Rev. Theodore Hesburgh

The obituary of the Rev. Theodore Hesburgh, ex-Notre Dame President via the Washington Post.

Codladh go maith  Athair.

On The Run {Part II}

I know I said that I wouldn't be posting today but had a few random thoughts and wanted to put them out there for the "Good of the Corp" {an old Culver Summer School expression which I don't expect anybody else but CSS alumni to understand}.  

-ISIS, the new war in Iraq, Syria, Ukraine, the economic problems in the European Union, American/Cuban attempts at repairing relations, drug wars in Mexico and continued tensions in the South China Sea are to me all indicators that the world is trying to get somewhere.  That somewhere is likely a new way of viewing things and a reordering of alliances and regional powers.  We may not know how this will finally look for years or decades, but suddenly everything old seems new again.  We're going to cover this a bit more in the future.

-Winter in the northern tier of the country has been brutal.  Expect it to start impacting GDP numbers for the first quarter just as it did last year.  My response to this will be the same as last year when winter never seemed to loosen its grip on us.  "Nobody bought cars, went to the mall or looked for a house.  Now some economic activity doesn't get made up.  You don't make up going to the movies or going out to dinner.  But most demand is simply demand that's been put off.  I think that things like car sales and consumer purchases will be much higher this spring than most investors expect.  I think we'll add a few basis points on to GDP because of this as well."  For what it's worth and solely on a gut basis, I'll guess that we've been about as cold as last year but we have nowhere near the snow so far.  That could change as some of our worst storms in the Chicagoland area have come in March.  Unless that happens we're going to end up only slightly above average this year in snow but the Great Lakes are more frozen now than they were a year ago.    East Coast has of course suffered our snow fate this year.  That's why I think we're about to see more buzz on winter's effect on the economy.  

-Let's say for the sake of argument I can buy an identical set of golf clubs on line as at a typical sporting goods store.  Let's also say that I can save myself $50-100 dollars on the purchase, then these are the questions I ask myself-even if I don't necessarily have all the answers.

1.) Why wouldn't I do this?  Ok maybe I won't but it's likely my children who are much more comfortable buying items unseen online would do so.

2.)  How do economists record this transaction.  The sporting goods store, to the extent they'd even know about this, would record it as a lost sale.  However, I DID buy clubs and the seller booked a transaction that looks every bit like a retail sale if I'd purchased these in the store.

3.)  What is the sales tax hit.  I know that somebody's supposed to pay sales taxes most of the time and I'm pretty sure that most of the time nobody's collecting any money for Uncle Sam.  Folks that have online businesses where this is their livelihood may do so but I'd be willing to bet the guy selling a used set of clubs in his garage isn't giving Uncle Sam his cut.

4.)  How much is this bleeding sales away from traditional retailers and how, if it all is it being measured as economic activity.

Back Monday.

Things Are Getting Better.

Much buzz this past week when Walmart announced that it would be raising it's minimum wage.  Both Business Insider and the Fiscal Times note that the job market has strengthened and competition for entry level and lower skills workers has finally started to increase.  Simply put in order for Walmart to keep their employees they're going to have to pay more money.   The news out of Walmart puts some meat on the bones of what we've been seeing in both the participation rate in the job market {rising} and the unemployment rate {falling-see chart above}.  Other retail companies have since stated that they too would be raising wages for their employees.  

The prospect of rising wages added to the lower cost of gasoline is longer term positive for the economy.  While so far the evidence doesn't show that consumers have necessarily spent the gas savings windfall, that might start to change if they begin to get paid more.  

Look I think there are big changes afoot in how and when consumers are willing to spend their cash and not all of them show up in the traditional metrics economists use to measure the economy.  At some point I'm going to write about this but for now let's just say that irrespective of how the public purchases the things it needs, more money in the pocket eventually will loosen the purse strings.  Maybe not today, maybe not in ways we're accustomed to seeing it spent and maybe instead of spending it all the American consumer will finally do what they've been urged to do for decades and save some of their earnings, but spend it eventually they will.  When they do we'll see that old velocity of money ripple through the economy.

Finally in another sign the economic recovery is starting to reach down into lower levels of the economy, the Fiscal Times also notes that food stamp use has plummeted:

"Food stamp caseloads grew significantly between 2007 and 2011 as the recession and lagging economic recovery led more low-income households to qualify and apply for help, according to the new report by the Center on Budget and Policy Priorities released on Monday. However, the caseload growth slowed substantially in 2012 and 2013, and then fell by about 2 percent in fiscal year 2014. 

Spending on food stamps fell by 11 percent in 2014 as a share of the gross domestic product and by nine percent after adjusting for inflation.

Fewer people participated in the program in each of the 15 months between September 2013 and November 2014 than in the same month one year earlier, according to the most recent government data available.

Indeed, 1.5 million fewer people participated in the food stamp program in November 2014 than when participation peaked in December 2012, according to the new study. In 43 states, the average number of   participants was lower in fiscal year 2014 than in fiscal year 2013."

Next post Monday.

an tSionna {02.25.2015}

We talked about how international markets have done well in 2015.  Here's how well below versus the S&P 500 so far in 2015.

Note though that these markets still have a long way to go before they catch up with the US markets which have outperformed almost everything else by a wide margin during that time.

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

Performance charts are from Stockcharts.com.

On The Run

I have a series of client meetings today.  I'll pass on a few brief thoughts before I run and I'll be back tomorrow.

-Markets right now act like they want to run higher.  There are strong historical seasonal tailwinds in February through sometime in April that tend to support price advancement. Probability would suggest that if this is going to happen it is showing up right when history says it should.

-The "Belle of the Ball" so far in 2015 have been overseas markets.  Hard to say right now whether this is a longer sustained push or just another false dawn.  Still statistically cheap versus the US.

-Interest rates at some point here in the US will go higher but whatever increases we see are likely to be slow and incremental and will probably not add much in the way of interest burden to the economy.  Hard to see how a long sustained rise in rates would fit into an economy that's lucky to grow 3%.  That said things are getting better here and a slight rise at some point I think will be viewed more confidently as long as it's not seen as the start of something bigger.

-I'm beginning to suspect that my earnings estimates for the S&P 500 for 2015 are too high due to the collapse in energy prices.  I'm working on that now and will update when I've completed my analysis.

-I'm also working on a longer term piece talking about where we go from here in regards to the equity markets both here and abroad.  Thought I'd be putting that out this week but that schedule now seems optimistic.  Stay tuned.  

Back tomorrow and Thursday.  No post Friday.

an tSionna

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

Chart courtesy of FINVIZ.com

A Bug

I'd planned to put something up here today but instead find myself fighting off what I think is a slight touch of the flu.  Glad I got that shot last fall.  I've had this same thing twice this winter.  I'm working but my energy level is really low.  Will be back here either tomorrow or Monday depending how I feel.

Why We Can't Plan For Retirement.

The CFA Institute recently put out an entire issue devoted to retirement.  Specifically in the article below the question is asked, "After 70 years of fruitful research, why is there still a retirement crisis?"  The short answer, in my opinion, could be summarized as follows:  There is a crisis in retirement planning because the future is unknowable and we mortals are mostly incapable of dealing with matters that may never occur {we could die before we reach retirement age} or are too far off to be of a concern right now.  Most thoughts about the future tend to get crowded out due to our concerns with the here and now.  Never-the-less the author lays out below the primary issues of how we got to where we are today.  

We are not dealing with the answers here, just highlighting what's wrong. {My highlights.}

	Low saving rates: Many people prefer living for today over saving for tomorrow.
	Agency costs: Some of the people entrusted with other people’s money keep as much as possible for themselves or simply do not know how to do their jobs.
	Lack of knowledge: Accustomed to having employers save on their behalf, employees who must now provide for themselves do not know how much to save, how to invest, or how much to spend.
	Longevity: People are living longer but not necessarily working longer.

Most of the other causes of the retirement crisis concern market circumstances and policy errors:

	Poor market returns: Since 2000, markets have mostly disappointed, but those responsible for pension and retirement planning have generally assumed strong returns and have budgeted their contributions accordingly.
	Ordinary costs: Conventional investment management and advice are expensive, and indexing has only recently caught on as a near-majority strategy.
	Unskillful investing: Many investors buy when asset prices are high, after market gains, and then, in a panic, sell low in the next downturn to avoid further losses. They also chase manager alpha unsuccessfully, buying funds after they have performed well and experiencing the inevitable deterioration.
	Ill-advised regulations and taxes: In the United States, for example, tax laws favor DB plans, which allow a large fraction of income to be tax deferred. Meanwhile, caps on DC plan tax deferrals are set so low that most participants cannot realistically retire on tax-deferred balances alone. US tax laws also favor certain types of employee benefits over others, regardless of what is best for the employee, and thus many individual investors face high marginal taxes on savings.
	Poorly defined property rights: With DB pension assets and liabilities (benefits) not clearly belonging to anyone, they become a political football and an object of financial maneuvering.

That’s quite a gauntlet for workers seeking retirement security, through either DB plans or individual investing, to run! It’s no wonder that a sufficient and reliable retirement income is elusive.

The next post here will be Thursday.

Link:  CFA Institute: After 70 Years of Fruitful Research, Why is There Still a Retirement Crisis?

Winter Letter to Clients {Conclusion}

Below is the conclusion to our Winter Letter.

 Major US indices ranged from 4.9% in the small cap universe to low double digits for larger capitalized US equity indices. That was in stark contrast to what occurred in almost every other asset class across the globe.   International markets returns were mostly to the negative, commodities saw double digit declines. Oil confounded all predictions by its massive decline.  Bonds also went against grain and advanced in price as their yields declined.  Very few market experts or economists predicted this at the beginning of 2014 as well.  So much for group-think.  Most thought rates would rise and bond prices decline. 

JP Morgan shows that a typical asset allocation strategy returned 5.2% last year*. Our view is that asset allocation should be the foundation to your portfolio, setting forth your personal game plan specifically identifying where and how to invest your money.  Asset allocation is important in two distinct ways.  First, asset allocation begins by understanding that except during a few extraordinary periods of time {like the last six months of 2009} some investment classes will be winners and some will be losers.  This should vary over time.  The addition of investment styles that perform differently than the rest of your portfolio {i.e. have a low correlation} can reduce overall portfolio volatility.  There will be other investments that partially offset that volatility, both on the upside and downside, which should help to produce more stable returns.  The 2^nd reason asset allocation is important is that it helps investors keep a long-term perspective and avoid knee-jerk reactions.  Investors have a tendency to chase the best performing segments of the market while shunning poor-performing areas.  Yet, it is incredibly difficult to guess what areas will continue to shine and what the next market leaders will be.  Asset allocation keeps you in the game from this. 

We further break asset allocation down into various portfolio strategies that we also define for risk.  It is hoped that this combination will in the long run damper portfolio volatility while contributing to long term total return via our various investment styles and per each client’s unique risk/reward characteristics.

* JP Morgan Asset Management, Guide to the Markets:  4Q | 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”.  I will be happy to furnish you a copy of the periodic table on asset returns from which this information is derived if you would like. 

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.

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

Winter Letter To Clients {Part II}

The S&P 500, the broadest measure of the US stock market, currently trades at 16 times earnings.  This is elevated in terms of price but by itself not fatal for market advances.  Stocks have historically traded in a price to earnings valuation range between 14-16 times their forward estimated earnings.  Also there is considerable debate on where equities ought to trade in a low interest rate world.  However, very few will argue that stocks are in the aggregate cheap. In regards to the current economic environment, we think that investors will have to once again get used to a higher level of volatility.  However, based on current analysis we think markets also have the potential to also be higher by year-end.  Here’s why.

We are using an estimated earnings range on the S&P 500 of 123-128 with a mid-point of 125.50 for this year.  Our current 2015 price cone of probability is 1,750 to 2,250 on the S&P 500.  That is appreciation potential of roughly 4-10% when accounting for dividends.  We introduce a preliminary estimate of 2016 earnings ranging between 130.50-135 for the S&P 500.  Please note that there is no guarantee that any of these estimates will be met.  The Cone of Probability is our current assessment of the price range within which we think stocks have the potential to trade during a described period, in this case calendar year 2015.  It is a probabilistic assessment based on many inputs.  Some of these 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.   We use this solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded in the past outside of its range.

At first glance with stocks struggling out of the gate, it might be hard to make an argument for higher prices in 2015.  Indeed it would not surprise us if our “friend” volatility wrecked a bit of havoc on equities this year.  It is now greater than two years since the markets have experienced a correction in excess of 10%.  This possibility means we have the defensive pages of the playbook and game plan nearby. But irrespective of these concerns we hold to our basic argument that things have been getting better in the US. The above-mentioned decline in the price of oil is the equivalent of a massive tax refund to the American consumer, one that is only now being felt in the economy. Unemployment is back to pre-recession levels, consumer confidence has returned which is manifest in record purchase of automobiles and a pick-up in housing. Markets like divided government.  A Democratic President contesting a Republican House and Senate is about as divided as it can get. There will be no sweeping agenda out of Washington this year or next as the Presidential races open up.  We are still of the opinion which we have reiterated over and over these past few years that positive demographic trends, advances in productivity as rooted in the efficiencies of the knowledge based economy and the continuing age of innovation that we have dubbed the “era of miniaturization” are all longer term positives for the economy. 

One major wild card is in the international arena.  The recent tragic events in France show that terrorists still have the potential to wreck havoc on Western society.  Also the Middle East and Ukraine are not going away this year.  Yet these events have in many ways been with us for the past decade and markets have learned to live with these events, horrible as they are.  At some point markets will have to deal with a deteriorating economy.  The evidence so far does not seem to indicate that 2015 is going to be that year, particularly in regards to the United States.

Tomorrow: The conclusion to our letter.

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

Winter Letter To Clients [Part I}

Today we begin releasing to the public our most recently investment letter which has already been sent to our clients.

Musings on the Return of an “Old Friend”.

An “old friend” seems to have stopped by for an uninvited and extended stay at Mr. Market’s home these days.  Mr. Market’s housemates though do not universally adore our “friend”.  Traders purport to love him-that is as long as they are in his good graces.  Investors generally loathe him as he often brings to them sleepless nights and churning stomachs.  Our “friend’s” manipulations are little understood by these folks and they just wish he would pack his bags and be off.  Our “friend” usually has a story to tell, but he speaks often in riddles or contradicts himself. Yet if you listen closely to what he brings there is one constant to his muddled views of the world which is uncertainty. 

Our “old friend” is volatility.  He went on vacation somewhere back in 2011, stopped in for a brief “how-do-you-do” in 2012 but then all but disappeared until last fall.  Since then he’s made his presence felt in the equity and bond markets, while most recently bringing havoc on currency traders.  Volatility often brings along his companion “trading range” and this visit is no exception.  With the passage of time we can see that the markets have been locked between roughly 1,820 and 2,080 on the S&P 500.  That’s roughly a fourteen-percentage point zone these two currently are dancing around.  Indeed as of this writing, stocks are only a few percentage points higher than where they traded right before the 4^th of July holiday last year. 

Our “old friend” volatility has returned because of uncertainty in the markets.  While the US economy continues to expand, most of the rest of the world is mired in low or zero growth environments.  Then there’s the two-sided story volatility spins about last year’s unexpected drop in the price of oil.  On one hand he says this is good for consumers globally.  A decline in the amount we’ve seen over the past few months is the equivalent of a global tax cut.  But our friend then says out of the other side of his mouth economics is often a zero sum game.  While consumers benefit from oil’s decline, there is a negative impact on economies dependent on a higher price of oil as well as the incipient fear that the decline is presaging a much slower growth rate world wide than investors are currently forecasting.

Volatility is the price investor’s pay for liquidity.  It is the reset mechanism that often caps the financial excesses that sometimes can lead to large market declines. Investors should expect some volatility and should accept that sometimes prices will correct.  Volatility is most often associated with market declines. Volatility can work both ways but presumably investors don’t mind when there is a sharp gain in their investments. Investors though mostly hate volatility when prices head lower, especially when the declines are swift and steep. There are strategies in our playbook that deal with trendless and more volatile periods that we use in our game plan for client accounts. One of the easiest methods to decrease volatility in a portfolio is to raise cash.  Cash is the only way to completely avoid a market decline.  Since it is unlikely that your portfolios will ever be 100% in cash when invested with us this is not complete protection against a bear market.  Put it this way.  If Warren Buffett knows of no way to completely hedge a portfolio then it is probably impossible to do.  The goal when investing is to be aware when the markets are in a lower probability environment, have enough cash that fits into your risk/reward parameters so you can ride out the decline and then be able to deploy that cash when markets begin their next advance.

Tomorrow Part II.

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

Things Are Getting Better {02.10.2015}

The US economy is  creating jobs at a rate not seen in years.  According to Bloomberg News:*

"{The} 257,000 January increase in employment capped the biggest three-month advance in 17 years and delivered the strongest wage gain since 2008, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as the prospect of finding work lured hundreds of thousands into the labor force."

Bloomberg also notes in the same article that the US economy has added a million jobs since November. 

A big factor is the return of the Millennial generation to the work force.  The chart below is published via Business Insider.  They note that "younger workers are the middle-age, household forming, tax- paying, consuming family heads of tomorrow".   

This is a huge economic development ff this generation is truly now getting a firm toe-hold into the working world.  {It is also a relief to a father of three such millennials, one already in the work force and another about to look for employment this spring.} It represents a significant economic tailwind in the outlying years, one that is supportive of both economic growth and a foundation for market advancement in the years ahead.

*Link:  Bloomberg News:  Job Report Crushes It.

Hedge Fund Returns

Hedge funds didn't have a great go at the markets in 2014.  Business Insider citing outside sources says hedge fund returns were up around 3%.  That's compared to the S&P 500's 13.7% return and a few better publicized composites showing that diversified portfolios returned between 5-6% last year.

I'm not sure what there is to say about this other than note the continued poor performance by the crowd that charges 2% management fees and then takes 20% of the profits.  I know that some funds shot the lights out and that there are good firms that consistently do much better than this.  But the aggregate performance of the industry should be something that all investors consider when getting ready to lock down money in private funds.  I'm not sure how probably 80% of these investors justify getting paid anymore.  I think there's gong to be a real shake out in this industry in the next 2-3 years if things don't change.

Link:  Business Insider.com:  "This is What the Hedge Funds that Won in 2014 Looked Like."

Turn Out the Lights.

An era will end this summer.  On Thursday, the CME Group announced that it would close most floor-based trading of futures in Chicago and New York.  I found a fitting requiem to this institution yesterday.  Go read this article by a fellow named Craig Pirrong, "Turn Out the Lights, The Party's Over."  Mr. Pirrong, who evidently spent some time down in the pits, does a pretty good job of describing what did in the Open Outcry" system.  {Hint: it was the machines!}  He also does a decent summation of what life was like down there for the traders who stood all day trying to scratch out a living.

"The floor was an amazing place. (Even though the floors will remain open until July, the past tense is appropriate in that sentence.) A seemingly chaotic place full of shouting and gesticulating men (and yes, it was an overwhelmingly male place). Despite the chaos, it was an extraordinarily efficient way to buy and sell futures. In the bond pit in the 80s and 90s, $100,000,000 notional could be bought in sold with a shout and a wave. Over and over and over.

The economics of the pits were fascinating, but the sociology was as well. They were truly little societies. There were the exchange rules that were in the book, and there were the rules not written in any book that you adhered to, or else. Face-to-face interactions day after day over periods of years created a unique dynamic and a unique culture with its own norms and hierarchies and rituals. And soon it will be but a memory."

I don't think any movie or any particular part of the entertainment industry ever adequately gave a feel for what it was like down there.  "Trading Places" comes close showing the commodities pits at the old Philadelphia exchanges, but as far as I know that's it.  {Start watching about the one minute mark to see the floor action.}

I never worked on those floors but I know a lot of men who did.  Even back in the day it was mostly a young person's world and as Mr. Pirrong noted, mostly male.  You didn't see a lot of floor traders over 40.  The constant pummeling these guys took down there  became too physically demanding.  A lot of those traders had been high school or college athletes.  As a rule they were tall, muscular and not afraid to get in your face if they felt they'd been screwed.  I once saw two traders have at it in the bar of the Union League Club in Chicago over what one fellow thought was the other walking away from a what I assume was a losing trade.  The floors were rough and tumble.  They were perhaps the last place in the investment world where a trader's word was his bond.  I know they were the last place in the financial world where young men who decided college wasn't for them could still go to the exchanges and if they had the moxy and the trading savvy could make fortunes.  I knew guys back in the day, in their 30's making a million dollars a year.  Now they and the places they traded are going.  They will soon be a memory of Chicago's past and in many ways we here will be the worse for their passing.

an tSionna {Jump Ball}

Various world indices that after a punk 2014 are starting to be of interest on their charts.

1st up below for comparison sake is the S&P 500 which we can now see has been locked in a trading range since last summer.

Here's the Vanguard European ETF, VGK.  Downward sloping trend line dating back to July has been broken but trading at resistance and slightly over bought short term by our work.

Next is the Vanguard emerging market ETF, VWO.  Close to the same chart pattern.

Here's the Vanguard Pacific ETF, VPL.  Ditto on the pattern, or close enough for government work!

Now for something a bit different {also so I'm not accused of being a shill for Vanguard}.  The pattern here is slightly different but it too is close to testing a longer term trend line.

Now I'm not trying to tell you to go out and buy these ETFs or any others similar to these today.  I also do not profess to know where these may be headed in the shorter term.   That is why I think these are currently more in the "Jump Ball" status in terms of where they might trade in terms of price.  We are probabilistic in terms of our investment strategies.  Because of this and because we are for the most part for clients longer term investors, I will say that I think there are several reasons why foreign markets may be more attractive right now for investment dollars, especially when it comes to valuation.  In full disclosure I also will let you know that we are long in some form international related ETFs and most of the ones displayed above in both client and personal accounts.  We are long these depending on investment strategy and client individual mandates.  Also in the name of full disclosure we may have been in the markets in regards to our international strategies recently and may be buyers in the future.   

We have our own international strategy for clients and anybody who is a casual reader of this blog knows that I am a strong advocate of you doing your own homework, talking to your own advisor about your international strategy or hiring us.  You should also know that I've been a strong advocate for international exposure for the past several years and have been dead wrong for the most part in terms of timing.  I will also say that anything you read here is our opinion, which has some percentage likelihood of being wrong and that international markets perhaps carry a higher degree of risk and volatility than we sometimes see here in the US.  If you are going to invest in this arena, understand what you are getting into or at least talk to your advisor.  Yet I think the discrepancies in these markets versus the US at the least bears watching and again is deserving of some additional homework on your part if you are a casual reader here.  

Next post here Monday when we will begin releasing our Winter Client Letter.

Charts via FINVIZ.com.