And I Heard Him Exclaim.....

And I heard him exclaim as he drove out of sight,

Merry Christmas to all and to all a good night.......

God Bless each and every one of you in 2013.  May the new year find you full of good health, good cheer and good fortune.

Happy Holidays!

Christopher R. English
President
Lumen Capital Management, LLC.

Out Till January.

We're taking a bit of a hiatus now until after the New Year.  Look for us back here in early January.  We wish each and every one of you a happy holiday season and a prosperous 2013!

Faster Economic Growth

We've argued for the past few months {most recently here} that the economy is growing faster than most investors realize.  We just received third quarter GDP numbers and commentary courtesy of Business Insider.com .  Final release shows the economy grew at a 3.1% clip versus a 2.8% consensus number.  I think this is going to start moving the needle on some economist growth numbers for 2013.  I think we're likely to see a bunch of revisions higher for next year in the months ahead.  Now if we could only get the folks in Washington to play nice together!

S&P By Sector

The folks over at Bespoke investment group show the year to date performance of the different sectors that comprise the S&P 500.  This is unlikely to change much in the next 11 days of the year.  Big winner was financial and the big loser was utilities.  Seven sectors have underperformed the index this year.  Three of those however {Industirals, telecom and technology} are close enough that this could change by year's end.  I'm sure that if I went back and looked at the beginning of the year the investment class would not have picked any of the top three sectors to be where they are today.  I'm equally sure that investors would be surprised at the poor performance of energy and materials.

*Long ETFs related to the S&P 500 in client and personal accounts.  In addition clients of our firm and my personal accounts may have positions in certain of these sectors shown above.

Link:  Bespoke Investment Group:  Financials on Top. 

Go See This!

I have to be out today, which is OK because I really don't have much to add to the investment matrix.  Markets are entering the Santa Season now.  The year is largely booked by now.  The price movements of stocks will matter less to the professional class the closer we get to year end except for that last print on December 31st around 4:00 PM EST.  That is the print on which many people will get paid.  Unless hedge fund patterns have improved much in the past few weeks, a lot of those folks are going to find coal in their stockings.

I'm leaving you today with a piece of advice.  Go see Les Miserables when it comes out on Christmas Day.  Even if you don't like musicals go see it.  Trust me on this!

BTW Anne Hathaway is a lock to win an Oscar.  Take that to the bank!

Business is Business Part II

We argued on December 6th that the reason markets were moving higher is that investors sniffed out a deal on the "Fiscal Cliff" even though there were no outward signs on such a thing.  Today's Washington Post and others are signaling movement on both sides in the past two days.  Markets as represented by the futures are moving higher on this news.  I think it's possible when we get a deal that markets may initially move lower before heading into rally mode again.   A real deal removes one of the major overhangs buffeting investors over the past few years.  It frees up business spending and gives people some certainty regarding their personal tax situations.  

These signals out of Washington are outlining the basics.  Somebody now only has to tuck in the fine print.  There may be a bit more screaming and shouting.  There is also a real possibility that the deal is too large to get done by December 31st.  But the thing is done.  Markets have been telling you that for the past few weeks.

Teaser: Notre Dame & the Stock Market.

You're going to see a post from me soon about how the Notre Dame football team's 2012 season reminds me of the stock market.  This is not an original idea as Doug Kass did something similar a few years ago {although I can't find a link to it back then}.  But I think I'm gonna have a new take on this and want to throw it out as a teaser right not before somebody also runs with this idea.

Stay tuned!.......

On The Run {12.17.12}

Folks liked the On the Run column we did the other day, so we'll give it another go.  Here's what I'm thinking today.

Individual investors have a long and storied history of being on the wrong side of the investment equation.  See this history.  March 2000 saw the largest single month influx of money into equity mutual funds just as the market was rolling over into the 2000-2003 bear market.   In March of 2003 just as stocks were ready to skyrocket higher these same investors pulled their money out in the face of what came to be Gulf War II.  More money went into housing in 2007, especially speculative money than any year previous and we know how that turned out.  Since March of "09" when stocks ended possibly their worst period since the Great Depression, investors have followed every step higher by yanking money off the table and putting it into fixed assets.  Most of the money parked in these accounts pay little to no interest.   According to Business Insider and Bank of America these sales have accelerated in the past two weeks.   I think this is going to be wrong longer term and we'll discuss bonds more in depth at a later date.  Stocks on average are up over the past three weeks as well.

On the S&P 500, Dr. Ed Yardeni notes that corporate revenues growth dropped nearly to zero in the just ended third quarter.  Corporate earnings rose to a new record of $25.98.  Yardeni thinks that better global economic growth will boost both revenues and earnings next year if we avoid the fiscal cliff.  If we avoid the whole thing then Yardeni sees economic growth as surprisingly strong.  For what it's worth that kind of economic growth would by my calculations get S&P 500 earnings next year in the $108-1138 range.  We'll also discuss this more in detail sometime early next year.

Guns in the United States.  The tragedy last week in Newton is unspeakable.  It is hard today sending a child off to classes and for me there's the added anxiety of having a bride who works as an aid in one of our local schools. I will leave the pontificating to others.  Instead I'll refer you to the statistical table below found yesterday over  at the UK's Daily Mail.  There's two disclaimers to note.  The first is that I assume these numbers are correct and the article uses the term 12 month period without saying which 12 months it's talking about so I'm making another assumption that these numbers are current.  Having said that  three things stand out to me.  The first is that the number of people shot in a 12 month period here at home far exceeds the number shot at in any 12 month period of our latest wars in Afghanistan and Iraq.  Also the 9,484 deaths in a single 12 month period exceeds the combined death totals of both conflicts.  Finally I'll note that German police fired a total of 95 shots in 2011. 

Hedge Fund Performance

This was published over at Zerohedge yesterday.  Key take away is here:

"For the third year in a row, hedge funds will underperform the market, this time by nearly 50%, having returned 5.15% through the end of November (with just equity funds +5.20% YTD), less than half what the MSCI World has returned. And while one can make the argument (not correctly) that a manager has to beat only a given benchmark, and not the overall market, the reality is that for virtually all LPs, seeing their money return well below the S&P not for one, not two, but for three years running, is about the last thing they need before they make a decision to fax in that redemption form."

This underperformance is why I think it's still possible for the market to catch a bit of a bid between now and Christmas as lagging funds will likely try and chase performance by possibly bidding up equities, especially the more volatile lot.   I also think somebody is going to have to start asking some very hard questions regarding private partnerships like hedge funds.  Investors pay a lot of money for performance that for too long has badly lagged most indices.  I think a combination of size and group think {too many funds chasing the same ideas} has hurt the industry.  Frankly I also think there's a whole cabal of funds that flourished over the years due to access to illegal insider information which has now dried up.  I know if I underperformed the market as much as these funds have over the past three years I'd likely be fired.  May be time for investors to do the same to most of this set.  

Link:  zerohedge.com: Paying 2 and 20 for what?

More on China

More on China from Chart of the Day:

...{T}he Chinese stock market went parabolic from mid-2005 until late 2007. China's boom was immediately followed by a financial crisis induced bust with the Shanghai Composite Index plunging 72% in a little more than one year. Unlike what occurred stateside, China's post-financial crisis rally was relatively short-lived (only nine months). Over the past two years, the Shanghai Composite Index has traded within the confines of a relatively steep downward sloping trend channel. Over the past week, the Shanghai Composite has worked its way higher as Chinese stock market investors anticipate the introduction/extension of stimulative government policies after this week's Central Economic Work Conference. This recent rally, has brought Chinese stock prices right back up to resistance (red line).

I think foreign markets have the potential to do well in 2013 and China has the potential to be a star next year.  I continue to add to these positions in certain strategies that we employ.  Just remember that potential doesn't necessarily mean that the event will occur and we'll monitor this thesis assiduously going forward just in case we're wrong.  

Link:  Chart of the Day:  China.

*Long various Chinese ETFs in client and personal accounts.  

On the Run!

I'm in and out much of the next three days.  As such posting will be a bit tough until later in the week.  Definitely will not be posting tomorrow but will try to be back on Wednesday.  I will be back Thursday for sure.  Today I'm posting a few musings from things I've heard, thought about over the weekend.  

China:

Lot's of chatter that China has turned in recent weeks.  While the most recent data is ambiguous, Chinese stocks {as represented by the Chinese ETF FXI-Chart courtesy of FreeStockCharts.com} have been on the rise since September.  If GDP can grow over there and they can keep inflation etc.  in check then the Chinese market has the potential to do something good next year.  Chinese stocks are basically flat since the summer of 2009.  Chart is bumping up against a longer term downtrend line in the chart above and Chinese stocks are overbought right now, so they could take a break at some point.  That being said this {and foreign stocks in general in my opinion} has the potential to positively surprise next year.  Note:  We have been purchasers of Chinese ETFs in our more aggressive strategies and for personal accounts in the past several months.

US Economy:  Apparently I'm not the only person who thinks the economy has the potential to do better next year.  Business Insider says that Goldman Sachs is in my camp as well.

Fiscal Cliff:  More indicators that a deal will get done.  The President and Speaker meet.  Here's the Washington Post's take.  

Don't forget that market seasonality thing! Particularly in a year where so many professional investors and traders are really behind the 8-ball.  See this CNBC report where they note that so far this year global hedge funds are up on average about 2%.  

Back later in the week!

Still At Sea

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea by the United States Navy.

Jobs Report

I've been arguing that the economy is doing better than most of us think.  Todays job's report number supports that.  Unemployment feel to 7.7%.  That's the lowest level since 2008.  According to the government, the US added 146,000 new jobs versus an expectation of 85,000.  

The market likes this number and futures are trending nicely higher now.  Barriers are falling for a potential market ramp into the end of the year.  Now if the politicians in Washington will only get out of the way!

Fiscal Cliff Update "Business is Business"

The markets shifted lower right after the election.  It seems the only people convinced that Romney was going to beat the President was the professional investors on Wall Street.  Since then however stocks have advanced about 5%.  The initial push higher came from optimistic talk about averting the "Fiscal Cliff" {I really hate that term!}.  In the past ten days though that positive talk out of Washington has largely gone away, at least in public.  Over the past week or so, positions on both sides seem to have hardened and both sides have publicly staked out very extreme positions.  Both sides are basically saying they're unwilling to budge.  So why hasn't the market tanked?  

In the last week, despite all this political drama, stocks are basically flat when many assumed they be falling apart.  International markets are flying.   Here's why.  Markets are sniffing out a deal.  Whether a full deal gets done before the end of the month or a stopgap is put in place to await the new year, markets are optimistic that the outlines of an agreement are in place.  As they say in the movie Kelly's Heroes" -"Business is Business".

The web site Politico.com outlines this morning in an article entitled "The 37 Percent Solution"-the basis for a compromise on tax rates.  This has raised a lot of eyebrows on the Street this morning and I think is indicative of what is going on behind closed doors.  

Here's the other thing that I thinks happening.  The untold story I believe is that the economy is improving on its own and politicians are starting to grasp that.  I'm pretty sure they're seeing that at the White House when they look at the economic data.  I think everybody knows in DC that if they can slog through some pretty tough issues in the next six months, that right now the way forward on economic growth looks pretty positive.  I think that if I'm right on the economic data a "grand bargain" in Washington would remove one of the last barriers to solid economic growth in the next few years which by definition would likely mean higher stock prices as well.

Now I know there will be purists on both side who are going to balk at the eventual deal.  There always will be folks like that.  But most recognize that the election results were ambiguous enough that everybody is going to have to bargain and neither side will get 100% of what they want.  If I'm right about a grand deal then everybody wins because economic growth will solve many of our problems as it should put more people to work.  At the end of the day economic growth will trump political ideology for most politicians.  That will likely be good for stocks.  Investors who believe as I do are trying to get ahead of that curve.  "Business is Business."

Banking Index

A look at the banking index from Chart of the Day.

Here's what they say:

For some perspective into the all-important banking sector, today's chart presents the current trend of the KBW Bank Index. As today's chart illustrates, banking stocks peaked back in early 2007. The impact of an already weakening real estate market began to take its toll and banking stocks began to trend lower at an ever-increasing rate. This weak banking sector performance ultimately preceded the recent financial crisis. Following a post-financial crisis rally into early 2010, banking stocks have traded in a fairly flat/choppy manner (though with a slight downward bias -- see red resistance line). Since late 2011, however, the trend has been up (see green line). With banking stocks having recently pulled back from resistance and currently testing support, this all-important sector is fast approaching a critical decision point.

My comment:  Banks seem to be back from the dead as they have for the most part restructured away their past sins.  Banks should continue to improve as the economy improves but are unlikely to recover the multiples they enjoyed prior to the real estate crisis began in 2007.  Regulation and distrust of the group as a whole will likely keep a lid on what investors are willing to pay for these names.  Plus, they pay nothing like the dividends they once did.

*Long ETFs related to the KBW Bank Index in client accounts, long certain other banking and financial indices in client accounts and personal accounts.  Certain clients own some individual bank stocks as legacy positions.

Smidiríní

Doug Kass:  The Fiscal Cliff, Don't Believe the Hype.  {The Street.com}

Josh Brown:  A Very Bad Bet:  How Wall Street Deluded Itself.  {The Reformed Broker}

Steve Ballmer's Nightmare is Coming True:  {Business Insider}.  Many of you have heard me say in the past that I think long term Microsoft is where Eastman Kodak {EK} was in about 1988, a company living off past success whose very foundation was rotting away.  EK last for about twenty more years and for awhile was able to mask its problems, but ultimately they proved to much for it to handle.  That I'm afraid is Microsoft's long term fate.

Manufacturing ISM Plummits to Lowest Print Since July, 2009.  {Zero Hedge}

The Strategies Necessary For Innovation.  {National Chamber Foundation}

{Again I can never figure out why I can't highlight all the links in blue!}

December is Usually Pretty Good for Stocks {The Big Picture}

Short Term Trading

Warning:  Today's post has nothing to do with the current markets so if that's why you're here, best to click off.  Now for the rest of us...

From time to time I get asked when I'm out about day trading, swing trading or some other form of short term trading.  Usually it's from somebody I know who's made some money flipping some stock they're familiar with or perhaps they think they've discovered some magic options trading strategy.  What they really are after is whether this could be a significant income stream for them.  Rarely am I asked whether they could quit their current jobs and go off and be a trader.  The people I know are too old for that., meaning they've already either made it in their current jobs or have no interest in doing nothing but staring at a trading screen all day.  That's for the under forty and mostly male crowd.  At any rate when I'm asked something along these lines,  my stock answer is "Perhaps you could do it but it's very hard".  

Now I don't really think that 99.5% of us can do this on a regular basis.  That is I don't think most people have a back tested, rules based strategy that they will strictly adhere to day in a day out.  Instead most will fly by the seat of their paints or most have either read about or purchased over the internet some trading strategy and inevitably they will fail.  I arbitrarily assign a .5% possibility that somebody can potentially make a go of it this way.  Somebody has to be at the right tail of the bell curve.  Somebody has to be Lebron James.  But statistically the odds are so small that I think most people are nuts to try it.  These odds become smaller still for the individual who thinks they can quit a day job and make up the income trading.  

Here's an excellent article written by a former day trader that sums up many of the reasons why this is so.  I'll leave you with these excerpts:

 ".....I do not know of ONE single scalper or trader with a time horizon less than a week who started in the 90s and is still in the game today. Not one. Perhaps more curiously, the professionals stock pickers who purport to be able to beat all the obstacles one faces when trading on a short-term time frame are also gone. Some are in jail. Some are bankrupt. Others have simply vanished to a life making ham & cheese omelettes for Russian tourists in coastal cities across the Eastern U.S....."

The landscape today? High frequency trading, quantitative zombie machines that are designed to take everything you learned from your favorite trading books and shove them into your rectum until your backside is confused for the reopening of Borders. They will take out your stops with precision. Your traditional means for entering a trade via breakout, crossover or whatever else you want has a coin flips chance of being retraced almost immediately. Your ability to execute into an opportunity will get front run by systems that are designed not waste a single millisecond. Faster than you can click buy at Etrade....."

....Your competition are hedge funds. Your competition are large institutional trading desks that breed future hedge fund managers. Your competition is global, sophisticated and hungry. I mean H-U-N-G-R-Y for returns. As a short-term retail trader, you are a high school football player, without a helmet, in the middle of an NFL game."