Thoughts {06.30.16}

End of the 2nd quarter and end of the half year for investors.  Markets are trying to rally for a third day.  This probably has as more to do with marking up portfolios than anything about Brexit.  That news I think at least for the next few weeks has largely been priced into the market.  

If you've been traveling and not looked at your portfolio then you could be forgiven for wondering what all the fuss has been about in the markets.  Stocks are essentially unchanged now from where they started out two weeks ago.  Of course you would have missed a 3% run up into the British vote, that big sell off afterwords and then this week's three day rally.  ETF investors were able to ride out this storm a bit better than individual stocks I think.  They certainly in the aggregate, especially those domestically based, saw less volatility than many individual issues.

Speaking of ETFs, the last 10 days of the quarter is dividend time.  ETF investors could not only take comfort in the benefits of diversification, but also knowing they were seeing dividend payouts going into that period of uncertainty.  We're going to spend some time in the next week or so talking about the impact of dividends on ETFs and on portfolios.  You can see some of what I want to talk about by reading this.

Is anybody sick of talking or reading about Brexit.  I know I am!  

Markets are close Monday for the 4th of July holiday so the next post here will be Tuesday unless there's a reason to break in.

Thoughts {06.29.16}

Well we're seeing that snapback rally I thought could occur when I last posted.  The S&P 500* rallied hard yesterday and wiped out all of Monday's decline.  As I'm writing this today, the index is up an additional 1%.  Also as of this writing, the index is only now lower by about a half percent from where it was on June 17, 2016.  The reason I use that date is that's where stocks traded before you saw a rather large move to the upside on position of an expected "remain" vote in Great Britain.
I think you need to take the week prior to the vote and the early days after its results off the table when trying to figure out where we should be trading.  The whole Brexit reaction is almost similar to throwing a large rock into a still pool.  There is a reaction as liquid fills the void left from the displacement by the stone when it hits the water, then counter reaction of the waves off of the displacement.  Eventually though things settle down.

And why are things settling down?  Because at the end of the day life goes on.  Companies selling olives from Greece into Britain, oranges from Spain and sinks from Germany are still selling those products into Great Britain today.  At some point doing that sort of business may be more difficult but I'm betting that business people will figure out how to get it done.  Money knows no boundaries and where there's a will to do business there's a way to bring it about.  There's going to be months of jockeying for position overseas and now more business uncertainty but these economies are too interconnected to simply ignore each other.

It also wouldn't surprise me if Britain either doesn't leave the EU or leaves it in name only.  A work around in my view would be for Scotland and perhaps Northern Ireland to stay in the Eurozone while England and Wales leaves.

Now as to the markets, some profit taking may occur soon but probability suggests that stocks will now hold up into the end of the quarter tomorrow.  The investment management community has an invested interest in making those end of quarter and end of half-year numbers look as good as possible.  Those numbers in any event are only going to look mediocre at best.  Major indices around the world are slightly lower to basically break-even through the end of June.

Back tomorrow.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note that positions can change at any time and without notice on this blog.

Thoughts {06.27.16}

Stocks once again have been repulsed in that same zone we've seen time and time again.  Go take a look at this chart here if you want to see what I'm talking about.  Nothing in that sense has changed.

Markets now though at least have their excuse to sell off with last week's vote in Great Britain.  Investors want to know what happens next.  Here's my thinking.  Markets were flirting a few weeks ago with breaking out of this trading range we've seen over the past few years and which we've discussed many times here on the blog.  Then investors  started to become unnerved by the upcoming British vote.  In particular markets became more defensive when polls in the UK started to show "leave" winning.  Markets rallied last week as confidence grew that "remain" was taking the lead only to turn tail on the actual results.  Probability suggests we will probably remain locked in this same range now for some time, possibly now through our elections in November.  You now have too many items of an unknown nature for investors to focus on in the next few months.  Both of our political party's political conventions are coming up in July, there are meetings of the Federal Reserve in July and September and then attention will focus in on the election itself.    Don't forget that August is also time where investor interest in the markets seems to wilt in the summer sun.

While I think it is possible that markets experience a bit more of a correction from last week's vote, evidence right now suggests the US economy just sort of continues to chug along.  Growth isn't explosive, but the economy is growing.  That should put a floor under stocks at some point.

I think it is possible we could see some further weakness early in the week, fallout from last week's vote.  The reason I'm leaning that way is the typical pattern you see when markets have an investment shock on a Friday is a few more days of sellers the next week.  Barring no further negative developments, buyers begin looking for bargains into the at part of the decline and the markets experience some sort of reflex rally.  I think we'll have to look at the clues after that rally to try and gage where we me be going next.

You can read a pretty decent write-up of last week's decision from Bloomberg here.

Back Wednesday unless events warrant a break-in.  

Blackrock's 5 Takeaways From The Brexit Vote.

Go read Blackrock's, "5 Key Takeaways From the Brexit Vote".

The Power of Dividends

Investors usually only pay attention to the current price of their stocks, mutual funds, or Exchange Traded Funds (ETFs). Sometimes they will compare current prices with where their investments were during a certain time period, for example how these have performed during the current year. Doing this type of analysis right now with most major stock market indices could lead to frustration amongst investors as most have now had long periods of time basically marching in place. However, doing this sort of snapshot analysis can miss the underlying power that dividends can have in a portfolio. Let’s take a real world example to illustrate my point.

Above I am showing a price chart of the S&P 500’s ETF {SPY}. I use charts of the ETF because it is something that most investors can own versus the actual S&P 500. The chart above is from Tradingview.com, a leading provider of investment and market data, though the annotations in it are mine. I like showing longer-term charts because it allows investors to focus on the big picture instead of day-to-day market fluctuations. While it may seem complex and messy at first glance, the chart is showing the performance of the S&P 500 from November 2014 through June 23, 2016. The yellow highlighted band shows the range where the market has traded for a majority of this timeframe. 

It also shows overall trends in the stock market over longer periods of time, which enables investors to prioritize the big picture. Here’s something interesting to note when looking at this chart: If you had bought the S&P 500 back in early November 2014, you would have earned slightly better than 3% in price appreciation through June 23, 2016. You also would have endured two downdrafts of roughly 10% during that period.  

However, you would have also collected $7.47 in dividends since your purchase of SPY. The dividends are indicated by the circled "D" on the chart. If you go to Tradingview.com and punch in SPY, you can hover over that "D" and see the date and the amount of each payment. Investors use the S&P 500 as an index representative of the US stock market and also as a proxy for the economy, so how the S&P 500 is trading gives us a rough idea on investors’ thoughts about both. As noted, the index has seen minimal appreciation in the past few years, likely reflecting investor uncertainty over the future. However, and perhaps reflecting that anxiety, the current annualized yield is slightly over 2%. If past history is indicative of the future, the dividend on the index will on average be increased between 2–7% per year. The current yield, as of this writing, on a one-year US Treasury is 58 basis points or 0.58%. The 10-year US bond yields a 1.73%.* Investors are locked into whatever yield bonds are trading on the day they make their purchases. 

Now, let’s be clear about something. We all know stocks go through corrections and sometimes worse. Owning stocks, ETFs, or mutual funds means you have to accept the inherent volatility in markets and understand that declines will occur at some point. Also, your exposure to equities as an asset class should depend on your unique risk/reward criteria. I also will point out that the actual dollar gains from that yield can be lowered or wiped out when stocks correct. In so saying, you can currently receive a better yield in the S&P 500 than you can from US government bonds. I stress yield here because I'm focusing solely on the yield, not price appreciation or total return.  

Owning a 10-year bond with a yield under 2% like now basically says investors feel negatively about  the future economy. They are willing to accept a yield where probability suggests that after inflation, and in many cases taxes, an investor will likely just break even during that 10-year period for the certainty of getting one’s principal back.  

Markets are volatile. They go both up and down and are therefore filled with uncertainty over the future, but growth investing along with dividends has been shown over time to generate positive total returns. In the case of this current market phase, where we've basically gone nowhere since November of 2014, you've literally been paid to wait by owning SPY.

*Long ETFs related to the S&P 500 in client and personal accounts. Please note that positions can change at any time without notice. Bond market returns were taken from sources deemed to be reliable at the time but cannot be guaranteed.

How We Can Help

Don’t let the complicated nature of the market turn you off of being in control of your finances. We are here to guide and educate you. If you have more questions about how we implement dividend investing in client portfolios, or would just like to better understand the details of your portfolio, we would love to talk to you! Please contact us at 708.488.0115 or by email at lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

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 currently closed to outside investors. 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 disclosure 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.

One Last Thing

The declines today in US stocks need to be taken into context with the moves we've seen since last week.  For example prior to last night's vote, the S&P 500 had advanced nearly 2% since June 17th in anticipation of a remain vote.  Subtracting last week's gains from today's decline and you have a market that was down a bit over 1.5% today.  Further, it is likely markets would have been weak in the days preceding Britain's referendum if the prevailing wisdom had been that "leave" was going to win.   In that case we may have been at the same spot by now but without the shock of the unexpected result.

We'll have to see what Monday brings.  A lot will depend on news flows and how investors digest this news over the weekend.

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

How They Voted.

From The Washington Post.

Thoughts {06.24.16}

Great Britain voted to leave the European Union yesterday.  The early repercussions are that British Prime Minister David Cameron has announced his intention to resign and global markets are seeing declines in the 3-8% Range.  The US markets look to be down around 3%  on the open as of this writing.  The reason for these declines is that global markets had priced in over the last week a "remain" victory.  Two weeks ago it started looking like "leave' would win in Britain.  Then circumstances and the odds seemed to shift in the "remain" camp's favor and the investment community largely placed its bets by following the odds.  Now, in Wall Street speak the short-term investment community is "offsides".  That is more of these investors ended up betting on the wrong side of the trade and now they have to do whatever possible to take as much risk off the table.  If "leave" had been seen as winning all this time then it is likely stocks would be seeing less of a reaction today.  Of course we might already be trading at the levels I think we're going to see at the open so perhaps it wouldn't be any different.  

Here are my first thoughts while digesting this decision:

I won't make too many guesses about the future but it does seem like a rate hike by our Federal Reserve is now off the table in July and probably September.

Today's decline, if contained somewhere around where we open, where the futures indicate will put us only about four points lower than where we were a week ago on the S&P 500.  There had been a huge run-up into the vote these past few days.

There is a lot of speculation out there what will come of this decision.  Nobody knows. what the long term economic outcome will bring.   I repeat, nobody knows. what the long term economic outcome will bring.  Some time and distance needs to take place between the vote yesterday and possible  investment implications of the outcome.  

In that vein,  I  think the best thing today in terms of portfolio changes is to do nothing.  I am comfortable for the most part with cash positions for clients.    In terms of portfolio thoughts I will repeat part of what I posted yesterday, which was in response to a question put to me by a client about how much cash should be in their portfolio.  In this case my clients had heard from others in their office they should be 100% in cash based on the outcome of the British vote:

 "What I think investor should focus on instead is whether they have their investments structured in such a way that their risk profiles match up with their return expectations.  Somebody who for example cannot live with the market's volatility shouldn't expect stock market type returns from their investments and should think about having a much higher percentage of their assets in safer investments.  I understand that right now those safer investments like bonds or CDs don't yield a lot in terms of interest, but the higher longer term return potential of equities  might not be what that person can stomach.  On the other side somebody who has invested a larger percentage of their assets in equities {either by individual stocks, mutual funds or Exchange Traded Funds} will have to be more comfortable with higher volatility and understand that their investments can decline in value.  I think investors should be concerned about Brexit just like I think they should be concerned about our upcoming elections and the performance of the economy, but I think to be worried about what will come out of Europe in the next few days to the point of having 100% of assets in cash means that person should rethink their risk/reward profiles.  

Finally I will close with this.  There can be no question that yesterday's vote is perceived as negative for Europe, Great Britain and for globalization.  Only time will prove if that assumption is correct.  At the end of the day Europe and Britain will have to learn how to co-exist and how to trade with each other.  The sun will still come up in the east tomorrow and the day after that.  Here at home companies that trade overseas could see some fallout from this event.  Again though it is too soon to tell how they will be affected.  However, what happened in Great Britain yesterday should have little to no impact on how many hamburgers are sold in the US, whether or not somebody decides to buy a house this weekend or how many folks are going to set out on vacation for the 4th of July holiday.  In short life will go on financially, economically and personally.

Will have some more ideas on this Monday.

P.S. {Added after the open}.

So far markets have held after their opens.  This may have something to do with a rebalancing of the various indices by Russell FTSE.  That may be muting some of today's price action.  One last thing occurred to me is we now need to watch whether this week marked a potential high in the markets for the summer.  We now have political events of our own we'll need to pay attention to.  Both Republican and Democratic conventions are going to be held in July and there could be some fireworks around that.  Markets were overbought prior to last night by our work so that may have added to today's decline as well.

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

On "Brexit" & Market Declines {Conclusion}

Here is the conclusion to yesterday's post and how I think investors should primarily be focused.

"What I think investor should focus on instead is whether they have their investments structured in such a way that their risk profiles match up with their return expectations.  Somebody who for example cannot live with the market's volatility shouldn't expect stock market type returns from their investments and should think about having a much higher percentage of their assets in safer investments.  I understand that right now those safer investments like bonds or CDs don't yield a lot in terms of interest, but the higher longer term return potential of equities  might not be what that person can stomach.  On the other side somebody who has invested a larger percentage of their assets in equities {either by individual stocks, mutual funds or Exchange Traded Funds} will have to be more comfortable with higher volatility and understand that their investments can decline in value.  I think investors should be concerned about Brexit just like I think they should be concerned about our upcoming elections and the performance of the economy, but I think to be worried about what will come out of Europe in the next few days to the point of having 100% of assets in cash means that person should rethink their risk/reward profiles.  

Finally there are only three ways I can think of how markets will respond to the Brexit vote, regardless of how it turns out.  In general equity markets can go up, basically go nowhere or trade down.  Now assuming somebody is correct about a steep market decline  and they have actually sold out and gone to cash, then they have another decision which is when to get back in the markets.  Many folks who sold out of their equity positions in 2008/2009 never got back in the markets and have missed a significant bull market since then.  Also what happens to the investor who sells out on bad news or market jitters  and then stocks go sideways or worse from that person's point of view,  trade higher.  When does that person get back in?  What if stocks respond to a a "remain" or "leave" vote with a rally?  Not only does the person who sold out need to figure out when to get back in but now they've also missed out on the profit potential.  

Getting investors in tune with their individual risk/reward criteria is the most important thing as that drives asset allocation.  Look for all I know Britain will leave the EU and stocks will go through a bad period, maybe even a steep short term decline.  But those who've bought into getting their portfolios aligned with their goals should be able to sleep better at night. "

Back Monday. 

On "Brexit" & Market Declines {PartI}

I had a call Monday afternoon from a client who was concerned that Thursday's vote in Great Britain on whether to stay or remain in the European Union could cause a significant decline in the markets or possibly a stock market crash.  She said many people in her office expressed the same concern.  I recently emailed my thoughts on this to her and I'm sharing it now with my readers today and tomorrow.  Today I'll address my thoughts on a "Brexit" and the markets.  Tomorrow I'll share what I believe investors should instead focus on.  Here's Part I:

"I think it is less probable tomorrow that Great Britain will vote to leave the European Union {Brexit}.  The stock market seems to believe that as well.  It has experienced a nice rally in the past few days.  I also believe if the consensus thinking {Britain staying in the EU} turns out to be incorrect then there is a greater likelihood that stocks could experience a near term pullback.  Experience would suggest such a pullback could be as mild as a few percentage points to as much as 10% if coupled with other bad news.  Of course anything is possible but I think a steep decline, which I'll define as a pullback in a very short period of time greater than 15-20%, seems to be a low probability event.  The reason I think such a decline is not the most likely outcome is that markets have had the opportunity to at least partially discount the possibility of Brexit.   Rapid market declines usually occur when an unforseen event or unexpected negative information suddenly catches investors "offsides".  That is such negative news causes investors to suddenly realize their exposure to stocks  is too great.  The September 11, 2001 attacks and their aftermath are a textbook example of an event happening out of the blue that investors could not have foreseen   The negative impact drove them almost significantly cut their exposure to stocks when trading next occurred, often regardless of cost.    

Brexit is a binary event. It's results will be "leave" or "remain".  Probability suggests large institutional investors have worked out the possibility that Britain leaves and they've reviewed its impact on their  portfolios.  Again I will stress I'm not saying stocks won't experience a decline if "leave" comes out on top.  Any result is possible. However, this result has already occurred to people and to some extent already in the markets.  We will only be able to know how much a "leave" is baked into stocks if it happens by how much, if any, markets decline.  In that vein, it is also possible that investors will take profits in the event "remain" wins as markets have seen a nice rally in the past few days.  "Buy the rumor and sell the news" is an old market saying and indicates that sometime speculators take their chances after market declines, buying shares into negative news events and then sell out when positive news breaks.  Binary events can be crapshoots in terms of how markets will behave."

Thoughts {06.20.16}

Risk on today!

This is going to be short as I unexpectedly have to be out today.  Markets are ripping higher this morning as polls are showing the odds swinging into the British voting to remain in the European Union.  I think it's likely that the vote swung in the "Remain"camp's favor after the murder of MP Jo Cox last week by an allegedly  deranged constituent.  Of course on a short-term basis markets were oversold enough to rally and that has to have helped as well.  

Markets will wake up Wednesday morning to whatever the results are from Europe and then do what they always do; that is to say they will look forward to the next event or data point.  This week Federal Reserve Chairman Janet Yellen is scheduled to give testimony before Congress, a twice a year event known as Humphrey-Hawkins.  It is unlikely that anything new is going to be telegraphed by her this week   If that is the case then there is a higher probability that markets will remain flattish or move a bit higher into the end of the month which is also the end of the 2nd quarter.  Managers will want to make those mid-year performance numbers look as good as possible.   

The period around the 4th of July holiday tends to be quiet in the markets.  In most years stocks sort of seem to sleepily drift higher in the summer doldrums.  Often though mid-summer marks plateau of sorts for the markets.  Mid-July to Mid-October has traditionally been a weaker period for stocks for all the reasons we've outlined in the past.

Beyond the 4th of July holiday I think markets start looking towards the political conventions. The Republicans are going to hold their donnybrook in Cleveland July 18-21 and the Democrats are going to convene in Philadelphia, July 25-28.    All indications say the Republican get-together promises to have the most fireworks.  The Democratic confab looks more like it will be a coronation.  

I will be out tomorrow but will post Wednesday.  

Risk Happens Fast {Part II}

Fundamental variables drive longer term prices of equities around the world.  Beyond that, particularly in shorter time frames, stocks are priced by sentiment and money flows.  That is the "risk on/risk off" environment we've been in now for over a decade.    

Above are shown performance charts for all the major US averages and the London Financial Times Stock Index through yesterday.  Since markets are weak this morning, these performance numbers will look worse unless there's a rebound later today.   The FTSE or "Footsie" is comprised of the 100 companies listed on the London Stock Exchange with the highest market capitalization and is shown above 2nd from left in dark blue.  Markets began to get the jitters about a week ago when it began to look like Great Britain might actually vote to leave the European Union.  Investors have been caught offsides by this and there has been a massive global risk off movement over the past two weeks.

There is a higher probability of this uncertainty and volatility continuing till we know the results of the vote next week.

Back Monday.

*Long ETFs related to all of these indices in client accounts.  Long ETFs related to all of these indices with the exception of the Dow Jones Industrial Average in personal accounts.  Please note positions can change at anytime without notice.

Risk Happens Fast

Risk can happen fast in the investment business.  Today's example is the Vanguard FTSE Europe ETF {Symbol VGK}.  Above is a chart of VGK from TradingView.com.  You can click on it to make it larger.  Investors in VGK were experiencing an nice ride off of last winter's lows until the world woke up about a week ago to polls out of Great Britain suggesting that those favoring exiting the European Union, the so called "Brexit" vote, had moved into a statistical tie with those who favor remaining.  Recent polling which is all over the map suggests the "Leave" vote has now pulled ahead.  In a few polls that lead is as much as 10%.  A week ago VGK was flirting with 2016 price highs.  Now it's lost nearly 10% on this news.  "Brexit" has become the "Next Big Bad Thing" or NBBT, the current media focused and often binary event that investors and pundits can obsess over until the results are in.  We introduced NBBT over a decade ago and there is always an NBBT.  Prior to Brexit investors worried about whether the Federal Reserve would raise interest rates in June or July. After that we'll likely worry about what comes out of the Democratic and Republican conventions this summer and then the elections in the fall.

We do not give individual investment advice or recommend securities on this blog.  We do, however, on occasion point out events in the market that we think might interest our readers.  In that vein, if you're hunting for yield then at some point you might want to review what you know about VGK.  Once the donnybrook over the vote is over the world will have to get on with life.  The sun is going to rise in the east in the morning after the event regardless of the vote and businesses all over the continent are going to have to figure out on how to continue working with each other.  Life will go on.  It may be harder to do business and profits may be impacted but at some point that will be priced into European shares.    In the interest of disclosure I want you to know that I  already own VGK for certain clients and in some personal accounts and I am likely to do some additional research on the name if this weakness persists.  Assuming no dividend cuts the current estimated yield on this security is north of 3%.  VGK is also becoming more oversold in the short-term by our work with each day that it trades like this.  One thing to note is that the volatility in this name has a higher probability of continuing in the days leading up to the Brexit vote so be aware of this possibility and take it into consideration when you do your research.  Also be aware that picking an ultimate bottom when events like this occur is hard.   You should be prepared for losses if your research  in VGK ultimately finds this name attractive and price in your risk accordingly.

Please note that I am simply pointing out the decline in this name, a security that currently carries an interesting yield and also what can happen when investors are caught on the wrong side of a market moving event.  This should not be considered a recommendation to buy or sell VGK.  You should do your own research on this security or talk to your financial advisor before taking any action with regards to VGK.  Better yet you can hire us!

*Long VGK in client and personal accounts.  Please note the possibility that we may become active in this security in the near future depending what our review indicates.  That review could lead us to buy, sell or hold VGK in both client and/or personal accounts.  We will not disclose on this blog the results of that review and whatever positions we own in VGK, for clients and for personal accounts, can change at any time without notice.

Is This The Beginning Of Market Seasonality?

We all know that the market has ups and downs. This uncertainty is due to multiple factors, including international conflicts, government fiscal policy, and corporate performance data, among others. But we believe that market seasonality also plays a factor in how investors view stocks during different times of the year.  In this article I’m going to explore why I think market seasonality occurs and why I think this is important.

What is Market Seasonality?

Stocks move constantly through different investment phases.  The study of these cycles means there is a higher probability that stocks at some point will experience a sell-off between 8-20%. This is simply the regular course of how markets behave in most years. It is also part of the seasonal variation of how, in a normal investment year, stocks will trend  between bullish and bearish phases as measured by money flows.

While market declines can come at any time, statistically stocks are most prone to substantial sell-offs between the months of March and October. While this is not a given, it is important that we include this factor in the equation due to the fact that these seasonal patterns exist and given where we are in the calendar.

Why is Market Seasonality Important?

This Chart comes to us from Chart of the Day.com and takes a look at market seasonality.  Although it is a few years dated at this point, it’s illustration of these cyclical patterns is still valid  Here is their commentary that ran with the chart: "Today's chart illustrates the Dow's average performance for each calendar month since 1950 (blue columns) and the average monthly performance of the Dow from 1950 to the present (gray line). Today's chart illustrates that the Dow has tended to perform best during the last several months and first several months of a calendar year. During the middle of a calendar year, the Dow has tended to struggle (with the exception of July). It is worth noting that there have been only two calendar months during which the Dow has declined on average -- June and September."

The red box in the chart above marks the statistical period of market weakness.

One of the reasons I think this pattern works is the philosophy behind how most institutional money is invested. The investment community uses the term “institutional money” as a generic classification for large institutions, such as pension plans; and large asset managers, such as mutual funds. It is managed on a relative basis, usually tied to a specific benchmark and is also managed so as to not give up assets.

An example of relative basis is that in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks.

Unless they are carrying a negative bias for the economy, institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April, but you can be knocked out of the running during that time if you lose to many games,

As the year progresses and, in particular, if stocks have advanced in the first few months, equities begin to look less attractive on year-end expectations. Stocks will either need unexpected positive news (i.e. better than expected earnings news or higher economic forecasts) or prices will begin to stall out.

What Is Possible?

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up, unless it’s bad news! It’s shocking how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008-banking crisis are examples of this.

Summer is also when analysts begin to fine-tune their expectations for stock prices as clarity starts to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn.

The cynical among us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply, Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

What Does This Mean For You?

Your portfolio and financial plan are long-term investments. Investing can be complicated and overwhelming, which many factors to consider, including market seasonality. In order to make the best decisions possible and create a portfolio that helps you feel secure and confident, it is important to work with a qualified and experienced financial professional.

This is where we come in. You can rely on us to understand the markets and use our depth of experience to make the best decisions possible for your finances. We want your investments to succeed and surpass your expectations. We would love to meet with you and answer any questions you may have. Please contact us at 708.488.0115 or by email at lumencapital@hotmail.com.  You can also keep up to date on our thoughts over at our blog, Solas!

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

*We own for certain clients at this time positions in Exchange Traded Funds {ETFs} related to the Dow Jones Industrial Averages.  We also own for clients and in personal accounts ETFs related to the S&P 500.  Please note these positions can change at any time without notice. 

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 currently closed to outside investors. 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 disclosure 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.

The Long View: Millennials and Your Social Security.

This is a repeat of an article I wrote over a year ago.  I decided to repost it as it is one of our central tenants that the generation between the current ages of 18-35 will profoundly impact this nation in a manner similar to the Baby Boomers.  

From May 21, 2015.  {Repeated with a few updates and grammatical corrections.}

"10,000 Baby Boomers Retire Each Day!  You can easily find headlines like this.   The Washington Post found out when they looked into the analysis behind those numbers, that the numbers are basically true.   From there it's pretty easy to extrapolate something like 76 million Baby Boomers collecting social security for 30 years and figure out that the program and other programs like medicare will run out of money. 

I say to that bunk.  Probably 95% of the sites on the web and the same amount of TV or radio adds you see or hear that points out a picture of looming bankruptcy for these programs has an agenda, usually to sell you something.  Before blindly taking these numbers as faith stop to consider the facts behind the headlines.  

First it is true that these programs have some short term demographic problems owing to the size of the "Boomer" cohort that is beginning to receive benefits.  However, these problems are more short term in nature and can likely be fixed {raise taxes, borrow, means test benefits, etc}.  The reason is the "Millennial Generation"- younger folks that in 2015 are between 18 and 35 years of age.  This cohort is beginning to enter the workplace.  I know because I have three  children of this generation.  One's already working and the other is {now teaching} special education.   There's also over 75 million of these "Millennials" which currently makes them larger than the Baby Boomers-who up till now were the largest demographic cohort in {this} country. 

Studies performed by the Pew Research Center and others show that the "Millennial Generation" is on the verge of becoming a major demographic force.  They're a cohort that folks ignore at their peril.  Perhaps I'm more in tune with this group owing to the nature of my own kids, but they're going to have an impact on the economy in the coming years and by their force will [likely change} investing.  They are becoming a major theme of ours and one you can expect to hear more about in the coming months.  

Now back to their impact on social programs for senior citizens.  The majority of Millennials are just now entering their family building stages.  Assuming they simply reproduce themselves there will be between 75-150 million of them 20 to 30 years down the pike.  You have to add into that mix the 55 million "Gen. Xers" that are ahead of them and whatever percentage of the 61 million group dubbed by Pew as the Post-Millennial generation thats already in nursery school and there's probably enough there to finance the "Boomers" retirement needs.  Also factor in that a certain amount of Seniors also leave this "mortal coil" each day and stop receiving benefits.  

Remember that the next time somebody tells you that you're not going to receive your social security. 

Update:  Regarding Millennials and investing read this over at BusinessInsider.com.  "Wall Street is Waking up to a $35.3 Trillion Opportunity."

Source:  Pew Research Center:  "This Year, Millennials Will Overtake Baby Boomers."

Chart Talk {06.13.16} The Song Remains The Same

At the risk of sounding like a broken record the most recent action in stocks, the 3.5% rally from May 19th to June 8th, hit resistance last week and then promptly sold off at the end of last week.  Stocks look like they'll extend that decline at least at the open today.  Hard to say what comes next.  On one hand stocks are overbought and there's enough short term issues out there such as Great Britain's referendum on leaving the EU and now yesterday's horrific shooting in Orlando so that one could make an argument for at least a  pause in the advance.

The other side would be that per my discussion last Tuesday, stocks have largely shrugged off entire lists of bad news since April and kept chugging higher.  In that vein, one could argue after a slight consolidation stocks power to new highs.  Not saying either scenario will happen.  These though are two of the possibilities we have to consider right now based on how stocks are trading.

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

*Charts are from Tradingview.com.

Major Market ETFs

Here's how major market ETFs have performed so far in 2016.  Performance matrix is courtesy of Stockcharts.com and you can click on the chart if you want  to see a larger view.  Owning an equal weighted portfolio of this  entire basket would have returned you on average 1.50% without adding in dividends.   That's not a great return but we have to remember that we started deep in the hole with last winter's market swoon.

The biggest drag on this portfolio would have been the technology and biotech heavy Nasdaq related ETFs.  Best performer is the S&P 500 Equal Weighted ETF {RSP}.  That likely has to do with the rebound in energy related companies this year.  Last year's collapse in oil caused RSP to underperform versus the S&P 500 so in a sense RSP is playing catch-up.  

Back Monday.

*Long all of these ETFs in various weightings or long ETFs related to these positions in client and personal portfolios.  Please note that positions can change at any time without notice on this blog or on any other medium where we post.

Questions I'm Asking {Also An Introduction}

I'm writing this post with the S&P 500 trading within a whisper of its all time highs, with bond yields at what at least seems to me as incomprehensibly low  rates of return, a presidential race that at time has bordered on farcical and much of the textbooks on investing that have been used for so many years now seemingly out of date.  The world has changed and in that changing world these are the questions I'm asking myself for my clients.

How do we invest in a world where all total rates of return on traditional asset classes have the potential to be lower over the next ten years than either historic assumptions would indicate?

How do we invest in a fixed income world at all?  Especially if total returns turn negative if/when interest rates ever experience a significant rise from current levels?

What is the proper way to invest in equities when today's market place seems to be marked with heightened levels of volatility and lower liquidity?  Are current valuations the new normal when considering the risk free return on bonds or an aberration?

How are the forces realigning the political spectrum all over the world going to play out for investors?

I know I could throw out more questions but these are at least some of the basics as far as I'm concerned.  My thesis is that everything is changing from politics to investments.  Today is just a teaser.  We're going to explore this new world in a series of articles and papers.  You've already been exposed to one of the principal ways we're going to talk about these changes in our series we've currently titled  "The Long View".  You can see two early examples of these articles here and here.  These articles are more "big picture" stories.  They will be were we attempt to bring attention to some of the underlying themes we see impacting the investment world.  The other ways we're going to explore this new world is through a new series that will at least initially be titled VIEW:  Variant Investing in an Evolving World.    Here I hope to explore the more practical aspects of how we make sense of this new world and how to invest in it.  I say the title is evolving because the world is changing at breakneck speed and I may find after a period of time that it doesn't adequately reflect what I'm trying to discuss.  If that becomes the case then like our VIEW, it may have to change as well.

Stay tuned.....



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

Thoughts {06.07.16}

It's probably worth mentioning that 72 years ago a lot of young men where happy to have survived the night having participated in the Normandy Landings on June 6, 1944.  

Much has been made on the passing of Muhammad Ali last Friday.  I think Keith Olbermann gave the best tribute.  Go read it here:  "Muhammad Ali:  Champion of the World".

Now regarding the markets.  Big down day on Friday followed by a nice rebound yesterday.  People want to blame a lousy jobs report last Friday for the trade lower and credit that same report today because there's less concern we'll see an interest rate increase this month.  We're usually more interested in how stocks trade than why they trade in a certain manner.  In regards to the how, this is what I find interesting.  Since the middle of April, stocks have taken many different data points that could have been construed as negative and basically refused to trade lower.  Think about it  when reviewing this list: Investors have worried about another interest rate increase from the Federal Reserve, seen Donald Trump ascend to the pinnacle of the Republican Party {a move that it would seem the investing class would interpret as negative because Trump is an unknown regarding economic policy}, dealt now with the distraction of a possible exit of Great Britain from the EU, and finally recently been handed a slew of economic indicators that have not been great.  This is just a partial list of the negatives I've seen bandied about.  Through it all stocks just won't go down.  Markets have more or less held their own and the S&P 500 is now flirting with it's old highs.  I don't know what this means but none of the concerns we have today are any different than what we saw at the beginning of the year.  Then stocks had a nasty 10% plunge.  Now they shrug many of the same issues away.  

Speaking of last year's high watermark on the S&P of 513.82, we're now about a percent away and short term overbought by our work. I think there's going to be many portfolio managers that are right now underinvested in the markets and will become very nervous real quick if we power through those old highs.  Especially if we do so on heavy volume.  See Josh Brown's thoughts on that here.

Back tomorrow.

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

Office SNAFUS

Having some mechanical issues here today @ "Global HQ".  I'll be back posting tomorrow unless I'm still having problems.  The Gremlins seem to be getting the best of me today!

I Can’t Predict the Stock Market (and Neither Can Anyone Else)

Too often, financial advisors and money managers pretend to have all the answers. These are what are known as “showmen.” Those that think they know for certain what’s going to happen tomorrow or in six months from now are either deceiving themselves or us (or both). The truth is, there are a lot of things money managers, including myself, either don’t know or can’t emphatically answer.

Here are just a few examples. I don’t know or can’t tell you with 100% certainty...

●     If the stock market is expensive, cheap, or fairly valued.

●     The current state of the economy.

●     If oil should trade at $15 or $60 per barrel.

Sure, I have theories, and I have knowledge and research to support my beliefs and advice. These are a lot of things I don’t have an answer to even though I’m in a business where I’m paid to manage investors’ money. But let me tell you something that I do know: no one has the answers to these questions.

There will always be debates regarding stock prices and whether or not they’re valued accurately. This is a pointless debate because no one knows the answer. What we do know is that stocks are expensive based on current valuation measures. But they may not be as expensive if earnings begin to accelerate in the coming quarters. We have pegged our current Cone of Probability for a range on the S&P 500 between 1,700 and 2,150 for this year. But stocks could explode much higher, or an event could trigger a sell-off that drops us below these probability ranges. However, if we stick to our guns and assume that stocks will trade around these levels, there's the potential for a 3% upside and over 20% downside. That is not a good risk/reward ratio. Contrast this with the market's trough back in February when stocks slowed to a downside range potential of 8% and an upside possibility of nearly 20%.

We are currently entering the seasonal period of the year when stocks traditionally have lower returns. Of course, this could be the year that stocks ignore past historical trends and gain traction. While this is unlikely, unexpected events have a way of cropping up and have many times spawned market declines during this period. This year is different than the last three because we’re in the midst of a presidential election, which can cause market volatility.

So what should investors do? I can't answer that with certainty as I don’t know what the stock market will do or what your particular risk tolerance is. However, I can provide you with four tips that I would share with my clients:

1. Know what you own and why you own it.

Whether you manage your portfolio yourself or work with a money manager, you should know what you own and why you own it. Your investments should align with your risk tolerance, and you should be comfortable with your portfolio’s asset allocation. If you aren’t, it’s time to consult with a money manager.

2. Know your investment time horizon. 

Your portfolio and market allocations partly depend on your time horizon. Are you hoping to build wealth and reach a goal within five years? What about 15 or 20 years? How quickly you need to build your wealth will impact how conservatively or how aggressively you invest.

3. Look in the mirror and ask yourself a few questions.

What's going to bother me the most? What will keep me up at night? Am I comfortable watching the markets grind lower and even seeing double-digit losses in my portfolio at some point this year? A money manager, friend, or colleague can’t answer these questions for you. Only you can.

4. De-risk your portfolio.

You need to feel comfortable with your investments. If you don’t, you’ll feel stressed anytime the market adjusts, and you may make a move based on emotion rather than objective judgment. One way to feel more comfortable with your investments is to reduce your portfolio’s risk. At Lumen Capital Management, LLC, our primary method for de-risking is to raise cash. Cash may not pay much right now, but sometimes earning next to nothing is better than losing money. Maintaining appropriate cash levels can help cushion a market decline and give us the opportunity to find value should a market correction occur. It is often easier to make up opportunity than losses, and this is something I'm comfortable with, as I believe my clients are.

While you can’t predict the markets, you can use historical models and research to plan ahead and develop strategies that aim to withstand fluctuations and volatility. Specializing in personalized investment management, we can help you build and manage a portfolio tailored to your risk tolerance, time horizon, values, and goals, both short and long-term. If you aren’t currently working with a money manager, haven’t met with one in several years, or have questions about your current portfolio, I encourage you to reach out for a second opinion and complimentary review.

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.

Letter to Clients {Conclusion}

Today we are publishing the conclusion to the letter we sent to our clients last week.

What should investors be doing?

Investors should understand that volatility is part of the stock market process.  That’s again why you should understand and be comfortable with your individual risk/reward criteria. In general this is what we as a firm are doing now for our clients and some of the things others should be aware of in their portfolios.   

1.  Know what you own and why you own it.  Check to see if you're comfortable with your portfolio's asset allocation. 

2.  Know your investment time horizon.  Think about portfolio and market allocations differently if you are one or two years away from a major event like paying for college or retirement than if you have a 10 or 15-year time horizon.  Probability suggests that despite short-term movements and volatility the longer view on equities is still positive.

3.  Look yourself in the mirror and ask these questions.  “What's going to bother me the most?  What will keep me up at night?  Am I comfortable watching the markets grind lower and perhaps seeing double-digit losses in my portfolio sometime this year?  Or will it bother me more to raise cash and see the market move higher?”  Nobody can answer this but you.  Please let me know immediately if your feelings on this have changed.

4.  De-risk your portfolio.  Get it to a place where you're comfortable with your investments.  My primary method for de-risking is to raise cash.  Cash may not pay much right now but sometimes earning next to nothing beats losing money.  I have raised cash in certain client accounts this year although I would note that these amounts may vary depending on a client’s risk/reward profile.  These levels are such that I believe my clients will still participate in much of the market's advance should stocks continue moving higher.  Cash should also help cushion a market decline and give us the opportunity to find value should a market correction occur.  That's something I'm comfortable with as are I believe my clients.  It is often easier to make up opportunity than losses.  

5.  Diversify your portfolio.  Don’t have too many eggs in one basket.  I monitor positions in terms of individual security size and in terms of asset allocation.  Exchange Traded Funds  {ETFs} help with diversification, although they will not stop portfolios from declining in a period of market weakness.

6.  Do your homework for better days.  Markets may have flat lined but there are sectors of the market that are starting to look attractive for further investment.  One of the reasons besides prudence to raise cash is to be able to deploy it when bargains appear.   I believe we are starting to see some early evidence of this.  The sectors that are catching my eye may not advance right away and will likely decline along with most every other equity or ETF during a period of higher market volatility.  However,  analysis of these sectors gives me comfort of their longer term potential.   My preferred investment vehicle to buy into markets and sectors with ETFs.