What We've Been Doing

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."  -Edwin Lefèvre, Reminiscences of a Stock Operator-the thinly disguised biography of Jessie Livermore.

This is one of the most quoted phrases on Wall Street.  The book, Reminiscences of a Stock Operator at one point was required reading in brokerage training classes.  The Patrician gave me a copy when I started years ago at Kidder Peabody as a welcoming gift.  I'll talk more about this book in a future post as the material it covers is as useful today as it was back in the 1920's.  Livermore believed in having conviction about his positions and also believed in cutting losses quickly when he felt he was wrong.  Livermore made and lost several fortunes during his life.  Notably his losses came when he violated his own trading disciplines.

We believe there are four disciplines to every investment.  These are determining where we are in the market cycle, fundamental analysis, valuation and money flows.  Money flows have until recently been indicative of an overbought state in the markets.  Therefore after doing some purchases of sector ETFs in June and investing some new money for clients in the early summer, we've been largely quiet on the investment front.  We really haven't been sellers or buyers, although as we've mentioned back in July we think that international ETFs are looking attractive at these levels.   One of the main reasons that we have been content to let portfolios ride is while the summer advance left valuations a bit stretched recently, we think that economic activity can be supportive of stock prices around these levels.   We have long believed that economic statistics indicate that the US is growing, although at a slower pace than most investors would like to see.  To us that means our market is supportive of stocks trading with a 15 or 16 PE.  US GDP grew at a 2.5% rate in the 2nd quarter.  That is a higher rate of growth than most economist were expecting and supports our believe that things are getting better and have been doing so for the past several years.

The current decline has started to change for us a bit in terms of our buying interest as we've seen prices come in some and our overbought readings begin to disappear.  We invested small amounts yesterday for certain new clients that have been underinvested relative to our strategies because of the timing of when their investment funds came to us.  Again these were small amounts and we took advantage of a few things that are starting to look washed up from a money flow standpoint.  We are not prepared to do more than this so far because our indicators haven't shown us that the coast is quite clear to do so.  While stocks haven't corrected all that much since their highs in July, stocks can correct by time as well as price.  

The sitting and waiting as Livermore attested is very hard to do.  This is largely because to the crowd things never look rosier than at the top and are bleakest near the bottom of the market cycle.  All during July and August the financial press beat the drums for higher markets.  They have only in the past week or so taken on a more strident, bearish tone.  Where they are right now is indicative of a market that while beginning to look more attractive is not completely out of the danger zone yet.  Also we are mindful of the seasonal factors that are in play in the late August-October period.  As such we're content except for some purchases with new money to sit on our hands and let our indicators be our guide.  

A Few Random Thoughts

A few random thoughts, none likely to make you any money today or tomorrow but simply little random notations that might be useful down the road.

-Starting a week ago Sunday and ending last Saturday when I returned to Chicago from dropping off the last of my children at college, I logged 2,267 miles on my car.  In that time I've seen the eastern seaboard and much of the midwest.  Slow economy or not, the rest areas and hotels along the interstates were busy.  I drove home and back every year from Rhode Island about this time.  Travel was the busiest I remember since 2007.  The price of gasoline has more or less remained constant during that time as well.  Saw more new cars this year on the road.  I'm defining these as cars likely bought within the last 24 months.  We're on track to sell in excess of 15 million new cars this year.  Remember these new cars are getting something like 25-30 miles per gallon and they're replacing vehicles that by and large were getting 15-20 mpg.  The US is becoming a net exporter of energy and more efficient cars helps that equation.

-The drought from last summer is ancient history although the midwest could currently use some rain.  The corn and soybean crops should be close to records this year based on what I've seen.  Much of July and August has been cooler and damp and that will help in the growing season as well.

-Tiger Woods failed again to win one of the four major golf tournaments.  I'm on record as saying that he'll never win another in his career.  I'm two years into that belief but I'll be the first to admit that Tiger's likely going to play golf for a long time so I'll freely admit that I could be wrong with this.

-The drumbeats over Syria, the market's reaction and the commentary remind me of Tommy Lee Jones character in the first Men In Black admonishing Will Smith, "There's always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet..." Now maybe Syria will be the prelude to World War III or maybe it will be a lot of noise signafying nothing or something in between.  Only time will tell about what's the ultimate result.  From my perch were not going to know until the event has passed and as it regards the markets, we'll let our indicators be our guide.

Finally I'd note that if the statistics on this blog are correct then there are over 700 people reading Solas! now every month.  You come from all over the nation and the world.  That's a far cry from when maybe I'd get 2-3 readers a month back when we started this in May of 2005.  Thank you.    We're going to talk about what we've been doing recently tomorrow and will be back full throttle after the Labor Day holiday next week.

August

So what is it about August anyway? Once again the month brings us angst & misery, at least in the financial markets. Kids don't notice it though thankfully. To them it's that last fling of summer before school intrudes back into their lives. In most cases  schools today intrudes earlier in the summer and for longer periods each year!

Markets of course don't know or care about seasonal patterns. They will as the consigliere used to say, "Do what they have to do to prove the most amount of people wrong.".........

               "So What Is It About August?",  Solas!, August 6, 2011.

Stocks are lower across the board this AM on two pieces of information, both of which came out late yesterday afternoon.  The first is that the US will reach its debt ceiling limits as early as October and the second {and probably the most timely of the two} is the likely US military response to Syria's alleged use of chemical weapons against civilians in its current civil war.   Stocks are currently down about 1% for the day and a bit under 3% for the month.  If this decline holds it should make August the worst performing month so far in 2013.  Even so most American stock indices are up in excess of 10% for the year right now.  One other caveat regarding the market's most recent decline.  Most of it has come on low volume.  Yesterday was the lowest volume trading day of the year.  The investment community is still vacationing and the thoughts of autumn and the final trading leg of the year won't begin in earnest until after Labor Day next week.

There is something about August that just seems to lead to trouble.  Both World Wars started in August, as did Korea and the first Gulf War.  It just always seems to be a month of international crisis and stagnant economic statistics.  Perhaps it often occurs this way because in most jobs or positions of influence, the "A Team" is away playing at the beach or perhaps August is just downright unlucky for investors.  I'll have more to say about the markets and the economy after Labor Day.  Until then I'll reiterate most of what I posted last week.

-Most of the list of things you see being rattled off as concerning markets are already known {The Syrian Crisis in recent days  and the American response of threatening military action was an unexpected event which markets  are now incorporating into their investment matrix}.  As such much of this information is likely already priced into stocks.  They are the excuse for profit taking after an uninterrupted 9% rise in stock prices.  

-Economic data is still supportive of a US economy that is expanding.  The only current debate is over the pace of that economic growth.  Expansion will provide a back stop to stock prices at some point.  A bearish note though is that most of the recent economic data has been weaker than expected.

-Markets are in the heart of the summer doldrums.  Nothing of economic consequence will occur between now and Labor Day.  The only thing that could stir the pot between now and then would be an unexpected outside event such as a major hurricane or a foreign crisis.  You've now had the foreign crisis.  The Atlantic is pretty quiet now so it is likely that we'll have to focus abroad for something that roils stocks.  

-Between now and mid-October is statistically the weakest point of the year.  Historically September is the worst month for stocks.

-There is support for the S&P 500 around 1615 by our work.  Stocks are currently overbought in both the intermediate and longer term range based on the indicators we follow.  They are short-term oversold so some kind of short term market bounce could be expected.  This is beginning to turn however and stocks are closer to reaching an oversold state by our work on an intermediate level.

One final thought.  Expect to see a lot of ink spilled over the coming debt ceiling negotiations.  In my opinion it will be a lot of noise and negotiations that ultimately will signal very little.  Congress shutting down the government over the debt ceiling for any length of time beyond something symbolic is a low probability event in our book.  Ultimately what will determine how stocks finish out the year will be corporate earnings and the shape of economic growth as we head into 2014.

Off To SLU

I mentioned back in June that one of our "employees" would opening a new branch for the firm this fall at St. Louis University.  We'll be moving her in starting tomorrow.  Regular posting will resume next week on Tuesday.  

"Don't adventures ever have an end? I suppose not. Someone else always has to carry on the story.....There was only one Road; that it was like a great river: its springs were at every doorstep, and every path was its tributary. "It's a dangerous business, going out of your door. You step into the Road, and if you don't keep your feet, there is no knowing where you might be swept off to."  Bilbo Baggins.  "The Fellowship of the Ring."

"I will not say: do not weep; for not all tears are an evil."  Gandalf-"The Return of the King." 

Go raibh grásta Dé leat, mo chuisle mo stór!

Market Correction

Breaking in from the land of sun and surf....Actually, I'm back in the office today but out until Monday.   More on that tomorrow.

Markets have gone into correction mode in the past week, with US equities losing about 3% from their highs.  The proximate cause cited for this has been a dramatic rise in interest rates resulting from a belief that the Federal Reserve will begin tapering bond purchases in September.  Add to that concerns over a looming debt ceiling crisis, the chaos in Egypt, uncertainty over the upcoming German elections, etc.  

Now here is how we see it.

-All of these concerns are valid but already known in the markets.  They are the excuse for profit taking after an uninterrupted 9% rise in stock prices.  

-Economic data is still supportive of a US economy that is expanding.  The only current debate is over the pace of that economic growth.  Expansion will provide a back stop to stock prices at some point.

-Markets are in the heart of the summer doldrums.  Nothing of economic consequence will occur between now and Labor Day.  The only thing that could stir the pot between now and then would be an unexpected outside event such as a major hurricane or a foreign crisis.  The Atlantic is pretty quiet now so it is likely that we'll have to focus abroad for something that roils stocks.  

-Between now and mid-October is statistically the weakest point of the year.  Historically September is the worst month for stocks.

-There is support for the S&P 500 around 1615 by our work.  Stocks are currently overbought in both the intermediate and longer term range based on the indicators we follow.  They are short-term oversold so some kind of short term market bounce could be expected.

Back to a regular summer posting schedule next week, Tuesday.

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

Off to Rhode Island

I will be taking the annual sojourn to the beaches of Rhode Island between now and next week.  I'm going to take some time off now to rest and recharge the batteries.  Posting will resume some time during the week of Auguat 19th.  As usual we'll break in if events warrant.  Otherwise I will be back here later in the month.

*Long sand and family.

Summer 2013 Investment Letter {Conclusion & Disclaimer}

Today we publish the conclusion to our latest investment letter.

On average stocks will decline around 12% during any giving year and about every five years we’ll see a period of volatility greater than 20%.  It has been much lower over the past year.  Volatility is in general not the same sort of risk as the risk of an investment going to zero.  It is true that volatility can affect portfolios especially in the short term. That is why investors are generally advised to separate money they may need in say a six to twelve month period from their longer-term investments.  It is for these longer periods that most investors should be invested with some portion of their assets.  In this time frame as long as the American economy continues to be an agent of growth and innovation, equities are likely to continue their advances, albeit in fits and starts.  Think about this.  The 2007-2009 bear market and subsequent recession likely rivaled the Great Depression.  Yet as of this writing, a little over four years from the bottom of the bear market, stocks trade at all time highs.   Nobody knows if the market will continue its straight-line advance this year.  Volatility may reassert itself going forward.  But strategies can be utilized to take advantage of this.  Volatility is one of the reasons that money flow analysis is one of the four pillars of our investment process.  Hopefully our studies in this area allow us to redeploy cash from areas of the market that are over bought into those investments which we believe have sound fundamentals and are over sold.  These disciplines are one of the principle reasons we are becoming more attracted to markets abroad.

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.

Summer 2013 Investment Letter {Part IV}

Part IV of our latest investment letter.  The conclusion will be published on Monday.

In general investors dislike volatility and the longer bear periods when stocks show broad losses.  Stocks may go up 75% of the time but investors still remember the last decade’s two large declines. It’s easy to abstractly discuss market corrections.  However, they are painful when they occur, particularly that bear market variety where stocks just grind lower month after month. Investors used to only be able to access equity exposure through individual stocks.  Then, investors had to deal with the prospect that some part of their investments could go to zero.  But the world has changed.  Today investors can approach equities through diversified products such as mutual funds or ETFs. The issue of diversified funds with a track record going out of business is largely off the table.  If one accepts the argument that these kinds of investments shouldn’t be able to go to zero, then market declines become more about volatility.  Volatility is the ticket to admission if you want to play in the modern investment arena.   As long as humans are a part of the market equation you will have the eternal conflict between fear and greed.  Markets cycle between bullish and bearish periods. During the investment year we call these cycles volatility.  The chart below courtesy of JP Morgan and the website Zerohedge.com** shows the historic yearly record of market volatility going back over thirty years.  

**Zerohedge.com:  07.02.13  The Real Roller Coaster of Investing In Stocks

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

Summer 2013 Investment Letter {Part III}

Part III of our latest investment letter:

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.  For the most part we were buyers of the weakness back in June.  Our purchases were generally made in certain market sectors that we thought were then attractive as well as certain international ETFs.  This of course is always in line with our individual client allocations, risk/reward parameters and overall cash positions.  We in general now have lower cash positions than we might at this time of year.  It is likely that we will address that issue in the near future. 

My letters to you and our posts on the Internet have indicated my positive view of equities and the overall US economy.  Let’s take that positive view and look out into the future to see what might occur.  Based on what we currently know, I think that stocks have annual growth potential on a total return basis {price appreciation + dividends} between 4-8% per year.  I’m writing this with the belief that stocks will not rise in straight line, I believe some years will be better than others and we could see a down year or two in the running.  In spite of that, I think there is a high probability that we will be surprised at how well stocks will continue to perform throughout the rest of this decade. I’m saying this aware of current valuations and also well aware that this kind of statement could look foolish near term if we see some sort of market correction. But remember I said that I think stocks could average between 4-8% on a total return basis for the rest of the decade.  That may not seem like a lot.  It is substantially lower than the “go-go” years that characterized the late 90’s.  But don’t overlook the compounding effect of this kind of return.  A portfolio that compounds at an 8% clip will roughly double in 9 years.  Compare that with the return on bonds right now and its hard not to still find stocks attractive on a longer-term basis.  As a side note you can still receive nearly all of the 10-year’s yield in the S&P 500 plus you can get that appreciation kicker.