The Earnings Conundrum

Earnings are a conundrum for analysts right now.  Specifically S&P 500 earnings estimates are all over the board for 2013.  The bearish camp will point to peak margins, slow economic growth plus the headwinds of the most recent tax increases and higher energy costs.  This camp puts S&P 500 earnings growth in the $98-103 range.  If they are correct then the market is likely fairly valued right now as it currently trades in a PE range between 14 and 16 times 2013 on those types of earnings estimates. 

The bullish camp sees an expanding economy in the 2nd half.  At worst it will argue that even if earnings aren't as robust this year that markets will look ahead into a stronger 2014 and assign a higher multiple on stocks.  They see earnings this year in the 108-112 range.  If they are correct then stocks currently trade in a PE range of 13-14 for this year.

My current analysis has an earnings probability cone between $104 and $108 for 2013 and I am currently using a 106.50 midpoint.   Using that 106.50 as a starting point, stocks currently trade with a 14.20 PE and an earnings yield of 7.0%.  This is not as cheap as stocks have traded at other points since this bull market started back in March of 2009 but it is also not expensive.  It is certainly not expensive on a historical basis and is particularly cheap when one considers a 7% earnings yield in an environment where 10 year treasuries yield less than 2%.

A stock market that would give my earnings estimate a 15 PE by the end of the year {which is basically where we currently trade on a trailing earnings basis} would see the S&P 500 trading around 1600 by year end.  Today using last night's close of 1515, we see stocks trading at a bit over a 5% discount from that potential target.

Stocks have currently worked off some of their overbought condition but not all of it.

By the way here's why I place such a heavy emphasis on S&P 500 earnings.  From Business Insider I find this quote from Dan Greenhaus:

While there is no doubt that Fed support has been a crucial, crucial support mechanism for higher equity values and economic improvement since first being utilized in late 2008, one cannot ignore (nor, admittedly, separate out) the improvement in the earnings environment. Our good friend Larry Kudlow is fond of saying that profits are the mother’s milk of stock prices. In that regard, the S&P 500’s four quarter trailing EPS is currently $98 or so. At the end of March 2009, that number was $43 or so meaning EPS has more than doubled, 129% higher today than at the equity market’s bottom. Guess how much the S&P 500 is up since then? 128%. We suppose this isn’t all about the Federal Reserve after all.

{Read more: http://www.businessinsider.com/corporate-profits-vs-sp-500-gains-since-the-march-2009-bottom-2013-2#ixzz2MCjT8PSj}

S&P 500 earnings are looking for 2012 to come in the 102.50 to 104 range.  {I was at 103.50-103. 75}.  Should those numbers hold up and my 106.50 number be closer to the real earnings report for 2013 then earnings would increase only about 3% this year which would be the slowest growth since this bull market began.    Time will tell whether the bulls or bears are right.  So far 2013 has been a win for the bulls.

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

The Real Costs Of Owning Mutual Funds.

I received some questions about the actual costs of owning mutual funds after I posted yesterday.  I thought I'd link again at the end of this article what the author, Ty A. Bernicke,  over at Forbes.com says are the real costs.  I'll list the executive summary edition below.

Expense Ratio- The expense ratio is frequently used to pay markeeting costs, distribution costs and management fees.  This ongoing cost can be identified by reading a mutual fund's prospectus.  The average U.S. Stock fund now costs .90% per year according to a recent Morningstar article.  

Transaction Costs- Broken down in the article into three groups brokerage commissions, market impact and spread costs.  The author cites a study that claims that transaction costs average around 1.44% a year.  I think this is probably high but this cost could be at least half of his estimate.

Tax Costs- The author cites Morningstar which claims the average tax cost ratio for stock funds as being between 1-1.2% per year.

Cash Drag- Cost in performance when cash is held in a mutual fund's portfolio.  It should be noted that cash can be an advantage in a declining market and I'd note that mutual funds typically do not hold that much cash.

Soft Dollar Costs- Trade commissions directed to Brokerage firms for either services offered or research.  Note that the SEC and FINRA have really cast a negative eye for these types of services in recent years. 

Advisory Fees- What investors pay guys like me to invest in mutual funds as part of their investment management agreement with say a broker or a Registered Investment Advisor.  I'd also note here that some advisors and most broker/dealers collect something called a 12(b)(1) fee which is an annual amount paid to these folks for continuing to hold their mutual funds.  ETFs do not pay 12(b)(1) fees  and Lumen Capital Management, LLC receives no such fees from any mutual fund we may hold for clients.  

All in the author claims that the real cost of owning a mutual fund in a non-taxable account is 3.17% and 4.17% in taxable accounts.  The author does not take into account any front end load fees which could make these costs much higher.  My own opinion is that he's somewhat high on some of these non-measurable costs such as cash drag and transaction costs.  Still I'd take his basic analysis and say that the costs of most mutual funds is likely between 2.5-3.5%.  Then there's this.

Most mutual funds are closet index funds.  That is most mutual funds have a high correlation to how they invest and an underlying index they are trying to beak.  If you go here  you can compare a five year chart of one of the premier mutual funds, American Funds Growth Fund of America {AGTHX} and the S&P 500 ETF {SPY}.  The chart shows that the actual performance of SPY has been better over five years than AGTHX although the two have traded in virtual identical patterns.  The cost of owing AGTHX is as follows for the A shares.  Maximum front end load is 5.75% on the A shares.  The expense ratio per Morningstar is .71%, management fees are .28% and 12(b)(1) fees run .24%.  The cost of SPY is .09%.  That 0 in front of the 9 is not a misprint!  The only other cost is the commission to buy the security.  Buying a 100 shares of SPY at Charles Schwab would cost you approximately $10 all in.  You can get that cheaper commission-wise if you work on your own at some of the more cut rate firms.  That's a huge difference.  

Game over longer term mutual funds in re costs unless they change.

Link:  Forbes.com: The Real Cost of Owning a Mutual Fund.

Europe Explained

Lot's of posts today!  This is the best explanation in an article I've ever seen about what is going on in Europe.  Read this if you want to know why Europe matters and why the Italian elections tanked world markets yesterday.

Link:  Businessinsider.com Why an Election in Italy has Caused Markets to Crater all Around the World

Better Fix This Soon

Chart courtesy of Finviz.com.

Futures are up a bit this morning pre-markets.  That's good because we've seen some technical damage this past week.  Don't like this series of lower highs and lower lows.  I really don't like how we reversed hard off of an initial rally yesterday.  Some folks are attributing that to the election situation in Italy.  Never a good thing in my book when we erase almost all of a month's gains in a few days.

The End Of Mutual Funds.

I saw this presentation when I was at the Index Universe ETF conference a few weeks ago:

"ETFs are likely to displace mutual funds within about 15 years, Ric Edelman, the top-rated financial advisor, told attendees at IndexUniverse’s 6^th annual Inside ETFs conference on {February 13, 2013}, one of numerous views expressed at the conference that the ETF is likely to be at the very center of the asset management business.

'The mutual fund made sense when it came out in 1924,' Edelman said during a 'fireside chat' with IndexUniverse President of ETF Analytics Matt Hougan. 'That was a pencil and paper business model, and it doesn’t make sense in a technologically driven world.'

Edelman’s views, founded on ETF attributes of low cost, transparency and tax efficiency, were consistent with the general thrust of commentary at the three-day Inside ETFs conference, held at the Westin Diplomat in Hollywood, Fla., from Sunday, Feb. 10 to Tuesday, Feb. 12.......

.......Artience Capital's Kim Nordmo said Sunday she expects to see ETFs coming to 401(k) plans. “There are 72 million investors that don’t have ETFs available” to their retirement programs. Nordmo said she expects more 401(k) administrators to realize the fiduciary responsibility they have to offer those to participants....

I'm not willing to say that all mutual funds will be gone in 10 years.  I do know ETFs are making significant inroads into the sandbox that mutual funds had to themselves for many years.  Mutual funds simply cannot compete on costs.  The average mutual fund costs investors in my view somewhere between 2-3% each year, although this gentleman says the costs are higher, possibly as much as over 4%!   Mutual funds also cannot compete on transaction speed as all orders have to be processed at the end of the day.  

Mutual funds lost a major battle last year when they were required to tell 401k shareholders what the management costs were to them in an easy to read form that investors received last summer.  Trust me that has opened a few eyes amongst those that hold these in their retirement accounts.  

Link:  Index Universe.com: Edelman: ETFs To Spell End Of Mutual Funds

Don't Trade These!

I warned you last week not to use our indicator changes as trading vehicles.  If you had you'd have missed out on a nice little pop in stocks.  We have been underweight cash depending on client mandates and strategies for months now.  What we did was simply raise a little money to move us from the lower end of our target allotments.  We are still pretty fully invested.  Our change solely indicates an acknowledgement that stocks are overbought and not as cheap as they were in last fall.  

I still think stocks have the potential to be higher by year end.  I don't think they will necessarily go up in a straight line.   Stocks are rallying today on positive news out of the Italian elections.  Will have to see what the rest of the week brings.

BTW I'm no genius but I got one thing right in the past few months!

An Indicator Change.

Reflecting some moves we have made in the past several days we are going to lower our shortest and intermediate term indicators  to NET MARKET NEUTRAL.  We upgraded our indicators to NET MARKET POSITIVE back on November 18, 2012.  You can go here for a definition of what these terms mean.  The market is up around 9% since we last changed our indicators.  However we do not use these changes as a market timing mechanism and if you are a casual reader of this blog you should not construe these as a trading strategy that we employ across the board with all our clients or attempt to emulate this as a personal strategy.  I have warned you not to do so and assume no responsibility if you ignore my advice.  My changes are based upon probabilistic analysis of market conditions and reflect the NET activity that has occurred in our client accounts.  As a matter of fact for some new money we've actually bought a few things over the past week or so.  But in the main for more established accounts we've made a few changes.

Here are some of my reasons for changing the indicators:

-S&P 500 had one of its worst days yesterday since this rally began right after the election.  Coming on a day after a nice market rally, this sort of reversal is worrisome particularly in an overbought market.

-Market is very overbought by our work.  Stocks trading above the 40 day and 200 day moving averages are doing so from areas where probability suggests a pullback of some sort.  For example until recently nearly 80% of all US stocks were trading above their 200 day moving averages.  This is a very high reading.  

-Markets have rallied nearly 14% from their lows back in mid-November to their most recent highs with nary a 3% pullback.  That may be too much too fast and at the very least markets may need some time to digest gains.  Remember as well that stocks can correct by time as well as price.

-Outside influences, sequestration, fears of a European slowdown questions about whether the Fed's easy money regimen may be closer to an end, slowing consumption {You know, the usual cast of characters!} may begin to weigh more heavily on stocks.

-Closer to the beginning of the seasonal time of the year when stocks have historically struggled.  

Now look, I don't know what stocks will do today tomorrow or next week, I do know that we are now entering a period where the playbook says a bit more caution may be warranted.  Adding to that I would say that in a few of our strategies we have carried very little cash since last fall and I've felt a bit of tweaking in that regard was warranted recently.  So far this is a minor cash raise and not even across every strategy that we use.  But since it reflects a bit of a change on our part I thought I would let you know what we are doing.  The playbook suggests that at times like these you keep the defensive pages of the game plan nearby and that's all we're doing at this point.

I will not be in tomorrow as I'm out calling on the outlying banks.  Next post will be Monday.

Nothing Today

I have to be out on appointments today so unless another meteor falls from the sky or the world is about to end we won't be posting today.  Back tomorrow for more fun and games.

About Those Bond Funds.

"All things end in tears" is an old Irish saying.  For the investors who've jammed trillions of dollars into bond funds in the past five years, tears are exactly what they're going to see at some point.  Before I go any further I want to tell you that I HATE investment articles that begin with something like this,  "The Coming Massacre in ________!" or Investment XYZ, what you MUST do NOW!   Investment writers know they have to sell the sizzle and headlines like this are designed to get you to read what they have to say.  Often it's not as jarring or important as the headline portends, but that's what sells in America today.

So let's just say that I hate having to tell you that if you own bond funds, at some point you're going to be in a world of hurt.  Now I don't think that's day comes tomorrow or maybe even next year but I do know as surely as the sun rises in the east and sets in the west that bonds are headed for a large fall at some point and today I want to tell you why that is.

The US ten year Treasury Bond currently trades at a yield of about 2% which is up from around 1.6'% range a few months ago.  In an article written last summer for the "Motley Fool.com" a gentleman by the name of Alex Dumortier took a look at what happened the last time interest rates were this low:

"At that end of last month, on May 29, the U.S. 10-year Treasury yield fell to 1.65%, the lowest value since March 1946. How, then, did bond investors fare the last time yields were at this level? The following table shows the after-inflation annualized return long-term government bonds produced over the five-, 10-, 20- and 30-year periods beginning in April 1946:

Investment Period	Real Return on U.S. Long-Term Government Bonds, Starting in April 1946
5 years	(5.8%)
10 years	(2.6%)
20 years	(1.3%)
30 years	(1.6%)

Source: Ibbotson Associates, a division of Morningstar; author's calculations.

These numbers are absolutely horrific. Let me remind you that these returns are annualized: Over the 10-year period spanning April 1946 through March 1956, for example, the purchasing power of one's investment suffered nearly a one-fourth decline. There is little reason to believe that long-term government bonds bought today will produce a significantly different result."

Most recently in an article titled Bond Market Bust, the New York Post's Jonathon M. Trugman took  a look at what is likely to happen when bond rates start to move higher.  Here's an excerpt:  "{R}ates would not have to go through the roof to take out billions in principal for investors, most of whom are in bonds because they are nearing retirement.  

'If the 10-year [bond] goes up 100 basis points, that could mean more than $35 billion is lost,' says one bond trader.  One hundred basis points is just a 1 percent increase, which would put the 10-year at about 2.6 percent. The average rate of return over the last decade is roughly 4 percent, which, if we return to that yield, could put principal losses close to $500 billion, says a bond manager."

Bond yields peaked in the early 1980s in the double digits.  When I started as a broker money market accounts yielded 8%.  Now they yield nothing.  But month after month investors pump money into bonds.  Most of that money goes into bond mutual funds or ETF bond funds.  Josh Brown in an article  on this subject over at his website "The Reformed Broker" notes a recent comment from Fidelity:  

"Far too many investors are waltzing around as though they're somehow 'safe' because of these massive bond allocations they're nurturing. They are walking beneath a dangling piano hoisted 10 stories above their heads, its shadow barely noticed in the noon-day sun.

Let me show you something - this comes from Fidelity and it is the statistical equivalent of buffalo herd charging across the prairie toward an unseen cliff:

The below-average real returns for equities during the past 12 years, in combination with the near- uninterrupted 30-year rally for bonds, has led to a recent shift in investor preferences. Since December 2007, investors have poured more than $1.1 trillion into bond mutual funds and exchange-traded funds (ETFs)—more than 33 times the amount allocated to equity funds and ETFs."  {Emphasis mine}

Traditionally an investors concerned with rising interest rates tries to shorten the duration of their bond portfolios.  That is they attempt to shorten the maturity dates of their bonds.  They might for example try to have more of their bonds mature within seven years or so.  The thinking goes with this is that bonds closer to maturity typically have lower exposure to rising interest rates and hence lower volatility.   The trade off is that the closer to maturity the lower the yield.  In today's world bonds in this range yield virtually nothing.  Investors who reach for yield have to go further out on the yield curve, that is they must go further out on the maturity spectrum or reach for lower quality bonds.  

Traditionally investors who made investments in bonds "laddered" their maturities.  That is they had certain percentages of bonds that matured over varying degrees of years.  A $100,000 might for example have $10,000 come due each year for ten years.  The maturing bonds in any given year would be reinvested ten years out and the process would continue for the lifetime of the portfolio.  Such a portfolio it was hoped would ride out the normal swings in the bond market.  

These are not traditional times.  

Today most money that goes into bonds goes into mutual funds or ETFs.  Because these are open ended funds that are constantly receiving money and are constantly buying bonds.  There is duration {think average yield to maturity} but no maturity for the whole portfolio.  Thus, unlike bond portfolios where in a worst case scenario you can quit adding to the portfolio and just wait out the maturity dates, bond funds never come due.  That means when rates start heading tbe other way and the bull market in bonds finally ends bond funds are likely going to be in a world of hurt.  

We have not been buyers of bonds for some time and where clients have bond funds we are beginning the slow process of liquidating these.  Again I don't know if this is an issue for 2013, but it is coming.  Don't say you haven't been warned. 

Taxes

I've always said that for taxable investment accounts the best thing I can do every year is give a client taxable losses and let the gains continue to accrue tax deferred inside the account.  Somebody else agrees with me.  Saw this post a while back over at the Reformed Broker.com on tax efficiency via a fellow named Bob Seawright.  {Green highlights are mine.}

"Tax efficient is better. Experienced money managers routinely argue that you shouldn’t “let the tax tail wag the investment dog.”  And it’s true that a poor investment isn’t often salvaged by good tax treatment.  However, the difference between having a $1,000 gain taxed at the long-term capital gains rate of 20 percent versus the income tax rate of 35 percent would save the investor $150 before considering state taxes and without even using the top income tax rate or noting that other new provisions could hit investment income as well.

Individuals with adjusted gross income over $200,000 ($250,000 for joint-filing couples) will face a 3.8 percent Medicare surtax on investment income. Singles who earn over $400,000 (joint filers over $450,000) will face a new top marginal tax bracket of 39.6 percent. Those same people will see their tax rates on dividends and long-term capital gains go up to 20 percent from 15 percent. And limits on itemized deductions and personal exemptions will start to kick in on incomes over $250,000. Details on recent tax law changes are available at the fine blog of Michael Kitces (here).  Taxes matter a great deal.

Moreover, tax efficiency has not generally hindered performance.  According to Lipper, for example, over the 10 years ended December 31, 2012, tax-managed large cap core stock funds returned an annual average of 5.82 percent after taxes while the entire category (which includes hundreds more funds) returned 5.71 percent after taxes.  Tax efficiency is the appropriate default setting."

Almost every mutual fund or public institution that publishes a track record fails to talk much about taxes.  The tax implications of owning a mutual fund that say returns 15% with over 100% turnover, much of it usually at short term rates, can profoundly impact your performance in the long run.  Likewise a trading account that does not maximize tax strategies and returns large amount of capital gains can see those actual returns eroded to the point that it may not have made sense to be trading in the first place.  

One of the advantages of ETFs is their tax efficiency.  In the end it's not what you make, its what you keep!

Links:  Reformed Broker.com:  Tax Efficiency.

            Seawright-Original Post.

Winter Investment Letter {Conclusion}

Below is the conclusion to our winter investment letter sent to clients in early February.

Basic economic numbers also point towards growth.  Existing home inventories are at levels last seen in the early 2000s in spite of population growth and increased family formation.  Housing is a huge economic multiplier as people that purchase homes need to buy all the things that go with them.  New home construction increased 28% in 2012 to 780,000 units 6. which is still below the estimated one million new homes needed on an annualized basis just to keep up with population growth.   Auto sales are approaching a three-year high while energy costs keep declining.  In regard to energy, North America has become the fastest growing oil and natural gas producing region in the world.  This is leading to jobs in these related fields and lower energy makes US manufacturing more competitive.  Finally while still too high, unemployment has edged down over the past year.  Take home pay for individuals has been rising slightly and consumer balance sheets are in a much better condition than they were a few years ago.  All of this can form the basis for favorable equity conditions over the next few years. 

While we earlier poked fun at the ‘gloom and doom” crowd, we do acknowledge that many of their concerns are valid.  Any of these concerns, as well as a few we have not thought of, has the potential to come back to the forefront. The potential for an exogenous shock out of the Middle cannot be discounted, as Syria seems to become more destabilized every day.  Recent rumblings out of Europe also remind us that all is not fixed there yet.  Here at home, markets are navigating confusion about corporate profits, largely owing to uncertainty over fiscal and tax policies out of Washington. However this last point should also be balanced against US corporations that are collectively in their best position in years with strong cash flows and record earnings.  Estimates on the S&P 500 range between $98 and $112. I am using an earnings range this year of $104-108 and a midpoint of $106.50.  That gives us a cone of probability for this year of between $1,490-1,700 on the S&P 500.  We will use as a mid-point 1,625, which is the same number that we introduced in our winter letter last year.  As always we will revise that number during the year as conditions warrant.  A market that could potentially trade at the mid-point of our estimates would trade with a mid 15 PE and an earnings yield of 6.5%, still attractive in a world of subpar interest rates.  We will introduce a rough 2014 estimate of $112-115 on the S&P 500 and a cone of probability between $1,575 and $1,810 on the S&P 500 for next year.  Please note that there is no guarantee that any of these estimates will be met.

We also note that markets have rallied about 5% in January and are up about around 11% since mid-November. Stocks are overbought and are now vulnerable to a correction of some sort.  It is unlikely that stocks will move to higher levels this year without experiencing a pullback.  Markets have now gone 16 months without experiencing a correction larger than 10%.  Normal volatility is for markets to pullback between 5-20% so events could shake us out a bit at some point this year.  To these events are the markets the final arbitrators and we’ll have the defensive pages of our playbook handy in case markets take a turn for the worse.  Given all of that however, in a world where interest rates hover around the 2% level, and stocks trade at reasonable valuations, a pullback absent a market changing event is likely a better buy.

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

Winter Investment Letter {Footnotes and Disclaimers}

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.

1. Bloomberg News  Smallest S&P 500 Gain Since 2005 Seen by Equity Strategists  By Inyoung Hwang on January 11, 2012  http://www.businessweek.com/news/2012-01-11/smallest-s-p-500-gain-since-2005-seen-by-equity-strategists.html#p1
2. Solas! {Investment Letter to Clients-January 27, 2012} reprinted on our blog Feb. 13-18, 2012. 
3. Solas! Thoughts on Fundamentals/Sentiment/Money Flows/Valuation:  June, 6, 2012.  http://lumencapital.blogspot.com/2012/06/we-discussed-yesterday-some-of.html
4. Solas! Investment  Letter to Clients, IBID .
5. The Reformed Broker.com, Fund Flows and the Postive Feedback Loop., Joshua M. Brown, January 11, 2013  http://www.thereformedbroker.com/2013/01/11/fund-flows-and-the-positive-feedback-loop/
6. New Residential Construction in December 2012.,  Department of Housing and Urban Development, Jan 17, 2013.  http://www.census.gov/construction/nrc/pdf/newresconst.pd

Winter Investment Letter {Part II}

Below is part II of our winter investment letter.

Now we begin 2013’s investment cycle.  Like tellers of ghost stories sitting around a campfire, many who predicted such dire consequences for last year trot out the same list of things that could go bump in the night.  Earnings will be weak in early 2013 they whisper, corporate profit margins are peaking, they warn.  The tax drag from the fiscal cliff compromise is too much for a weak economy.  We are again reminded about Europe, China and the Middle East.  So far this year they have again been wrong as stocks have gained about 5% out of the gate, their charts mirroring a similar 2012.  If markets follow last year’s pattern then stocks would gain nearly another 7% by April.  That would put the S&P 500 at 1613 under that scenario.  Guess what?  Even at 1613 on consensus 2013 estimates stocks would trade with a 15 PE and a 6.7% earnings yield.  Translation:  Stocks would not be expensive by historical valuations even at that price.

Investors should have a long-term strategy. For our clients this strategy comes from understanding their unique risk/reward criteria and then incorporating that into our investment disciplines. Our strategies are based on our playbook which 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 market scenarios. We use these 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. 

As I gaze into my crystal ball {a ball that because it looks into the future is cloudy at best} and formulate the game plan, I think two things are happening.  The first is that the world is also beginning to believe as I do that things are getting better.  For one thing there is a staggering amount of innovation that has quietly taken place these past few years.  We’ve chronicled last year how past periods of research spending-usually resulting from conflicts such as a world war or from the hostilities surrounding the Cold War-is finally entering the civilian workplace.  We’ve called this the era of miniaturization {think of the PC morphing into the Ipad}. It is having an impact on virtually every industry and business in fields as diverse as energy and computing to medicine and robotics.4.  This sort of innovation spurs productivity.  Increased productivity is ultimately good for stocks.  Secondly, investors are starting to shift money away from bonds that yield them virtually nothing back into equities.  Fixed Income’s three year performance is an annualized 4.97%, S&P 500 Total Return three year annualized performance is 15.3%.5.  I think this is the year individuals might finally take notice of that discrepancy.

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