Markets Higher!

Markets higher intraday headed into the last hour of trading.  {Chart is from FINVIZ.com}  Not sure we should be that surprised by this.  It's the end of the quarter and Wall Street wants to get paid!

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

I'm Back!

Back from nearly a two week trip of client visits, a bit of vacation and some investment research.  A few quick observations.  I'll try to go into more of what I've learned/experienced in the future.

-I was in eight cities in twelve days. Six in Florida, plus Boston and Providence, RI.   The one constant in each was the amount of building and remodeling I saw in each.  Most of the cities I was in had long ago sloughed off the last vestiges of the Great Recession.

-The United States is still the choice country for immigration.  This is as equally true among both rich and poor.  The rich desperately want to come here, especially from the developing world because they fear the confiscatory policies of their governments.

-English may be the official language of the country but you'd be hard pressed to believe that when you get beyond the interior.  This was as true in Boston as Miami.

-Hard not to find Florida,  a state where there's no state income tax and no inheritance tax,  financially compelling especially when you live in Illinois and you come home to headlines like this and this.  This last winter up here makes that argument even more interesting.

-Much being made today of Michael Lewis' "60 Minutes" interview covering his new book "Flash Boys" and how the stock market is rigged via high frequency trading {HFT}.  Didn't see the interview and have only read cursory reviews of it and what might be in the book.  The nearest I can figure out from what I've seen is that proprietors of HFT may garner a millisecond advantage over other traders and make perhaps a penny or two per share.  This may not be fair to other investors but I'd make two points if the assertion is correct.  The first is that longer term investors probably don't care.  The second is that when I started in the business market insiders routinely traded on news that today would have them be considered insiders.  Back then all of this was legal and it meant that traders back in the day could have information days to weeks before the rest of us knew what it was.   That advantage today is gone.  Also when I started in the business stocks traded in spreads of 1/8s to 1/4s and an investor buying say 500 shares of IBM through his broker was probably forking over $250 in commissions for the privilege of doing so.  This meant that investor started out at best after his transaction 63 to 75 cents in the hole versus maybe 2 to 3 cents today.  The real issue with HFT is its capacity to cause another market crash and so far from what I can tell this hasn't been addressed.  Will see if it's covered after I read the book.

-Finally we don't speak often of our clients and friends here.  When we do we disguise their identity so as to protect their confidentiality.  Today we want to put a shout out to Mrs. Garson who had a bit of a setback over the weekend.  Mrs. G. all of our thoughts and prayers are with you and the family today.

    

Wealth Management

One of the latest buzzwords in the investment business is Wealth Management.  I hate this term!  There's a variety of reasons why and  maybe I'll feel like writing about it at some point.    A few of the reasons  though can be found in this article here.  Too long to post here but I think it's a good read.  Tells a lot of the state of the industry and what goes on in some quarters of my neck of the woods.

Smidiríní:

Quartz.com:   Drones Will Cause an Upheaval of Society Like We Haven't Seen in 700 Years.

Rick Ferri:  Three Questions to Ask An Advisor.  {I'd add the question of "What is your plan for my assets when things go wrong?"-I'll try to write about this sometime in the future.}

Pragmatic Capitalism:  Charts From the Muddle Through Economy.

Bespoke Investment Group:  Another Bric in the Wall.  {Chart below is from this post and is dated by about a week as of this writing.}

401{k}s

Barry Ritholtz did an excellent piece on the problems with 401(k)s a week or so ago.  I think it's worth a read on everybody's part.  Here's two takeaways from the article.

"As we shall see, the parties involved in designing, running and investing in 401(k)s have made a hash of it. You, your employer and your plan’s investment managers fail to follow even the most basic rules of investing. You overtrade, chase performance, do not think long term. All of you — ALL OF YOU — have done a horrible job managing your retirement plans."

"What’s wrong with these plans? Human behavior, which has managed to turn a relatively simple idea into a complex, overpriced, underperforming mess. Returns have lagged behind a myriad of asset classes doing exceptionally well over the long haul.

Mr. Ritholtz then proceeds to give out some great common sense ways that 401(k)s could be fixed.  Go read the article."

Link:  What's the Problem With 401(k)s? You.

A Follow-Up To Yesterday

A final thought  to what I said yesterday.  It is unclear how much that last thrust higher in 2013 took away from 2014's gains, but it is obvious that the market has at the very least been struggling with valuations at current prices.  Stocks are up between 1-2% in 2014 and that's a much slower start out of the gate than we've seen in the past few years.  I think we will perhaps see more volatility in the coming months and it's possible a correction of 10% or more could be in the offing.  Stocks will finish the period in which they've historically seen the largest percentage of monthly advancement soon.  Historically that's been late fall of the previous year to mid-march-early may of the following year.  

This is what we said earlier this year  in our Winter Letter to Clients:

"One thing we can say is that stocks no longer appear to be cheap, yet they are not expensive by historic measures either.  Today they appear to be fairly valued which is where they have traded for the majority of my twenty-eight years in this business.  It is possible that 2014 could be a year of consolidation.  We are using an earnings range in 2014 for the S&P 500 of $117-121 and a mid-point of $118.75.  Our price cone of probability for this year is $1,900-2,100.  That is a price appreciation potential of roughly 3-6%, 5-8% roughly with dividends around our mid-point."

I see no reason to change that analysis at this time.  I do think there may possibly be a period where stocks are better to buy at some point this year but would also caution that stocks can correct sometimes by time as well as price.  Meaning that we must also accept the possibility that stocks will simply just flop around for a longer period of time and in essence not do much of anything.  That would not be a bad thing in my view as it would weed out any potential excesses lurking in the weeds.

I will be gone now until after April 1.  Some of that will be visiting clients, some is vacation time and a little bit of that involves some investment research.  I have a few things scheduled in the hopper but expect posting to be erratic until I get back.  Of course we'll break in if anything major occurs.

See you in the Spring.  At least I hope the weather's better here when I get back!!!

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

Beyond Here There Be Dragons

{Chart of SPY is from FINVIZ.com.}

The professional investor class, that is the folks who manage investor assets for a living, the financial press and the pundit class, have by and large never really been comfortable with the bull market that began in 2009.  In particular the press, CNBC and the like, seem to have fought this thing tooth and nail as stocks have driven higher.  I have no data but it seems that until about six months ago you would see two negative stories on the markets and investing for every positive report.  Subtly it seems to me that's changed as we moved to new highs last year but it's still pretty common to see the bears trotted out each time we have a piece of negative data or bad news.  

Part of it has been the extraordinary times we've lived through in the past five years.  Josh Brown over at the Reformed Broker has a pretty good piece talking about how it may seem obvious now that stocks should have moved higher but in reality there have been many issues confronting investors all the way up.  In his words the "Easy Money" theory of that period is a myth.  I agree with that view.

Another reason for the professional investor class to really have embraced this bull market is that they've been encumbered by the past.  If generals always fight the last war then investors probably always fight the last bear market. By and large the pros didn't see the events of 2007-2009 coming and have tried making up for that by being more skeptical of events since.  We talked about this last year here.   

But there is another thing I think bothering the "pros" right now and it's that we've been sailing through uncharted waters.  The chart above shows monthly performance of the S&P 500 ETF {SPY} going back to 2006.  Prior to last year we had all these nice reference points in terms of support and resistance that investors could look to in relation to the underlying fundamentals and market valuation.  The most obvious of these levels was the major resistance formed from the market tops in 2000 and 2007.  Every time we came close to breaking through that level the market pulled back or wavered.  We broke straight through that resistance at the beginning of 2013 and never really looked back.  We've never really experienced a pullback during that period or seen a real period of consolidation.  Stocks seem to have taken all that news, both good and bad, and used each minor dip as an opportunity to buy.  This makes the professional class nervous as there's no reference points they're  used to by which to navigate.  In ancient days, mariners would speak in hushed tones about the unknown areas that lurked beyond their maps.  All sorts of monsters and unknown things were thought to be beyond those points. All manner of dragons and beasties were thought to live in the lands beyond what was then known.  That is until sailors using modern navigation techniques figured a way to sail those unknown seas and then they became just a part of the normal reference points.

That is in essence how we talk now.  We speak of a market that at best is fairly valued.  We worry about events beyond our borders, a slowing economy in China, a missing airplane that offers no explanation of where it is or what happened to it, events in Ukraine or debt issues in the developing countries.  We worry about sluggish economic growth at home, at times ignoring all the statistics that show that on an economic basis we are slowly improving.  We talk about slow housing or mall sales and don't seem to take into any account that most of the country east of the Mississippi has been locked into a winter that seems almost medieval.  We study old economic metrics without taking into account how much things have changed via technology and productivity advances.  And we are sometimes afraid.

I respect the power of the markets but I am not afraid of their fluctuations.  I say this with the knowledge that there will always volatility and that I think there is a real possibility that stocks will perhaps sleep for much of this year.  I believe that based on what we know today the long term arch of things is for the world's economies and therefore its markets to move higher.  Unless there is a game changer that we can't see over the bowsprit, I think the future is brighter than most might believe.  I know there are issues {there always are} and I am aware of the many of the forces that could change this analysis but for now I think things look much better than anybody could have imagined a few years ago.  I can't wait over the coming months to talk more about why I feel this way.

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

Why the Bull Market Isn't nearing its End Yet.

From Business Insider.com.  {Excerpt}

"Warnings that the current bull market is near its end are back in the headlines, but Brian Belski at BMO Capital Markets doesn't think this is the case. Belski points to five reasons the bull market isn't near its end.

1. The length of the bull market — Some point out that few bull markets extend to five years "but cycles of this length are not unprecedented with 3 of the last 10 bull markets reaching this milestone."
2. Valuation and earnings — "Current price multiples are only slightly above historical norms and are below levels witnessed at prior peaks; earnings growth has staged an impressive rebound in recent months, while longer-term projections continue to improve."
3. Corporate guidance — "Negative profit outlooks have spooked some investors, but dividend actions suggest that corporate management remains confident with their longer-term outlooks."
4. Market internals — "While defensive sectors are leading market performance lately, there is still very broad participation across the market judging by the number of stocks still outperforming."
5. Fund flow activity — The recent flow into equity funds has caused some concern but investors pulled so much out during the financial crisis that "when you consider a longer-term fund flow measurement period (three years), current levels are still strongly negative."

Link:  Business Insider.com:  Five Reasons the End of the Bull Market Isn't Near.

Ireland

To honor St. Patrick's Day, I thought I'd update 10 facts about the Irish, the parade or about Ireland which are not well known. Just trying to have some fun with the season and we will get back to more serious matters soon. Irregardless if you are 100% Irish, part Irish (like my family) or just Irish For The Day- Cead Mille Failte!

1) Ireland is slightly larger than West Virginia. If it were part of the U.S. it would rank approximately 19th in terms of population between Wisconsin and Maryland according to 2000 census figures.

2) The Gross Domestic Product of the U.S. is in excess of $11 Trillion dollars & is ranked 1st in the world. Ireland is ranked 30th at $183 billion dollars. Chicago's GDP has been estimated at around 380 Billion.

3) According to the Chicago Tribune, "Corned Beef and Cabbage" is an Irish-American staple and more Budweiser is consumed in Ireland than Guinness.

4) Musicians with Irish ancestral ties include Paul, McCartney, John Lennon & George Harrison of the Beatles; Bruce Springsteen & Keith Richards.

5) 17 American Presidents have Irish Ancestry. This list not only includes obvious Presidents such as Kennedy and Reagan but also includes Andrew Jackson, Both Bush's, Bill Clinton and President Obama. Every elected President since 1960 claims Irish ancestry. 

6) New York City has the largest St. Patrick's Day parade in the world. Last year more than 150,000 marchers participated and it attracted roughly 2 million viewers. That is roughly 500,ooo more souls attended the parade than the combined populations of Dublin, Belfast, Limerick & Cork.

7) Michael Flately of Riverdance fame is credited with popularizing Irish Step Dancing around the world. It is widely assumed that Flately is a native of Ireland but in fact he was born and raised right here in the Chicago area. Perhaps because of this it is claimed that over 100,000 young women in Chicago and its surrounding environs actively participate in some form of Irish Dance.

8) George Clooney, Harrison Ford, Mel Gibson, Gregory Peck, Barbara Stanwyck, John Travolta, Spencer Tracy, Judy Garland & John Wayne all had Irish ancestors.

9) Guinness & St. Patrick's Day seem to go hand in hand. (At least they do in my neck of the woods). They also have a side business of that World Record Book. Almost 2 billion pints of Guinness are served each year. More Guinness is served on St. Patrick's Day than on any other day of the year.

10) Finally the best for the last. It is claimed that Ireland has never had a population greater than about 8 million people. The Irish have emigrated all over the world. The majority of their descendants are found in Canada, the U.S., Australia, New Zealand and the United Kingdom. 47 million Americans claim Irish Ancestry. Their descendants can also be found in more unexpected places like Chile, South Africa, Mexico, Argentina and even China. Former Mexican President Vincente Fox is of Irish ancestry. Altogether it is estimated that perhaps as many as 90 million people can trace some part of their family tree back to Ireland. This is over fourteen times the population of the island of Ireland itself!

Dia dhuit.

Beannachtaí na féile Pádraig!

Beannachtaí na féile Pádraig!

{Happy St. Patrick's Day!}

Brilliant

Guinness add for the "Season".  Enjoy

Market Tops

From Barry Ritholtz over at Bloombergview.com:

"….{T}he health of a bull market can be observed by watching internal indicators that provide insight into the overall appetite for equity accumulation.

These four include:

1. New 52-Week Highs

2. Market Breadth (Advanced/Decline Line)

3. Capitalization: Small Cap, Mid Cap, Large Cap

4. Percentage of Stocks at 20 percent or greater from their recent highs"

Link:  How Market Tops Get Made.

Asset Returns

Josh Brown over at the Reformed Broker puts up some interesting observations about asset classes.  I'm republishing it below as well as the Callan asset return periodic table.

Periodic Table of Investment Returns 1994-2013

…..They serve as a healthy reminder that:

a) asset classes rally in multi-year streaks…

b) …except when they don’t

c) any asset class can “win” any given year, and any can “lose” – even last year’s big winners

d) diversification is superior to trend-following for most investors

e) when everyone has given up on an asset class, the wheel is about to turn and fortune is about to shine its light into the dark corner we least expect it to

f) most importantly, there is no one in the universe who has correctly handicapped all these shifts, because if there were he or she would be managing trillions of dollars.

Using simple math, an equal allocation last year to each of these would have returned just under 21% last year.  Adding cash to that mix lowers the return to just under 19%.

Links:  The Reformed Broker.com: Periodic Table of Investment Returns 1994-2013.
            Callan Associates

Seanchas {A Look Back}

I've been writing this blog since the summer of 2005.  There are three reasons that I've kept at this over the years.  These are:

1.  Help me be more disciplined with my investment process.

2.  Provide information to clients and friends of my firm Lumen Capital Management, LLC.

3.  Have a record of what I've said over the years.

The last is important because too often you will find folks who try to have it both ways {as in being bullish or bearish} or casually seem to forget certain prognostications that turn out to be incorrect.  I believe that when you say something, quote something or reference something in the past you ought to assume that somebody may at some point ask you to either show you where those facts came from and also be able to point out what you said at a certain point in time.

With that in mind this is what we were saying back in March of 2009 {Green highlights have currently been added by me}.

From March 9, 2009:

An ugly February employment report was all the bears needed to close out the first week of March on an incredibly negative note. For the week, the Dow was off 6.2%, the S&P 500 was down 7.0%, and even the venerable Nasdaq finished the week 6.1% lower. Finally the bulls had some relieve with some late buying on Friday which lifted the Dow and S&P 500 to a positive close. The 651,000 job losses while not as bad as it could have been, still shook the markets . Unemployment rose to 8.1% the highest level since the early 1980's. Apparently, we have seen 2.6 million job losses in just the past four months! That helps explain why the Dow and S&P 500 are already off 25% or so year-to-date!

Now going forward what do I think. Well it is likely impossible to time the markets consistently, but it is probably a whole lot less risky right now to be a buyer with the Dow down 8000 or so points from its October of 2007 high! Markets are very oversold and a snap back rally of some sort is likely to commence soon. Given the negativity out there right now and the fact we are more than 50% off of most major indices’ highs, it seems that some sort of turn (even if an advance is of atemporary nature) should be in the offing.

Our money flow analysis shows a few bright spots as well. The number of new lows that have accompanied the recent downturns is decreasing, and the Volatility Index (VIX) has held to relatively low levels. This means that the “fear factor” might finally be wrung out of the market, which could pave the way for a lasting (and maybe permanent) rebound. Also with most major indices off 50% or more, the media has sort of grown tired of reporting about the devastation in the stock market. Maybe this means that the “panic” factor has been thoroughly priced in.

The U.S. economy will bounce once all of the uncertainty is wrung out. The new Administration has added a lot of uncertainty to the equation. If and when the Governement clearly addresses our economic concerns and when they add clarity to how they plan to deal with the economic crisis, the faster we might return to a more vibrant economy and stock market. Stock markets love certainty, and the lack thereof right now is clearly weighing heavily on equity prices. History shows that stocks generally turn well ahead of the general economy (6 to 12 months). As bad as the economic news is right now, the bullish camp is ready and waiting for the turn. There will be no bell, and there will be no siren. Nobody thought in October 2002 that stocks could ever go up again. But buyers then were well rewarded to the tune of almost 100% gains over the next five years. You also had to wait about six months and retest the market bottoms. But when stocks regain their confidence it will likely be off to the races for the bulls.

And this from March 16, 2009:

Here is a variant thought that we'll discuss more in the days & weeks ahead. In the Summer of 07 almost nobody had financial scenarios depicting what we've experienced since then. Today the most talked about scenario is a market that spends the next two-three years not doing much at all. Some even talk about another leg down perhaps to 450-500 on the S&P 500*. Well....

..."Markets do what they have to do to prove the most amount of people wrong". That is one of the first lessons theConsiglieri taught me when I started in the business. The most unlooked for scenario would be a market that rockets considerably higher from here. There is a scenario that could get us to 1000-1100 on the S&P over the next year {or sooner} & 1300 by the end of 2010. This seems "pie in the sky" but the first targets would get us only to where we were early in the fall and 1300 revisits the summer of 08.

I'm not saying this will happen and I would not act on this thought without doing homework first but it is the one scenario that I have heard absolutely nobody discuss. Therefore I think we need to consider its possibility. Look for more discussions on this possibility soon.

*Long ETFs related to the S&P 500.

Finally here's March 23, 2009:

So I was thinking this morning about the old saw in our business that "Markets will do what they have to do to prove the most amount of people wrong". Again I keep thinking what is the one thing investors aren't looking for and again I come back to the notion that would be stocks absolutely exploding to the upside. We first touched on this subject here:http://lumencapital.blogspot.com/2009/03/variant-thought.html

News of the Treasury's new bailout plan is rocketing stocks north this morning. I think more and more of us are at least beginning to feel like if nothing more a bottom is in for the market. That is most investors now have to think that until proven wrong the March lows might hold.

Now again I'm not saying that something like getting us back to say 1300 on the S&P 500 will happen. But I can devise a scenario of how it COULD happen as such we must now incorporate that probability (even if it is slight) into the game plan. It is still the one scenario I've heard absolutely nobody discuss. Remember almost nobody saw last year's crash coming. 12 months ago must of us would have dismissed that notion. Does get one to thinking!

*Long ETF's related to the S*P 500.

Investing, at least as we have come to define some of its core elements, is a probabilistic assessment of the current environment.  Using this plus market history and investment cycles has enabled us to develop our playbook and our game plan.  The playbook is situational analysis based on historical market results. We study money flows along with the disciplines of fundamental and valuation analysis to see how markets have responded to similar historical events. The playbook gives us different scenarios regarding current market activity. We use it to then formulate our game plan. The game plan is a tactical and 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 various clients. 

I will stress that we didn't know back in March, 2009 where the market was going and there is nothing written in this post trying to imply that that we did.   Nor are we trying to pat ourselves on the back for calling things correctly.  If you go back and read some of our later posts from the next few months you will note that we at certain points raised some cash and I would also like to think that we invested conservatively based on client risk reward criteria.  We were concerned about where we stood along with everybody else and wouldn't have been surprised back then if stocks had at some point retested those 666 lows.  But we did recognize that there was a greater probability at that time that investors on a longer term  {as in multi year} basis would be rewarded for patience.  Our confidence in that analysis improved over the years as the economy slowly repaired itself and began again to grow.  In short we had a plan for both good and bad what we intended to do.  We have adhered to that plan during the ensuing years and have no plans to deviate from our basic investment structure on a going forward basis.  We may become more bearish or bullish depending on the environment and what our indicators tell us, but there's no reason at this juncture to cut out the partner that's so far brought us along this far  to the dance.  All investors should have a plan.  Do you?

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

Bull Market's Five Year Anniversary. {An introduction to Seanchas}

The current bull market turned five years old back on March 6.  Back then the S&P 500 touched 666.79 before turning around and rallying almost 31% over the next five weeks.  All that did was rally us back into the support level in which we'd traded from the market's crash in October, 2008 until February, 2009.  

Of course back in March and April, 2009 there was a furious debate in financial circles as to what all of this meant.  Most of the investment world and the financial media were bearish.  Not all of course fell into this camp.  Doug Kass of Seabreeze Partners is one well known market commentator who sided with the bulls.  The late Mark Haines of CNBC famously called the bear market bottom on air five years ago yesterday.  Barry Ritholtz is another commentator that became more bullish in March.  Still if you go back and peruse the newspapers or the web from  then you'll likely find a lot more commentary skewed towards the negative than what could have been the positive outcome that we've since experienced.  That's because the financial press for the most part focuses on the here and now as that's what sells.  There's little doubt that the financial news back then was grim.  The economy was on life support and businesses were laying off employees as fast as they could churn out the pink slips.  On top of that we had a mess in the housing market that we're still digging out of today.  Investors that either held on to what they had when the market bottomed or were buyers of securities during most of that period are likely happy today with the results.  Since the March 2009 lows stocks are up about 180%.  

You could note that percentage return number is if you bought at the exact bottom.  That's technically correct but it doesn't tell the whole story about the last five years.  What if you were too scared then to buy?  What if you waited until the summer of 2009 when stocks seemed to stall out from the first stage of the advance?  Still would be up about 110%.  What if you'd bought in the weeks just before the May 2010 flash crash?  Returns of about 55%.  Summer of 2011 right before they downgraded the US debt?  Returns of between 40-50%.  That period by the way was the last real shot that you had to buy the market on a meaningful dip.  Beginning of last year?  Stocks are up over 30%.  These numbers don't include dividends which have tacked on roughly an additional 2% per year, most of the time yielding better than the 10 year US Treasury.

Now with the bull market's five year anniversary financial commentary has taken on a different tone.  If it's not exactly extremely bullish it is certainly less negative.  Stocks are also nowhere as cheap as they once were, although we would argue that they are also not overvalued.  Investors probably care less about where we've been and want to know what does any of this mean for them and  where do we go from here?  In the coming weeks we are going to begin at this blog a discussion on those two questions and a deeper dive look into our investment process.  Hopefully we can provide some insight into our process and maybe add some insight on where we may be going.  

This is going to be different than what you've seen here before in the sense of discussing how we go about addressing client's portfolios, our worldview and our investment process.  Too be frank these blog entries are going to be in essence the crib notes for some new marketing that we're going to roll out  throughout the course of the year.  You'll be the beneficiaries of that.  In keeping with our Irish theme we will call this new section Seanchas.  That's gaelic for lore, folklore, or can be loosely translated as wisdom.  Hopefully we can all learn something along the way.

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

Things Are Getting Better Department

I lied about putting something up today as I came upon this over the weekend and thought I'd just post a link.  Go read Twelve Telling Charts Pulled From the Jobs Report.  {From Quartz}

"Let It Go!"

It's been a brutal winter here and for that matter any place east of the Mississippi.  At least we can laugh about it in Chicago.  See WGN's Dan Ponce perform his rendition of "Let It Go!"  Don't know when he filmed this but there's as much snow {or maybe more} on the ground today now as when that was probably shot!

Smidiríní: The Notre Dame Way of Investing

Institutional Investor profile of University of Notre Dame's CIO Scott Malpass.    I came to this article via Abnormal Returns.com.

Washington Post.  Henry Kissinger:  To Settle the Ukraine Crisis, Start at the End.

The Reformed Broker.com:  The Relentless Bid Explained.  {I plan to come back to this theme at some point because there's a very important point buried in the article about the changing nature of the investment business.

ETF.com:  Reasons to Love Transparent ETFs.

Pragmatic Capitalist.com:  Thinking About Price Compression.  Another theme we'll revisit this year.

Business Insider.com:  Impact of Cutting Extended Unemployment Benefits.

Next post here will be Tuesday unless something dramatic happens over the weekend.

an tSionna {03.06.14}

From Chart of the Day.com {Subscription required to access the website.}:

"With the crisis in the Ukraine subsiding (at least temporarily), the S&P 500 rallied to new record highs. So how does the current S&P 500 rally rank? To answer this question and to provide some perspective, all major S&P 500 rallies of the last 82 years are plotted on today's chart. With the S&P 500 up 70.5% since its October 2011 lows (the 2011 correction resulted in a significant 19.4% decline), the current rally is near average in duration but slightly below average in magnitude."

"Notes:
- A major stock market rally has been defined as a S&P 500 gain of 30% or more (following a correction of at least 15%).
- The S&P 500 was not adjusted for inflation or dividends.
- Selected rallies were labeled with the year in which they began.
- There are 252 trading days in a year (100 trading days equal about 4.8 calendar months)."


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

Link:  Chart of the Day.com  S&P 500 Makes New Record Highs.

Asset Classes

I saw these charts yesterday over at All Star Charts.  Mr. Parets, who writes that blog, does an excellent job putting out visual illustrations along with concise interpretations of different investment concepts and ideas.  

Here's how several major asset classes have done in 2014.

Commodities and bonds significantly outperforming stocks.  That's an inverse of 2013 where stocks trounced everything else.

Market Sectors are mixed.  Health care and utilities the winners.  Utilities likely winning for their yields and defensive nature in more volatile markets.

International markets have clearly under performed.  Longer term I think these look attractive as I've said before but so far that has not been a rewarding investment theme.  

Link:   All Star Charts.com:  How are Assets Performing in 2014?

*I will mention that I am long various international ETFs in client and personal accounts since I highlighted that investment theme.

Ukraine: A Pause

Markets rallying on hints out of Russia that Military force would be a "last resort" in Ukraine.  I saw this via Business Insider.com reposting comments from Kit Juckes from SocGen today that does a pretty good job of explaining where we are right now:

"…..Tensions in the Ukraine and Crimea have (temporarily) been eased. Russian troops have finished their ‘military exercise' and financial market tension is melting away. And no, of course it's not ‘all over'. The economic fallout, notably in Russia, will be significant and building political stability in the Ukraine remains a huge challenge. But financial markets are short-sighted animals and everything is calmer. Even the (very) overvalued Rouble is stronger today. And so, risk is a lot less ‘off' than it was……"*

I like the fact that somebody has put the word "temporary" in today's rally.  I'm  of the opinion that there will still be one more shoe to drop in this crisis and the markets will have higher volatility as a result in the next few weeks.  But unless there's an unlooked for event that changes the dynamic of the  affair, it's likely markets will look through this in the coming weeks.

The map above which also comes to us by way of Business Insider.com shows the ethnic divisions in Ukraine.  These are the reasons that I still think the price for Ukraine leaving the Russian sphere will be either real or de facto loss of territory.  But the outlines of the end game should be apparent soon and markets will sniff that out long before the rest of us do.  

*Link:  Business Insider.com: Markets are Rallying Everywhere on Hints of Russian De-Escalation.

Ukraine: An Update

I had a few thoughts after I finished my Ukraine post.  Everything I said on Saturday still holds as long as the events in Ukraine remained confined to the Crimean region and the regions of Ukraine that hold a large Russian speaking population.  Should events spiral out of control,  and by that I mean something that looks like a serious diplomatic or military escalation, then I'll have to rethink my stance.  The Crimea is probably already lost to Ukraine and the markets will factor that in shortly enough.  A Russian throw of the dice-say an expanded invasion in the rest of the country-would change the equation.  

I don't think it's going to come to this and I'd note that the financial world is already punishing the Russians in a way that the diplomats really can't as the Ruble is getting smoked today.  But should the politicians lose control over the events, then we'd rapidly change our thoughts about how this could turn out.

P.S.  {11:10 AM Chicago Time} There are reports now that the Russians have delivered an ultimatum to Ukrainian troops in the Crimea to lay down their arms and surrender and they have until about 10:00 our time tonight to do so. I don't think this changes anything above or over the weekend as I've said regarding the longer term picture as long as any possible hostilities remain confined to the regions where Russia has a strategic interest.  One thing to note is that the market was over bought prior to this event so the participants are all leaning the wrong way right now.  That could give us some more chop in the next few days and we'll have to see how this plays out.  Stocks are down over 1% today so you can see what the short term reaction to this has been.

an tSionna: Nasdaq

From Chart of the Day.com.  {Subscription required to access the website}

"The US stock market rallied sharply during the month of February with the Nasdaq trading up over 4% month to date. For some perspective, today's chart illustrates the overall trend of the stock market (as measured by the Nasdaq Composite) since 2000. As today's chart illustrates, the post-financial crisis rally (which began in early 2009) has been significant enough to have the Nasdaq surpass its credit bubble highs of late 2007. In addition, the latest leg of the post-financial crisis rally has the Nasdaq at levels not seen in nearly 14 years. As today's chart illustrates, the Nasdaq continues to trade within its tightly confined yet steep 15-month uptrend channel."

*Long ETFs related to the Nasdaq in client and personal accounts.

Link:  Chart of the Day: Nasdaq

Ukraine

I'm writing this while reading the headlines that Russia is preparing for some sort of military action in Ukraine.  This follows behind what looks like the effective beginnings of a Russian military occupation of the Crimean peninsula which began yesterday and a warning last evening from our President to Russia to stay out of the Ukraine's internal affairs.  

I'm not going to waste the time discussing how we came to this point or the geopolitical implications of what's going on in Central Europe.   I'm going to briefly come about this from an investors perspective. Unless this gets resolved this weekend I think it's possible the market could have some trouble with this at the beginning of the week.  Then I think it sort of goes away.  Maybe not immediately,  but unless I'm really missing the mark on how this is going to play out in the real world, this should not be a major defining moment of 2014.  Here's why.

Ukraine has a large Russian speaking and Russian aligned population in the Eastern part of the country and in the Crimea.  The Crimea is also the home to the Russian Black Sea fleet.  It is the Western part of Ukraine that wants to become more aligned with the West.  The closer you come to Russia's borders the fiercer the Russian bear becomes.  Russia will act in its own interest in Ukraine because it will see itself as having no choice.  Think about this.  What would we do, how would we react, if the southern thirds of Texas, New Mexico, Arizona and California wanted to become part of Mexico?  Would we simply stand by and let this happen.  The answer is no and reasonable people should not expect the Russians to act any differently.  If Ukraine wants a split with Russia then the price will be high.  That price will likely see at a minimum loss of some eastern territory and what will amount to de facto Russian sovereignty in the Crimea.  The West will yell and cry about this.  We will make speeches and in the short run there may be economic threats or boycotts. But that will be all.  There will be no war and the world will go on as before.  It is too far away and the economic costs will not justify the means.  

I don't think that's what you'll hear if you pay attention to the news this weekend.  Expect to listen to all sorts of historical parallels. Somebody will dust off old books on the Crimean War along with references to the Prague Spring or 1956's Hungarian Revolution.  None of these will matter.  I think in two weeks tops this will be forgotten at least as it matters to the investment world.  Maybe not by the political class, but it will be a nonevent in the views of the people who buy and sell securities.  

Now a word about the painting above.  "Triumph of the Victorious Motherland" is a painting by the Ukrainian Artist Mykhaylo Khmelko, a Ukrainian and Soviet era painter.  It is a stylized depiction of the Moscow Victory Parade held June 22, 1945 celebrating the end of the War in Europe.   People in the West often forget that Russia was intent on setting out World War II until attacked by Germany.  War came to them at a level in size and sophistication that the world may never see again.  Their costs were horrific and not completely understood by the West until Soviet era archives were opened at the end of the Cold War.  But the Russians, when war came, rose up and ground the Germans into dust.    They'd suffered two invasions by western powers in two separate centuries and they've said "nyet" to that again.  I've never met any Russians but I've heard that when you get to know them that they are a very warm and friendly people.  I do know that when provoked they can be stone cold killers.  President Putin has ice in his veins.  The bear has been aroused and marked his territory.  "Nada mass" or whatever is the Russian equivalent he says.

I think when all's said and done, the world will heed the bear, he'll slink off behind his borders and life will go on as before.  If I'm wrong we'll get out the defensive pages of the playbook.