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.