A Follow-Up

I had a few questions from yesterday's post and I thought I'd answer them today.

Please square your longer term bullish outlook with your recent change in your indicators.

We changed our shortest term indicator to NET MARKET NEUTRAL back on August 5, 2014 You can go here for a definition of what this term means.  Any changes we make in these indicators are based upon probabilistic analysis of market conditions and are meant to solely reflect the NET activity that has occurred in our client accounts.  We do not use these changes as a market timing mechanism.  If you are a casual reader of this blog, you should not construe these changes as a trading strategy that we employ across the board with all of our clients or attempt to emulate anything here as a personal strategy.  I have and continue to warn against this and therefore assume no responsibility if you ignore my advice.  

Will you be changing your target range for the S&P 500 now that the index has crossed 2,000?  

There are no plans to change our current target range for 2014.  That range is currently 1,700-2,100 on the S&P 500.

What is the greatest risk that you see to markets right now?

There are two things as I see it.  There is short term seasonal risk.  Late summer through October has traditionally been a seasonal period of weakness for stocks.  This has the potential to be compounded this year due to the elections in early November.  Apart from that, the biggest risk seems to be an exogenous event likely coming from one of the crisis areas of the world or a natural disaster such as an earthquake.  The hurricane season is shaping up to be rather mild this year so I think a Katrina type disaster is likely off the table.  The problem in managing a portfolio is that an event like this-one that could have a serious impact on equity valuations-is that it could happen tomorrow or it could happen never.  

What is one area that you would point to regarding the economy that is a positive and is often overlooked?

The great advances in innovation and productivity that have been occurring for about the past 10 years. These are driving new technologies and advances in many fields that should enhance economic growth for many years to come.

How will the Notre Dame Fighting Irish do in Football this year?

OK nobody asked me this but I thought I'd throw it out there anyway.  I see a range between 8-4 and 10-2. 

Posting schedule.  I'm out tomorrow and Monday is a holiday.  Expect posts Tuesday-Thursday next week.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time. 

S&P 500 at 2000

The S&P 500 closed yesterday for the first time above 2,000.  That's a 200% increase from it's lowest print back in March of 2009 and is roughly 50% higher than its price on June 19th, 2012 when I noted the following:

"NEVER IN MY INVESTMENT CAREER {now spanning over a quarter of a century} HAVE I SEEN STOCK VALUATIONS THIS CHEAP BASED ON HISTORIC PE LEVELS AND ABSENT A RECESSION OR A SIGNIFICANT ECONOMIC CONTRACTION!!!!  Either we are going to have an event that provides a significant hit to growth or stocks are presenting a buying opportunity of a generation for longer term investors,"

Investors today likely forget what things were like back then.  Then as now economic growth had been tepid and we were gearing up for a bruising Presidential election that fall.  Stocks had recently corrected about 6%.  At roughly 1,335 on the S&P 500, equities had basically traded in place for a the past 17 months.  There were many positives around if one looked under the hood of the world economic engine but the bad news seemed to have crowded all of that out.  We looked out at the world and saw that different economic potential.  We felt investors we discounting all that bad news.  We thought there was great economic opportunity in equities.  We are not saying that we made a market call or that we knew stocks were going to go higher back then.  What we did was make a probabilistic assessment based on our investment pillars of market sentiment, fundamentals, valuation and money flow analysis.  {See here} We thought stocks were better to buy.  While there have been times since then that we have become in the short term a bit more defensive, we have not wavered from our longer term positive view of the economy or equities at any time since we made that announcement.  You can go back and search the history of this blog and you will find many posts that verify what I just said.

At S&P 2000 you would think there would much more fanfare from the main stream press about stocks.  Instead as Josh Brown over at the "Reformed Broker" noted on Monday when the S&P traded above 2000 for the first time, "The public will be largely unaware of this milestone, one in a series during the course of the current bull market that have eluded the notice of Main Street".

Why this has occurred, why the investing public has been so reluctant or unable to embrace this bull market is a subject for another time.  Yet all the data shows this to have been the case. From the 3 Trillion dollars sitting in money market funds earning practically nothing to the  billions that have poured into fixed income mutual funds and ETFs in the past few years, investors have shown a striking preference for assets that do not have perceived equity exposure.  Last year's 20% plus percent return for most equity indices and a good start to 2014 have finally started to see a reverse of this money flow, but it is still a trickle rather than a torrent.  Unlike the late 90's when stocks regularly set new highs, I am rarely asked in social situations my views on the markets.

In bull markets stocks "climb  climb a wall of worry" is one of those old Wall Street adages you learn early on in your career.  We all could list 15-20 things that are wrong with the world right now and I'll bet the average person couldn't list five things that are economically significant but have the potential to let the bull market in equities continue for the next few years.  That is perhaps the most positive development longer term in my mind.  Generals and investors fight the last war.  To this generation the last war was the lost years of 2000-2009.  Everybody has their antenna to the ground trying to find the next bubble or mania.  Almost nobody acknowledges that period had a few unique attributes {high valuations, exogenous events, poor policy decisions etc.} that may not be repeated for many many years.

S&P 2,000 is just a number.  It is a valuation marker and ultimately translates into a dollar figure in some form in equity accounts.  2,000 will be followed by other numbers in the years to come.  Hopefully those numbers will in general move higher.  It's our job to interpret the data, look for investments with the potential for superior returns and become defensive when we need to do so.  Yet at the end of the day our main job is to try to keep our investors in the game.  Doing so, even in bad times, keeps us positioned for when things get better.


*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time. 

Smidiríní:

A few articles that caught my eye yesterday and today when the S&P 500 crossed the 2000 level for the first time ever!

XX Committee:  War and the (Islamic) State:  {Others are starting to openly talk about the fact that the President seems to have checked out.}

"It is difficult to escape the suspicion that the president is tired of the hard job of being Commander-in-Chief. Certainly his public comments on the Islamic State lack the dire tone emanating from some senior administration officials. This week, Defense Secretary Chuck Hagel spoke of IS in alarming terms as a threat “beyond anything that we’ve seen…They’re beyond just a terrorist group.” General Martin Dempsey, DoD’s military head, stated that IS possesses an “apocalyptic, end-of-days strategic vision” and the group “will eventually have to be defeated.” It’s an open secret in the Pentagon that such blunt statements reflect widespread concerns in DoD and the IC that President Obama is not taking the current threat seriously enough."

Politico.com:  "Pitchforks are Coming":  {The glaring discrepancy between the relatively few wealthy and the poor are starting to be more openly discussed amongst the 1%!  This is a great and honest read and I'd strongly encourage you to take a few minutes with this article.}

"If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when."

From the "Things are Getting Better Department":  BusinessInsider.com:  "Durable Goods Orders Surge by a Record 22% in July".
Finally from Yahoo Finance:  "Common Financial Myths".

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Summer's End

The investment world is on vacation mode.  The time between now and Labor Day will find the denizens of Wall Street focused on anything besides the markets.  The desks in New York, Boston and London will be largely manned by the "B" team as the bosses head to whatever watering holes they like to bide their summer time.  

There should be very little economic or corporate news in the next two weeks.  Yes there is the meeting of central bankers from around the world at Jackson Hole this weekend and there will be much discussion of economic policy going forward.  But the short term direction of things has been telegraphed before these meetings and the long range implications coming out of the conference can be worried about in a few weeks.  

Markets turned on a dime from their correction mode a few weeks ago and for the most part now are flirting with all time highs.  They have bled higher this week on little news.  This may not hold especially if events abroad deteriorate.  We saw how quickly markets went into "risk off" mode last Friday when the Ukrainians shelled a Russian military convoy.  For now though overseas have taken a back seat and seem far away in the summer winds.  Let us pray that they do not seem far away like they did in the waining summer days of 1939.  For the world is a mess.  It is perhaps in its grandest state of chaos and flux in any time since the end of the Cold War and our political leaders here seem to have checked out.  For now though at least in the short term things seem to be at least in a holding pattern.  The advances of ISIS in Iraq seem to have at least been stopped.  The Russians and the Ukrainians for the moment seem to at least pretend to talk, Gaza has a cease-fire etc.  This is the one area that could ignite itself out of the blue, causing problems for markets along the way.  But for now those problems seem far away, best monitored over a cold beverage by the lake, beach or pool.  

Yet as Shakespeare noted so accurately "Summers lease hath all to short a date".  Summer, at least the traditional Memorial Day to Labor Day season burned into every person's memory who grew up in another era, has now become a more compact time.  Schools in many parts of the country that used to start after Labor Day now start in August.  Our schools here start Monday.  The Catholic school at the end of my street started yesterday.  In many parts of the south and lower Midwest, school has been in session for a few weeks.  Blame football for that.  The Irish have a game next week as do many other college teams.  

Speaking of college I will be busy the next few days reopening the Lumen Capital Management branches at Butler University and St. Louis University so I will be a bit out of pocket.  I'm also doing a bit of traveling and taking a few days off over the holiday next weekend.  Posting schedule will be Tuesday, Wednesday and Thursday next week and the same schedule the week after.  I have some interesting things to discuss when September roles around so stay tuned.  Enjoy these last few weeks of summer if you can.  Fall is not far around the bend now and we know what comes after that.  Summer for the most part in this neck of the woods has been moderate and I'm afraid we could see a repeat of last year's December-May pattern.  To quote a certain television series, "Winter is coming".

an tSionna {08.20.14)

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note that these positions can change at any time.

Chart courtesy of FINVIZ.com.

Summer Letter to Clients {Conclusion}

Today we conclude our summer letter to clients originally dated July 25, 2014.  Please note that the next post here will be next Wednesday as I have some work related traveling.

So what do the numbers show?  First, the bad news.  The average intra-year decline for the S&P 500 is 14.4% according to JP Morgan.  Thus, on average, stocks at some point during each year covered by the data had an event that caused investors to head for the exits resulting in an average decline of over 14%. In dollar terms this means that an account worth $100,000 at some point on average saw it’s value slip to about $84,000.  Sometimes, particularly in bullish periods, those declines are relatively benign.  The mid-1990’s for example rarely saw an intra-year decline above 10%.  At other times those declines were more severe.  Nine years saw declines not associated with bear markets but were in excess of 10%.  Six years, many associated with economic contraction or foreign turmoil, saw declines in excess of 20%.  Those losses were worse in the 2000’s multi-year bear market period. 

The positive side to this is that stocks advanced 26 of the 33 completed years or nearly 80% of the time.  The average annualized return 1980-2013 is nearly 12%.  A dollar invested in 1980 would be worth $44.55 today if reinvested and left alone.^  That’s just using a simple buy and hold strategy across an index which was hard to until about the mid-1990’s.  Today there are many ETFs or mutual funds that let you do exactly that.  That analysis also doesn’t include what might have occurred if you follow one of our primary investment mantras which is to have a strategy to sow away some cash for these intra-year declines and a discipline to put some of that cash to work when stocks again became cheap.  The long and short is if you sign up for the markets then you have to be able to put up with volatility.  Most investors hate volatility because it leads to uncertainty and at least for a certain period of time a decline in the value of their assets.  However, I hope that I’ve shown that volatility can be used as a significant part of the game plan, particularly if you have the strategies and disciplines to deal with it when it inevitably shows up. 

Very truly yours,

Christopher R. English

*JP Morgan Asset Management, Guide to the Markets:  3Q | 2014.  This publication is updated quarterly and is full of useful charts and statistics.  The subjects covered include the economy, the stock and fixed income markets as well as international sectors and commodities.  You can access it at www.JPMorganfunds.com, go to “Insights” and then click on “Guide to the Markets”.  

^You can go to www.moneychimp.com , look for the section on compound annual growth rate and plug in  January 1, 1980 and December 31, 2013 to see how I came up with these calculations.  The dollar amounts are not adjusted for inflation.

**Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.

Disclaimer

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 Letter to Clients {Part IV}

Today is the 4th Installment of our summer letter to clients originally dated July 25th, 2014:

We included a chart from an excellent publication from JP Morgan.**  It shows annual returns of the S&P 500 {the bar lines in grey} and each year’s intra-year declines {the numbers in red}. The chart represents over 33 years of data.  I like this chart because it represents a long statistical fact set. There’s a long secular bull market in the 80’s and 90’s and two bear markets in the 2000’s {or one long period of stagnation during that decade if you prefer to view history that way}.  It shows inflationary periods as well as stagnant gains in prices.  The data covers six Presidents {three from each party}, wars, the end of the Cold War, a significant terrorist event in the United States and several change of control in the Congress.  It represents eras of wrenching change in the world as well as unthinkable inventions and innovations a few short years before this chart was started.  In short it represents a full spectrum of both good and bad times.  In the markets, it represents periods of both fear and greed. 

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.

**JP Morgan Asset Management, Guide to the Markets:  3Q | 2014.  This publication is updated quarterly and is full of useful charts and statistics.  The subjects covered include the economy, the stock and fixed income markets as well as international sectors and commodities.  You can access it at www.JPMorganfunds.com, go to “Insights” and then click on “Guide to the Markets”.