an tSionna {01.30.15}

Back from the Inside ETFs conference.  Will try to summerize some thoughts about it next week.  In the meantime take a look at the trading range stocks have been locked into since last summer.

The thing most will notice is the increase in volatility we've seen since December.  Some will point to this as a topping pattern in stocks.  It very well might be, however the weight of the evidence does not yet support that conclusion.  Irrespective the overall markets have been in a corrective phase since at least last summer.  Remember stocks can sometimes correct by time as well as price.  Given the tailwinds we're currently seeing in the US economy, it is entirely possible we'll just flop around in some kind of range for a bit.  We'll let our indicators ultimately sort this out for us.

Charts are from Stockcharts.com.

*Long ETFs related to the S&P 500 although positions can change at any time.

Investment Business-Know What You're Getting Into.

There is no better description of being in the investment business than what I saw published over at the Reformed Broker blog last week.  Those of us who have been around long enough will surely understand:

This is a business, for better or for worse, of attrition. It wears you down until you have nothing left. Only then, when you are faced with a decision and a path, will you learn if this business is for you. I’ve been faced with this reality numerous times over the past 17 years and have always chose to bear down and make it work. Only through ox-headed perseverance will you succeed at being a trader, money manager, operator of coin, in this god forsaken avenue of employment.

Upon reflection, the first part of this quote probably applies to most any profession in which an individual spends most of their adult lives.  There are situations though unique to the investment business that will lead to many dark nights for the soul.  It's hard to lose money and even harder to lose money for clients.  If you do our jobs long enough then you will know not every investment works according to plan and that bear market phases follow the bull.  Takes a while to find out if your up to the task.  In every career you have to take the good with the bad when you go to get your ticket punched.  The often lonely business of managing money, in both good times and bad, is the burden those of us in the business carry.

Link:  The Reformed Broker:  "The Stupidest Job on Earth.

As Goes January

The market has certainly not put in one of it's better months to start off the new year.  Of course the same thing could have been said about trading last year at this time.  Last year the markets churned around for much of January before having a short but nasty 6% decline into early February.  Sellers then missed out on a pretty good market for the next six months as the S&P 500  tacked on just shy of 14% in gains.  It's because of things like this that I'm inclined to be skeptical of those who draw all sorts of statistical comparisons with Januarys of the past.  

The author Salil Mehta seems to agree with me and has an interesting quantitative blog for those of you who are into this sort of thing called "Statistical Ideas".  He's just published an article called  "As Goes Early January, so Goes Nothing" . He does a better job than I can in his article of debunking the crowd that gets caught up in the "as goes x, so goes y" stream of analysis or as Mr. Mehta puts it the "case of dangerous people abusing probability to confuse anyone into believe there is definitely a there there."

Look the market may go down this year and there are a lot of compelling reasons that one could list why this might happen.  But I think it's dangerous to look for trading patterns in one month and apply them out to the whole world as if they are something written in stone and bound to occur.  Glad to see others agree with me.

I will be attending the "Inside ETFs" conference next week.  I will try and pass on anything that I think is worth mentioning from the conference but posting will be sporadic next week.  Back to a Monday-Thursday Schedule the week of 02.03.15.

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

an tSionna {01.22.15-Europe}

Europe as expected did its own version of quantitative easing today.  Here's a chart of the Vanguard FTSE European ETF.  Notice it's approaching a downward sloping trendline that has been in place since last summer.  We will have to wait to see how it reacts if and when it retests that trendline.  

*Long VGK in certain client accounts and certain investment strategies.

Interest Rates

There was an article via Business Insider, originally from Reuters last week that's main premise is that the decline in oil prices this year has made the Federal Reserve more determined to raise interest rates around mid-year.  You should know there's probably been more ink spilled debating when interest rates will rise over the past three years than any other financial topic.  Most of Wall Street has been dead wrong in terms of the timing when this would occur.  Most economists felt that rates would rise in 2014.  Instead they declined.

I have no better insight on when rates will rise again then the rest of my compadres in the business.  I know they will at some point and while I think there's a higher probability that the markets will initially throw a fit when it occurs, I think that once the dust settles investors will believe that slightly higher rates will confirm that the US economy has entered a more sustained and even growth phase.  If that's the view then it ought to be positive for stocks down the road.  

However, there's one part of the market that does see the longer term benefit of lower rates and that's the mortgage market.  Chart of the Day took a look at this last week.  Here's their chart of mortgage rates.

The result of this most recent decline is a rise in mortgage applications.  Housing is a huge multiplier for the economy as the purchase of a home usually is often accompanied by purchases of appliances, furniture, remodeling etc.  A pick-up in the moribund housing market could be a definite boost to the economy.  Mortgage activity has sagged in the past when rates have gone up and it wouldn't surprise me if the Federal Reserve takes this into account when deciding on rate increases.

Interest rates are going to go up at some point.  I think it will be viewed longer term as a positive but let's not be so quick to assume this is a done deal as soon as some are now expecting.  All those young folks trying to buy homes might appreciate interest rates at these low levels for a longer period of time.

Valuation {1.21.15}

It's been a while since we last looked at the valuation of the S&P 500.  The index closed at 2,019.42 on Friday.  Thats a bit better than a 6% return from the last time we took a look at this on 10.21.15.  Back then of course the S&P was just starting a climb out of a rather short and sudden 8% decline that it had seen from mid-September.   Below is our current analysis.  Please note that the forward PE for the index is now based on year end 2015 results.  Earnings have declined for the index overall but what needs to be noted that most of this decline is in the energy sector and reflects the huge decline in the price of oil.  From now on I am gong to use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite. 

Our Midpoint S&P 500 Earnings Estimate of $125.50 {Through 12.31.2014}

Current PE:                     16.48

Earnings Yield:                 6.08%

Dividend Yield:               1.87% {Estimated.} 

Rolling Four Quarter Estimate  $125.50 {End of 2015 Via Fundamentalis.com}

Current PE:                   16.21

Earnings Yield:               6.17%

Dividend Yield:              1.87% {Estimated}

Current Expected Price Cone of Probability,   01.20.14:   1,750-2,250.

The current yield on the 10 year US Treasury is 1.83% and has declined 36 basis points since the last time we did this analysis.    

We are still in the process of developing our probable trading range for stocks this year.  The preliminary range on the Cone of Probability is 1,750-2,400.  That range is likely to be changed in the next few weeks.  The Cone of Probability is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

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

Volatility

Breaking in today and passing along a "stat" I just heard on CNBC.  They just pointed out that the Dow Jones Industrials have moved 3200 points in the past ten trading sessions.  If that's true then that's a move in stocks you don't see most of the time.  If you want a good example of volatility then the month of January is likely textbook.

*Long ETFs related to the Dow Jones Industrial average in certain legacy accounts.

New Website!

New Year and a few changes.  For one we have a new website!  We've spent a lot of time over the last few months putting together what we hope will be a fact filled and easiy viewing way for you to understand a bit more about us, understanding our philosophies on the markets and getting a better read on how we manage client assets.  

Check it out here!  Hope you like it!  We will over time be posting special content to the website so think about signing up.

Posting schedule.  Monday is the Martin Luther King holiday and the markets are closed.  Next post here will be Tuesday unless events warrant a change.

Terms: Net Market Positive, etc.

I am going to slightly revise my definitions for our market indicators.  I'm doing this so that they reflect on a more accurate manner how we use them.  I am changing these to the following below:

Net Market Positive:

Should be interpreted as :

1.} That we have over a certain period of time become net buyers of securities. That is on a net basis we have added more securities, {usually ETFs} to client accounts than we have sold. We may be both buyers and sellers during this given time but on balance we will have purchased more securities than we have sold. Such an action can be confined to one of our individual investment categories or it could possibly be something we have attended to across substantially all of our client accounts. We will not disclose what percentage of our client accounts such a positive bias accounts for except in extraordinary circumstances. We may also indicate whether we are Net Market Positive or Net Buyers of Stock in a shorter time frame or for a longer period of time but we will not be obligated to do so.

2.} That our investment indicators currently are or have become positive to a point that regardless of investment activity in client accounts, we believe the environment for equities or whatever investment class we are analysing is in a bullish phase.  We define a bullish phase as where on balance our money flow analysis indicates that on a net basis there are more buyers than sellers.  We may define this as a broad indicator of the overall market or a specific indicator to a certain sector or sectors of the market or even to individual securities.   

3.} We break down this analysis into three distinct periods of time.  These are short term indicators, intermediate indicators and longer term indicator.  There is no hard definition of these dates as markets are constantly changing, however a general way of viewing these different time frames is to say short term can comprise a period of time that is days to weeks, intermediate is weeks to months and longer term is months to years.

Net Market Negative:

Should be interpreted as:

1.}  That we have over a certain period of time become net sellers of securities. That is on a net basis we have sold more securities, {usually ETFs} in client accounts than we have bought. We may be both buyers and sellers during this given time but on balance we will have sold more securities than we have bought. Such an action can be confined to one of our individual investment categories or it could possibly be something we have attended to across substantially all of our client accounts. We will not disclose what percentage of our client accounts such a negative bias accounts for except in extraordinary circumstances. We may also indicate whether we are Net Market Negative or Net Sellers of Stock in a shorter time frame or for a longer period of time but we will not be obligated to do so.

2.} That our investment indicators currently are or have become positive to a point that regardless of investment activity in client accounts, we believe the environment for equities or whatever investment class we are analysing is in a bearish phase.  We define a bearish phase as where on balance our money flow analysis indicates that on a net basis there are more buyers than sellers.  We may define this as a broad indicator of the overall market or a specific indicator to a certain sector or sectors of the market or even to individual securities.   

3.} We break down this analysis into three distinct periods of time.  These are short term indicators, intermediate indicators and longer term indicator.  There is no hard definition of these dates as markets are constantly changing, however a general way of viewing these different time frames is to say short term can comprise a period of time that is days to weeks, intermediate is weeks to months and longer term is months to years.

Market Neutral:

1.} In general we are neither net buyers or sellers of stock. 

2.} That our investment indicators currently are or have become neutral to a point that regardless of investment activity in client accounts, we believe the environment for equities or whatever investment class we are analysing is market neutral.  We define market neutral as where on balance our money flow analysis indicates that on a net basis neither buyers or sellers are in control of the market or security we are discussing.  We may define this as a broad indicator of the overall market or a specific indicator to a certain sector or sectors of the market or even to individual securities.   

3.} We break down this analysis into three distinct periods of time.  These are short term indicators, intermediate indicators and longer term indicator.  There is no hard definition of these dates as markets are constantly changing, however a general way of viewing these different time frames is to say short term can comprise a period of time that is days to weeks, intermediate is weeks to months and longer term is months to years.

Now for the disclaimers!

These definitions are a work in progress. Such a system is not perfect, no generalization ever is. This is also not at this time meant to be seen as a market timing model nor as a blanket description of every portfolio. That is it will not be an audited event and we will not be in the business of grading its results. It is simply our attempt at giving our clients and friends a better grasp of our investment positioning at certain points in time. As I reserve the right to change these definitions should events warrant it.

Markets can be in different investment phases depending on the time period.  It is possible for example for us to carry a market neutral rating in the short or intermediate term while showing that longer term the secular indicator is bullish or bearish.

While we may in general from time to time review our current indicators and may either compare or contrast them to the markets and to past changes in said indicators we  do not use or represent these changes as a market timing mechanism.  You should solely use these as a way for you the reader of this blog to better understand the Investment Process of Lumen Capital Management, LLC.  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.  In general we will also not discuss any specific ETF, strategy or any other security we might have purchased or sold.  If you want those sort of specifics you need to hire us! 

Down, Then Up.

Market volatility has increased over the past month.  Actually it's been on the rise since last fall but has probably been more noticeable to the average investor ore recently.  One of the reasons this is likely happening is the increasingly negative earnings revisions we're seeing from analysts regarding 4th quarter reports.  

The chart above showing the decline in net earnings estimates is from Bespoke Investment Group who took a look at this yesterday.  Here's their thoughts:

"Another earnings season kicks off after the close Monday, and judging by the pace of estimate revisions, analysts are increasingly worried.  Over the last four weeks, companies with negative analyst revisions outnumbered companies with positive revisions by 278.  This works out to nearly 19% of the stocks in the index, and is close to the lowest levels we have seen in a year.  In fact, the pace of revisions is more negative than it has been heading into any earnings season in at least a year."

My comments:  Much of the negative revision is due to massive cuts in earnings over at energy companies.  Since most of the revisions we're seeing are in that arena and since there is a positive component to consumers having extra money from gas savings right now, it is a bit difficult to figure out if this is a one off for stocks or the beginning of a larger trend.  We have to remember that outside of the US growth around the world is more or less stagnant.  The market seems confused by this as well, hence the increase in volatility.  

Stocks may get the benefit of the doubt if the decline is seen mostly confined to energy but we need to remember that declining earnings, especially at these elevated valuation levels is normally not the stuff that bull markets come from.

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

Link: Bespoke: Analyst Sentiment Dropping Lika a Stone.

an tSionna {07.12.15-Oil}

I was trying to find something that shows the dramatic decline in oil prices since last summer.  This chart from Richard Zeits over at Seeking Alpha.com will have to do.  It's not exactly what I was looking for and I am not endorsing his conclusions or ideas, but I do think it will give my readers some idea as to the extent of oil's collapse.  One thing he does point out is that oil does on occasion correct and at times rather substantially.  Investors are free to argue amongst themselves what the extent of this decline portends.

*Long energy ETFs in certain client and personal accounts.

an tSionna {01.08.14-SPY}

First stock chart of the year!!!

Sorry for the typos in the captions.  Had some issues with putting this together.  Notice that so far each recovery comes from a higher low than the previous.  That is usually a positive pattern for stocks.  

The one thing to watch in the next couple of weeks is whether the volatility we've seen in the past few weeks continues.  Sometimes volatility like this can point to a change in trend down the road.  Stay tuned.

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

Chart is from FINVIZ.com.  

I will be posting on a Monday-Thursday basis until further notice.  Next post from me will be Monday unless something comes over the transom.

Asset Allocation

Above, I've shown a chart depicting asset class returns for both 2014 and longer term.  This slide is from the presentation put together each quarter by the folks over at JP Morgan Asset Management.  You can see the whole thing here.  I've blown this up on the blog as large as I can so you can see each of the style boxes more clearly.   I want you to focus on the white box with the line through it marked asset allocation.

The asset allocation story gets lost in years like 2012 and 2013 when a major and well known index like the S&P 500 posts above average returns.  What investors should focus on however are  the longer term returns.  In JP Morgan's work the long term returns {2005-2014} of an asset allocation strategy show investment returns roughly a percentage point lower than the Russell 2000 and the S&P 500 but in 4th place overall.  This despite never having a year when an asset allocation strategy would have been the top performing asset.  

This should make sense as a strategy that spreads your money around will benefit from the winners but also be dragged down by the losers.  Of course if one could see perfectly into the future then we could avoid the losing asset classes and overweight the winners.  Nobody is that good all of the time. To point that out  let's take a look at the asset class for REITS or Real Estate Investment Trusts shown above.

REITS are the second best performing asset class longer term in JP Morgan's work, while also being  the best performing asset class in nearly half of the years listed in the study.  REITS significantly underperformed the major markets in 2013 when investors worried about rising interest rates and a slowing economy.  Given what we knew at the beginning of last year and given the performance of REITS in 2013, how many people would have picked them to be the best performing asset class in 2014?  Well not many did.  

The real benefits of asset allocation are apparent in 2008.  Asset allocation strategies lost nearly 25% in value in that terrible year.  But that is a lot better than the equity related portions of the investment curve.  These all lost in excess of 30-50% of their value back then.  Which leads to the other major benefit of asset allocation.

You win more by losing less!  The way the math works it takes a 11.1% return to recover from a 10% decline and a 25% return to get back to even from a 20% decline.  An asset class like emerging markets back in 2008 had to make in excess of 110% in order to just make back that 53.2% loss.   Asset allocation strategies typically have less of a road to travel back after market declines.  Along with spreading risk and having the potential to lower volatility, the real advantage of asset allocation is that it keeps you in the game by usually giving investors the potential for lower declines in portfolio values during corrections.

We have our own take on asset allocation via our various investment strategies but the importance of the asset allocation is worth remembering after a pretty good run for equities when these sort of disciplines may come into question by both investors and the chattering investment classes.

*We are long various asset classes depicted above via ETFs  in client and or personal accounts.  Positions can vary in accounts depending on account strategy and the unique risk/reward characteristics of our clients.

What Bull Market?

Last year around the July 4th holiday I published a post titled "Time Off"  In that piece I listed several things that might bother the markets going forward.  Back then I was simply referring to the often tepid late summer/early autumn months where stocks often experience their greatest period of weakness.  Yesterday's sell-off had me go back and look at that piece and the time period around it.  Turns out that stocks rolled around for a bit and then experienced a short but nasty 9% decline into mid-October.  

But the bigger story to me is that after yesterday's sell-off we're really not that much higher than when I wrote that piece back in late June.  Here's a list of different asset classes via their ETFs from July 3rd, 2014 till yesterday.  Charts are from Stockcharts.com. As you can see, if you take out the major US indices, not much has worked besides these, REITs and longer term bonds.

One other thing I noted back then was this in regards to the events that were worrying investors.  "Of course it's likely that the thing which will finally give markets a pause and even lead to some sort of a decline isn't even registering on any body's radar.  That's the way it is sometimes."

What turned out to put the breaks on the markets in large part was the massive decline in oil prices.  I don't think anybody thought too much about that possibility back in the summer.   On balance it seems that investors are currently of the view that this is more a negative than a positive.   That is, the global implications of lower oil and a slower world economy may currently be trumping the huge benefits to consumers in saved gas costs.  Only time will tell how this is going to work out but below you can see the impact lower prices have had on the energy sector since the summer as well as the more modest returns of most everything else.

Finally there is a lot of chatter about what all of this means as the year begins.  On one hand you'll hear folks talking about the first five trading days of the year and how that weighs in on markets, but I'd retort that stocks were down the first five days of last year, suffered a late January sell off, then moved higher for the next six weeks and never were in the red on a yearly basis beyond that January period the rest of 2014.  It's just too early to judge.  I'll have more to say on this in the coming weeks.

*We are long various ETFs depicted above in client and or personal accounts.  Positions can vary in accounts depending on account strategy and the unique risk/reward characteristics of our clients.

Terms: Cone Of Probability

I'm going to spend some time early this year redefining some of the terms you see me use from time to time on this blog.  First up is the "Cone of Probability".  You've heard me in the past use the term the Cone of Probability or probability cone.  It's a term I've borrowed from meteorology, particularly in the study of hurricane forecasting.  In meteorology it refers to the probable path a hurricane can be expected to take and has a wide margin of error the further in the future the forecast looks out.  We use it when doing valuation analysis.  Here is our definition of this term. 

The Cone of Probability is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, and whether those estimates are rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

Solas! The Introduction.

Solas!

Hello and Welcome! At least once a year I will try to republish the introduction to this blog and my general disclaimer..

As stated way back when, this is an experiment and Solas! so far seems to me to be the best opportunity to focus on what I want to write in a time efficient and hopefully interesting manner. However, please keep in mind that so far this is a hit or miss experiment. I don't yet know if this is going to work, how it's going to look or even if I am going to be satisfied with the end product. As a work in progress, especially at its inception, this may be a hit or miss endeavor. I don't know how and may never have time to do many of the things that make this look pretty or more professional. Nor am I going to take time away from my business to become an expert blogger. I do over time hope to make this better. I welcome your comments and suggestions.

What this is:

A learning experience. A way for me on occasion to make a point.

A way for me on occasion to discuss markets and investing.

A place for me on occasion to discuss the vagaries of life and perhaps editorialize.

A place to discuss the investment process.

What this is not:

A forum to tout any form of individual investments. (Particularly individual stocks or ETFs). We do not make recommendations on this blog! If we do discuss individual sectors or securities it will be solely in the context of a learning experience. You should understand that any individual sector or security that may be discussed here has the possibility of loss of principal.

A place for me to give individual investment advice. (Call me or others for this).

A theatre for me to tell you how wonderful I am.

An environment for me to make stock valuation claims i.e. "XYZ is worth 50 dollars!" If & when we do discuss valuations, that will be an opinion and nothing there should be construed as a guarantee of return or a guarantee that a stock will ever trade to an actual price.

And anything else that I might think of going forward.

One other thing. Where I discuss any individual security I will disclose whether I or clients currently own that stock or ETF. That disclosure is only valid for the day of the post as investments can change at any time. Any person who reads this blog and is not a client of Lumen Capital Management, LLC should either do their own research, give us a call or talk to their own investment advisor before making any investment based on anything written within the confines of this blog.

Oh and a final disclaimer!!! I write principally for the clients and friends of my firm, Lumen Capital Management, LLC. It is a way for them to get a quick read on my thoughts about the markets and any other subject I might cover. I do so after understanding to the best of my ability their unique risk/reward criteria. As such any casual or outside reader of this blog should understand that I am not writing for them! Therefore I or my firm takes no responsibility for any actions overt or otherwise a casual reader of this blog might take based on our discussions here. Casual or outside readers should do their own homework, discuss our articles with their own investment advisors or better yet hire us.

In short if you're not a client and you read this you're on your own.