stocks have so far outwitted the seasonal weakness that normally prevails between late August and mid-October as the S&P 500 is up a bit over 4% during that time.  It is possible that the election period will bring about a bit of unevenness.  However, I believe that markets are increasingly pricing in that the President will be reelected on November 6th so this may be less of a factor now than was expected a month ago.

Outliers that could change stock prices before the end of the year:  Changes in the European debt crisis, new developments in the Middle East, a further deterioration in relations between Japan and China, a corporate earnings slowdown that is more dramatic than investors currently anticipate,  no progress on the fiscal budgetary impasse that threatens huge spending cuts starting January 1 or any other unanticipated event that we currently cannot see.  

Summation:  Stocks have had a pretty impressive run since the beginning of the summer.  They are now displaying all the classic signs of a market that is tired and in the least needs to rest and regroup before trying to head higher.  It is an unknowable today whether that thrust to the next level comes from these levels or whether we must head a bit lower first.  We have been very quiet for clients so far this month. We raised a bit of cash at the beginning of the month so that accounts in general have a position of around 10-15%.  While in general we have seen no reason to change that allocation, we have had the defensive pages of the playbook and game plan open for quite some time and there are a few things we might consider taking off the table should some of our individual security indicators change for the worse in the next few weeks.  Irrespective of that though stocks still have the potential to head higher in the months ahead, but it is likely that will occur after a period of digestion of the current results.

*Long ETFs related to the S&P 500 in client and personal accounts.  Long shares of Apple computer for certain clients at their own discretion.  Apple is a key component of several ETFs that we own both personally and for clients.  Long various European ETFs in client and personal accounts.

IPhone 5

I had a late morning appointment yesterday near the Apple store in Oak Brook, Il.  Since I had a few minutes to kill I went in and had a look at the new iPhone.  I'll skip a review of all the fancy stuff that you can find all over the web and besides I looked at the thing for maybe five minutes so not sure what I could tell you about all the new wonderful features anyway.   Here's my quick two cents.

Phone is lighter.  You can tell that right away.  Phone is light enough to almost feel cheaply made.  Not saying it is.  Just saying that it feels that way from my point of view.

Bigger screen is useful for those of us with eyes over 50.  That being said, other than the occasional U-Tube video, I rarely watch anything on my phone.

Didn't try the camera.  Pictures I've seen though seem to be a marginal improvement.

Software:  For me most of the useful new software features on the phone for the 5, I was able to download in I OS. 6.

Siri:  Still a big disappointment.  Doesn't seem to work much better for me than the original.

Bottom line:  Phone is a marginal improvement.  I think this is less an issue with Apple than a fact that the easy fruit in the smart phone/ tablet space has already been scooped up.  Won't rush out to trade in my current phone.  Will likely buy a new one when my cellphone contract is up.  Since that will likely be sometime next year I think I could skip this whole generation and just wait for the 6 if there is going to be one.

Also saw the Samsung Galaxy S3.  Nice but not nice enough to get me to switch.

Just my opinion so take this for what it's worth.

*Long ETFs that hold Apple Computer as an underlying component in client and personal accounts.  Long Apple Computer in certain client accounts at clients' personal discretion.

TBP-Running Out The Clock

The Big Picture.com is out with an interesting piece this AM on how hedge funds have significantly under perfomed the major indices this year and how mutual funds may be incentivized to lock in gains as the year turns into its final quarter.  

Here is the pertinent part of the article:

"Mutual Fund managers sitting on big gains have plenty of macro reasons to move away from equities — Asia has softened, Europe is unable to resolve their crisis, and even China is facing economic  difficulties. Iron Ore, Copper, and Crude Oil are retreating, sending an ominous warning about the economy.

But from a strategic game theory approach, its not the macro issues that are giving them pause — its the desire to lock in gains and bonuses before the year ends, perhaps even before Q3 ends.

One group NOT sitting on big gains are hedge Fund managers: They have missed 2012′s equity. HFRX Equity Hedge Index is up a mere 3.5% this year, lagging the S&P by an astonishing 14% (total including dividends). Perhaps they may pile in and drive markets higher.  

Regardless, lots of investors have to be wondering, I am paying 2&20 for what?"  

This just points to something I've stressed here for years especially when we talk about the normal cyclical trading market patterns that occur almost every year.  The only print that matters on Wall Street is the last one of the year because that's the number on which most money managers get paid.

Link:  Running Out the Clock on 2012 Stocks.

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

ETF Fees Are Trending Lower

According to the Wall Street Journal the management fees being charged on ETFs are coming down.  "Charles Schwab has cut fees on more than a dozen ETFs, according to new prospectuses filed Thursday with the Securities and Exchange Commission.   The fee cuts come a little more than a week after BlackRock CEO Laurence Fink said at a financial-services conference that his firm would lower the fees of its own iShares ETFs to better compete with Vanguard Group, whose ETFs have rapidly accumulated assets at the expense of some iShares products." 

According to the Journal article {which you can link here } most Schwab ETFs will now charge under 10 basis points.  Vanguard's fees range around 20 basis points.  Price is not the only factor when deciding which ETF to buy.  However, in an era where according to Forbes the real cost of owning a mutual fund ranges higher than 3% in a non-taxable account and higher than 4% in a taxable account*, it is difficult for me to see why investors continue to keep their money in mutual funds.

*Forbes.com The Real Cost of Owning a Mutual Fund.

**Please note that Charles Schwab is the custodian for many of our client accounts.  We do not currently invest in the Schwab family of ETFs.

an tSionna {Nasdaq Q's}

Charts courtesy of finviz.com.

This is a chart of the Powershares QQQ-the largest 100 nonfinancial stocks in the NASDAQ Composite Index {Symbol-QQQ}.  It is one of our largest holdings as we own this ETF for clients across a broad spectrum of our investment strategies. We almost never purchase individual stocks for clients as we have no interest in the event risk individual securities carry in today's "shoot first ask, questions later" investment world.   We believe that over the long term we best serve our client's i investment mandates by concentrating on investments that have the potential to provide long term equity rates of return while also being subject to less risk.  ETFs fit that bill for us in the current investment market because they remove the single stock risk described above. However, sometimes clients will say that they wished, if they owned any individual stock with me, that they owned Apple.  My response to them is that they do own Apple, albeit indirectly.  For better or worse Apple makes up about 20% of the QQQ.  QQQ has advanced around 27% for the year and is up about 26% in the past twelve months.  

QQQ is overbought like almost everything else right now.  Support for the ETF lies around the $68 price level.

*Long QQQ and ETFs related to the Nasdaq composite in client and personal accounts.  Certain clients of Lumen Capital Management, LLC own Apple Computer.

For informational purposes only I'm posting a link to the Morningstar section on QQQ.

an tSionna {PE Averages-Another Look}

Another look at historical PE averages from Dr. Ed's Blog.  He notes that "the S&P 500 is now only 6.7% below its record high of 1,565 on October 9, 2007.  The S&P 500's forward PE jumped to 13.1 last week the highest since June 2008."

I'm assuming he's referring to four quarter forward PE's because his numbers imply S&P 500 earnings of around $112.

An update on posting.  The events I mentioned yesterday went from horrible to tragic.  Sadly at some point in the next two weeks I will have to be out to attend either a funeral or a memorial service.  As a result posting will be a bit sporadic during that time.  I'll try to put something up the rest of this week if I am not out of the office.  The bigger piece I promised you will likely have to wait until I'm finished with these events.

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

an tSionna

The highlighted post below is from the blog  Crossing Wall Street.  {So is the chart above.}

"One of the paradoxes of this market is that stocks have climbed higher even as earnings estimates have come down. Consider that the S&P 500’s earnings multiple is up nearly 30% since the market’s low nearly one year ago.

I think part of the reason for the increased valuation is that the economic uncertainty has started to fade. The Federal Reserve’s move last week probably helped clear up some of that uncertainty.

What’s interesting is that despite the higher valuation’s, the S&P 500’s Price/Earnings Ratio is still lower now that it was at any point from March 1995 to October 2008. And except for some brief periods, the market’s P/E Ratio is currently lower than it was during the vast majority of the time from 1991 to 2010."

Low valuations have been a backstop for our investment thesis most of this year.  In some ways that is still the case.  Irrespective of the market's big move in the past few months, stocks are still trading at around 14 times our end of year market estimate and trade with a 7% earnings yield with a 2% dividend in an environment where 10 year treasuries yield under 2%.

I spent quite a bit of time trying to parse through my brain the implications of the Federal Reserve's move last week.  I know I promised you something more in depth today on last week's action.  This is not that piece.   Part of the time frankly over the weekend when I would have spent time working on this was devoted to dealing with something horrible that has happened to a personal friend of mine.   Posting may be a bit sporadic this week depending on how that event unfolds.  I will try to get the article I discussed with you last week out a bit later today or tomorrow but no promises.

In the meantime I ask you to keep my friend and his family in your thoughts and prayers.

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

Heineken

Whoever does these commercials for Heineken is a genius.  The band in the video is called Clairy Browne and the Bangin Rackettes.  They're from Australia.  They perform their song "Love Letter" in the commercial.

QE3

Chart from the reformed broker.com showing what happened the last time QE was announced.  The opened ended aspect to this latest round of quantitative easing potentially changes things.  Message seems to be, to quote CNBC, "buy everything, the Fed is there.  I'm going to think a bit about this and be back to you next week.  Publishing schedule next week will again be Monday, Wednesday, Friday.

Cross Currents & The Jewish Holidays.

Market strikes me as being buffeted today by competing currents.  On one hand you have the positive buzz out of Apple today where it is widely expected that they will release a new iPhone.  You also have a positive ruling on Euro-debt out of the German Constitutional Court.  This lets the ECB go ahead with their planned bond program and is a stabilizing factor in Europe.

On the other side you have the Israelis again saber rattling against Iran and the attacks on American embassies in both Egypt and Libya yesterday where we are just finding out that the American ambassador to Libya was killed.  On top of that stocks are very oversold.  Then there is this.  There is an old Wall Street saying which goes, “Buy Rosh Hashanah, Sell Yom Kippur.”  Like many words from the old hands it sometimes works and sometimes doesn't.  More than anything, if I had to wager, I'd guess that it mostly reflects the seasonal patterns of weakness in September.  However this old saw  gets tossed around every autumn when the “Jewish high holidays” draw near.  Rosh Hashanah is the Jewish New Year and Yom Kippur is the Day of Atonement.   

For those interested the Rosh Hashanah to Yom Kippur period last year fell between September 28-October 7.  The S&P 500 fell roughly 4.5% between September 28 and October 3rd.  By October 7th the market had rebounded about 5.25% for roughly a gain during the total time frame of about .5%, albeit with a lot of volatility.  Anybody buying the market on October 7th and holding through the end of the year would have experienced a gain of about 8.5%, again with a higher than normal amount of volatility.*

 Rosh Hashanah begins this year on September 16th at sundown.  Yom Kippur begins at Sundown on September 25th.  

*Historical price data courtesy of Morningstar.com.

**Long ETFs related to the S&P 500 in client and personal accounts.  Certain clients of our firm also own Apple Computer. 

Today Andy Murray is a Brit

Andy Murray defeats Novak Djokovic 7-6,7-5, 2-6, 3-6, 6-2 to win the U.S. Open in tennis.  Today Murray is a Brit.  Scotland will always claim him as one of their own!

an tSionna {SPY}

Different chart look as my normal program is on the fritz this am.  That's a multiyear breakout folks {although futures are down this morning}.  Irrespective of our slightly more cautious stance, we have to respect this action. 

A lot of blocking and tackling this week.  Fed meets later this week, Dutch elections, German Supreme Court, maybe companies start to pre-announce punk earnings?  Who knows.  But markets have continued to climb this same wall of worry and maybe we're just going to ride this into the end of the year.  

As I write this I am conscious that this sounds a bit more bullish than I'm currently feeling.  I have a more neutral view of markets right now and that has lead over the past few weeks for us to raise some cash in most client accounts.  On average we carry 10-15% cash right now, up from 5-8% earlier in the summer.  That is by no means a bearish setup for us but it is also not the bullish posture we were feeling earlier in the summer when stocks traded at about 11 times 2012 earnings.  

Right now I'm pretty content to stay the course and see what happens. We will see and of course we have the defensive pages of game plan and playbook ready, but stocks seem better to buy right now against all expectations.  

Chart courtesy of Finviz.com

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

Posts This Week.

A heads up.  Here's the posting schedule this week as I've a few meetings and out of office commitments going forward.  We'll post today, Wednesday and Friday.  We'll break in of course if events warrant.

Football Season Begins

Irish play Purdue today in South Bend.  Ghosts will be watching!!

Consumer Credit

Americans continue to deleverage.   See this Financial Times article.  According to the article the outstanding balance on credit cards is 22.7% below its 2008. peak.

Bad Returns At Hedge Funds

Hedge funds, the institutions that are supposed to deliver significant returns across all sorts of different market cycles, had a not so stellar 2011.  In one sense that may have been understandable since the markets were punk late in the year.  However, turns out that in a pretty good market, their aggregate returns continue to stink up the joint.  Go read this article from Covestor "Hedge Funds are Having Another Terrible Year".   Here's the main part:

"The latest reading from Bank of America Merrill Lynch’s investible hedge fund composite index finds that hedge funds are up just 1.85% so far in 2012, while the S&P 500 has rallied to gain nearly 12% over the same period. A separate tally from Goldman Sachs shows that the average hedge fund is up 4.6% so far in 2012, and that only 11% of the hedge funds it tracks have beaten a low cost S&P 500 index fund."

Remember these are the folks that generally get paid a 2% fee plus 20% of the profits.

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

an tSionna {09.04.12} Nasdaq Qs

Weekly chart of the NASDAQ 100.  {ETF symbol QQQ}Looking at a longer range chart of this index shows that it long ago left the 2008 crash in the dust.  Morningstar shows this up a frenetic 51% in the last four years.  Show this chart to people the next time somebody says that stocks are still under water from 2008.

Much of this gain comes from Apple which is again pushing towards 20% of the index.  Short term QQQ is pushing up towards resistance levels first encountered last March.  

QQQ is overbought like so many other stocks and ETFs right now and is therefore vulnerable to a correction.  Apple's unveiling of new iPhone next week could be a catalyst one way or the other.  

*Long QQQ and certain other indices related to the QQQ in client and personal accounts.  Certain clients of our firm own Apple as well.

an tSionna {09.04.12-VGK}

Back at the end of July we published a chart of the Vanguard European Index Fund {ETF symbol VGK} and asked the question amidst all of Europe's gloom and doom why was this chart not lower?  I have no better answer to that question now than I did then but I will note that VGK is trading towards the upper end of its trading range right now and is up nearly 10% since we posed that question. VGK is up around 9% on a price basis in 2012 and according to Morningstar currently sports a dividend yield of about 4.25%. VGK is overbought like most everything else right now and it will be interesting to see how the ETF reacts to that longer term downward sloping trend line that I've shown in blue in the chart above.  That may be the real clue to the ETF's performance in the coming weeks.

*Long VGK in client and personal accounts. 

Chart Week {or two?}

As a follow up to our market outlook series from last week we're going to take a look at a series of charts over the next week or so that we hope gives us a bit of a look into what we could face between now and year end.  Hopefully they will add a bit of color to what we have been describing.