Merry Christmas

Merry Christmas.

And I Heard Him Exclaim...

As he drove out of sight,

Happy Christmas to all, 

And to all a good night.

Happy Holidays from Lumen Capital Management!

On behalf of Lumen Capital Management, LLC I want to wish you happy holidays as we finish out 2016! On behalf of myself and my family, I hope this season finds you thriving and surrounded by family and friends. It is also my hope that you are looking ahead with anticipation to a prosperous 2017. Now is the time to leave the noise of the last year behind and look forward to a bright new year.

Hope For the Future

It would not be a challenge to make a list of all the recent negative news and events and all of the issues that have divided us. Many seem to thrive on doing just that, but we would be wise to tune out this negativity and focus on bigger and better things.

It is my belief that we as Americans have more in common than not, despite everything that tries to drive us apart. Our unity has been our enduring strength these two hundred some years we've existed as a nation, and I believe we will continue to draw from this strength as we go forward. I believe, as I have for a long time, that things have been improving and gaining momentum, and it is my hope that this trend continues.

Just as importantly, I hope the season finds you happy and healthy.

With Great Appreciation

I would like to say thank you to all of my clients for your continued support in 2016. I sincerely appreciate the trust you place in Lumen Capital, and I take my responsibility to you and your family very seriously.

I also want to thank all of my friends and acquaintances for being a significant part of my life. I am better off knowing each and every one of you. If a man can count his treasure by family, friends, and associates, then I am rich beyond all measure.

Above all, this holiday season is about hope and joy, regardless of how it is celebrated. On that note, I wish you the merriest of holiday seasons, a prosperous new year, and I look forward to seeing each and every one of you in 2017. Finally, may your Yuletide be ever bright, Happy Hanukkah, Merry Christmas, and most of all, God Bless!

I would love to hear from you about your reflections on 2016 and your goals for the new year. Call my office at 708.488.0115 or email us at lumencapital@hotmail.com to share your stories.

See you in 2017.

About Chris

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 investors, developing customized portfolios that reflect a client’s unique risk/reward parameters.   We also manage a private partnership currently closed to outside investors.   Mr. English has over 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 him at lumencapital@hotmail.com.

Go Read, Go See

Things to read over the holidays if you have some spare time!


Articles:

The Great A.I. Awakening-The New York Times:  How Google used artificial intelligence to transform Google Translate, one of its more popular services-and how machine learning is poised to reinvent computing itself.  

"Reflections on the Trump Presidency, One Month After the Election"-Ray Dalio:

"Now that we’re a month past the election and most of the cabinet posts have been filled, it is increasingly obvious that we are about to experience a profound, president-led ideological shift that will have a big impact on both the US and the world. This will not just be a shift in government policy, but also a shift in how government policy is pursued. Trump is a deal maker who negotiates hard, and doesn’t mind getting banged around or banging others around. Similarly, the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics and in foreign policy (as well as other areas such as education, environmental policies, etc.). They also have different temperaments and different views that will have to be resolved.

Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do as her books pretty well capture the mindset. "

If you want to capture a bit of the world view and mindset of the military officers being nominated to join the new Trump Administration then go read "No True Glory:  A Frontline Account of the Battle for Fallujah" by Bing West.  

Finally if you have time to go to a movie this holiday season that's not "Rogue One" then go see "La La Land":  If you want escapism and want to see a feel good movie in the old school Hollywood tradition then go see this.

Finally we're going to take some time off now between Christmas and New Year.  We'll be back at the start of 2017.  Hard to believe we're back at the beginning of a new year!  Good luck to each and every one of you in the coming months!

Chart Talk {A Last Look}

A last look at the S&P 500 ETF, SPY, for 2016.  You can double-click on the chart to make it larger for better viewing.  Chart is from TradingView.com.

*Long ETFs related to SPY in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

Gas Prices Surge

There are a lot of positives to higher oil prices in terms of employment here in the US and abroad but one of the downsides is higher gas prices.  Gas has surged on average from closer to $2.00 to around $2.24 on a national average over the last month.   According to Brian Sozzi and via AAAnews, gas prices are straight up over the past 20 days.  Right now this still makes gasoline a bargain when compared to prices in 2013 and about average for 2014-2015 years.  However, one has to wonder if the price of gas could become a headwind to growth next year.  Right now we're in the winter season when gasoline blends are cheaper than at other times, but you have to consider what happens if gas prices approach $3.00 next year during the peak driving season.

Not trying to be a Grinch and this is just one negative in a sea of positives.  But it is something that every American is aware of and has ramifications for us all so it bears watching.  The good news is that more of this money stays in the US now as drilling here supplies more of our oil needs.

Chart Talk {Dow 20,000}

There's been a lot of discussion recently in the financial press on the Dow Jones Industrial Average breaching the 20,000 level.  These sort of thresholds don't mean a lot to folks in the investment business and the Dow is not the average many money managers pay attention to.  There are too few stocks in it to be representative of the overall market.  Still, individuals know this index the best, it's the one featured in the papers as representative of the stock market and whenever there's a lot of volatility in the markets {up big or down big}, it's the Dow that seems to get featured on TV or radio. So in that sense it's still important  Anyway  "Chart of the Day's recently took a look at the index as it approaches this level.    Here's their chart and commentary below:

"With the Dow quickly approaching the 20,000 milestone, today's chart provides some long-term perspective by illustrating the inflation-adjusted Dow since 1900 -- there are several points of interest. Take for example an unlucky buy-and-hold investor that invested in the Dow right at the dot-com peak of December 1999. A decade and a half later, the inflation-adjusted Dow is up a mere 20%. That is not altogether an impressive performance considering that 17 years have passed. On the other hand, take the investor who bought right at the end of the financial crisis. The inflation-adjusted Dow is up a significant 146% from its financial crisis lows -- not bad for a for a seven and a half year investment. More recently, the inflation-adjusted Dow has rallied and continues to make new all-time highs as it approaches a major 20,000 milestone."

Link:  Chart of the Day.com

*Long ETFs related to the Dow Jones industrial Average in certain legacy accounts.

Fed Raises Interest Rates.

For the first time in a year the Federal Reserve yesterday raised interest rates by a quarter of a percent.  You can find a pretty good overview of what they did  via Bloomberg here.   The stock market took it on the chin after the announcement yesterday, with almost anything associated with a dividend feeling the main brunt of the selling.  

I can understand this being the initial reaction.  We've had a pretty good run-up in prices since the election and an excuse for some sort of profit taking was probably needed.  As we noted Monday, the markets had basically gone parabolic in the past week.  Yesterday's sell-off hardly erased much of that gain.  In most instances it only took us back to where we were a few trading days ago.  

Longer term I'm not so sure this is a big negative for the markets and the economy.  First, as we've said many times in the past, the economy has been getting better.  Even the Wall Street Journal seems to have noticed this.  If you can get behind their paywall then go read "Surprise!  The Economy is Looking Pretty Good Right Now". To me that means a rise in interest rates is a positive as it seems to be showing the economy is doing well enough for interest rates to become more normalized.  I also think that a rise of nearly a percent over the next year might ultimately give savers a bit more in their pockets.  Probably not at banks, but bond yields may rise to a point where investors are willing to take a look at fixed income again.  If fixed income isn't on their radar now it might be a year from now if longer dated bonds show yields nearer 4%.  

Finally remember back to last year at this time.  The Federal Reserve had their first rate increase in years and indicated they could potentially raise four more times during 2016.  The market gagged and coughed up over a 10% decline before it was all over.  That was the end of the four rate increase talk for 2016.  Let's see if their actions match their words as we get into the new year.  We know last year they blinked when things got tough so let's see how resolute they are if markets or events get choppy.

Finally the market seems to be in a much better mental position to handle higher rates now then a year ago.  Maybe it's the euphoria from the elections that's hit the markets or maybe investors are finally latching onto the belief that the economy is doing better, but so far this move down is more muted than what we saw a year ago.  Surely nobody right now is calling for a repeat of last year.  

At any rate I would think if a move lower is coming then probability suggests we'll see the bulk of it in 2017.  I think it's possible investors are going to be reluctant to want to pay those taxes this year in what could be a much higher capital gains rate environment right now.  The hope for more favorable capital gains treatment from the upcoming Trump Administration will likely "Trump" fear of a more formidable correction at least this year.  Besides Wall Street is going to want to keep those gains into  year end.  Folks want to get paid!

Back Monday.

Another View Of The Elections

There's been a lot of talk on what helped Mr. Trump win the White House.  In that regard take a look at the two illustrations below.  The first needs a bit of background.  Many who study politics and sociology have noted that the US is not so much one country but a Republic comprised of a certain number of nations.  I've seen studies on that which find as few as four nations to as many as thirteen.   Each nation under these theories is bound together by shared histories, cultures, geography weather etc and this helps explain the differences you encounter in various parts of our country.  The map below is an illustration of this thinking and you can find a better explanation of this viewpoint as well as the different nations here.  

Take a look at that map above then notice how it corresponds the the electoral college map from the last election below.

Map is from 270towin.com.

Looking at information like this won't necessarily help you with your investments  in the short term.  However,  it is useful when  forming the overall backdrop that is part of the modern investment mosaic.  Also it's sort of fun for a nerd like me to dig into facts like these.

Back Friday.

10 Financial Steps to Take Prior to the End of 2016

It seems hard to believe that 2016 is almost over! While December can be a celebratory time of year as we enjoy the holidays and get caught up in the festivities, it can also be overwhelming for many of us. As we get ready to say goodbye to 2016, we may realize that we have not accomplished all our goals and we frantically attempt to squeeze in a few last-minute projects before January 1st rolls around.

Since your wallet definitely won’t be gathering dust this season, why would you let your financial considerations fall to the wayside? Below I’ve listed ten important financial steps you can take before we enter 2017.   Remember these are general rules so you need to see how these might impact your personal situation first.

1. Make the Most of Your Retirement Accounts

If possible, increase your contribution to your 401(k) by the end of the year to max out your retirement savings. Here are the general rules.  For 2016, you can contribute as much as $18,000 (or $24,000 if you are 50 or older). You may also consider contributing to a Roth IRA. For 2016, you can add as much as $5,500 (or $6,500 if you are 50 or older). Keep in mind that if your income is over $132,000 if you're single or $194,000 if you’re married filing jointly, you won’t be eligible to contribute to a Roth IRA.  As always consult with your tax advisor if you are unclear on how these rules might fit into your general financial situation.

2. Use Up Your Medical and Dental Benefits

Have you been planning to get a root canal, blood work, or other medical or dental procedure? Now’s the time to take advantage of all your health care needs before your medical deductibles reset. Dental plans, in particular, often have a maximum coverage amount. If you haven’t used up the full amount and anticipate treatments, make an appointment before December 31st.  Keep in mind that dentists are busy this time of year with patients trying to do the same thing regarding their deductibles, so it’s better to make that appointment as soon as possible.

3. Check Expiring Sick and Vacation Time

Depending on your company, your sick or vacation time might expire at the end of the year. Check with your HR department to learn about any deadlines. If your sick or vacation time does expire, and if you are able to work some time off into your schedule then fit in a last-minute vacation, a “staycation”, or trips to the doctor so you don’t lose this valuable benefit.

4. Use Your Flexible Spending Account

Some firms or institutions offer Flexible Spending Accounts {FSA}.  Like your health insurance benefits, you’ll want to use up your FSA dollars by year’s end. Your benefits won’t carry over and you’ll lose any unspent money in your account at the end of the year. Remember to check the rules for your FSA account to see what restrictions may apply

5. Review Required RMDs

If you are retired, review your retirement accounts’ required minimum distributions (RMDs). A RMD is the amount the Federal government requires you to withdraw each year from your retirement accounts, including 401(k)s, SIMPLE IRAs, SEP IRAs, and traditional IRAs, usually starting at age 70½. If you don’t, you may face penalties. To calculate your RMD, use one of the IRS worksheets or consult with your advisor who can assist you in calculating your RMD with your account custodians.

6. Stay on Top of Charitable Contributions

If you made a charitable contribution in 2016, you might be able to lower your total tax bill when you file early next year. It can be especially advantageous if you donated appreciated securities to avoid paying taxes on the gains. Along with your other tax documents, find and organize any receipts you have from donating to charities, whether it was a cash donation, securities contribution, or another type of gift.

7. Consider a Roth Conversion

Roth IRAs are attractive because you don’t pay income tax when you withdraw funds in retirement. However, if you’re a high-income earner, you may not be eligible to contribute and instead invest in a Traditional IRA. If you have a Traditional IRA, you may have the opportunity to convert to a Roth IRA and save money on taxes in the long run. The deadline to convert to a Roth IRA is December 31st, so if you’ve been considering doing so, or wonder if it’s an appropriate option for you, talk to your tax advisor ASAP.

8. Speak to Your Advisor About Harvesting Losses

If you invest in bonds, mutual funds, or stocks in accounts other than your 401(k) or IRA, review your realized and unrealized gains and losses. You might be able to offset some of your gains by selling some losses. Tax-loss harvesting can help you save on taxes, but you want to make sure the move also makes financial sense for your situation. Talk with your advisor about potentially harvesting your losses and if it makes sense for you. Should you determine tax-loss harvesting is appropriate, you’ll need to complete it by December 31st.  Tax loss harvesting is a program we started reviewing in appropriate client accounts earlier this year.

9. Set a Budget for Holiday Spending

Not surprisingly, Americans will spend nearly $1,000 this year on holiday gifts alone. During such an expensive time of year, a budget is a must to avoid overspending. Break down your spending and allocate a set amount of funds for everything you need this holiday season, including gifts (with an individual budget for each person), food, transportation, postage, and gift-wrap. Be realistic about what you can afford to spend.

10. Avoid Gift Tax Consequences

It’s never too early to start planning the legacy you want to leave without sharing a good portion of it with Uncle Sam. You may want to consider gifting. Each year, you can gift up to $14,000 to as many people as you wish without those gifts counting against your lifetime exemption of $5 million. If you’ve yet to gift this year or haven’t reached $14,000, consider gifting to your children or grandchildren by December 31st.

Do you have questions about last-minute financial actions you can take before 2016 ends? Do you want to start off on the right financial foot for the new year? I’d love the opportunity to offer you support along your financial journey. If you are interested in starting the year off strong, I encourage you to reach out to me for a year-end review. Call my office at 708.488.0115 or email us at lumencapital@hotmail.com to set-up an appointment today.

About Chris

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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 investors, developing customized portfolios that reflect a client’s unique risk/reward parameters.   We also manage a private partnership currently closed to outside investors.   Mr. English has over 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 him at lumencapital@hotmail.com.

Chart Talk {Parabolic}

Today we're posting a chart of the S&P 500 ETF, SPY*.  Chart is from Tradingview.com and you can double-click on this to make it larger if you'd like.  Folks, you're looking at a chart that's gone parabolic in the past week.  The better than 3% move we've seen does not occur all that often.  Short sellers of the S&P 500 have been ripped to shreds.  As always we need to look at the tea leaves and frankly right now they're a bit murkier than normal.

On one hand a move like this sometimes comes towards the end of an advance and could be representative of too much enthusiasm by investors.  In that interpretation we are moving towards a climatic change in market direction.  Under that thinking then we would look for a reversal in the index sooner rather than later.  The fundamentalists would point out that stocks are now expensive after such a move higher and don't support prices at these levels.

A different interpretation would say that the market is discounting a better business environment in the coming Trump Administration and the coming changes will impact corporate earnings to the positive going forward.  They would argue that stocks might even be cheap if earnings improve as much as the optimists think we could see.  To that point I'd note the sort of parabolic move we've seen since the election is the sort of thing often associated with market bottoms.   The problem with that interpretation is that at market bottoms sentiment is usually negative and right now it's pretty good.

I think there's good arguments for both views but markets may be caught up more in seasonal directions than anything else.  There are 15 trading days left in 2016, including today.  Investors with profits are probably looking to hold onto those gains now and will wait to sell into the new year.  Hopes of a more favorable tax treatment in a coming Trump Administration and at the very least desiring to avoid having to pay those taxes for another year should dampen sellers.  Also it is easy to see how money managers might want to keep pouring it on now.  Many are behind the performance eight ball and will be looking to catch up as much as possible.  Remember, the only print Wall Street cares about is the one that shows up at 4:00 PM EST on the last trading day of the year.  That's the number that follows them for the rest of their careers and the number on which they get paid.  

Based on that probability suggests a market that should hold together into 2017 right now.  I'm not saying we won't see any profit taking.  A move higher like this should flush out some folks wanting to lock in these gains.  But you need more sellers than buyers for stocks to have a much more sustained decline and right now there is a higher probability that they have gone hiding.  If that's the case then look for a more consolidating sort of sell off.  That would be shallow and not for more than a few days.  In that scenario stocks stabilize and even potentially move higher into the new year.  Then the debate will be whether or not we've stolen some of next year's advance into the end of 2016.

*Long ETFs related to SPY in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

Nuestra Señora

La Fiesta de Nuestra Señora de Guadalupe.  Patrona de las Américas.

"No estoy yo aqui que soy tu madre?"

En recuerdo de las Monjas en el Colegio de Ciencias y Humanidades, Villahermosa, Tabasco, México.

Advantage ETFs

I saw this posted over at Meb Faber's twitter feed and the info seems to have come to him via Morgan Stanley.  What this is showing is the difference in fees charged by Exchange Traded Funds {ETFs} vs. Mutual Funds.  As you can see the average cost advantage of ETFs  compared to mutual funds is one of their significant investment advantages.  The money saved in fees to you is money you have to invest.  It can add up over time.  Paying an extra $100 in fees each year is a $1,000 you don't have after a decade.  

First though let me tell you what you're viewing using the first line under ETFs as an example.   Under US Equity we see that the expense ratio {the fee charged by the management firm to basically run the ETF} can be as little as 3 basis points {bps} to a high of 308 bps.  The average is 40 bps but since the ETF world is dominated by a few very large players it is probably better to take a look at the weighted average column produced above.  On US Equity the weighted average is 16 bps.  

Now simply compare that weighted average column to the of for actively managed open-end mutual funds and the average is 130 bps or the passive indexed funds where the average is still 101.  Basically on a $10,000 investment where there is a strong possibility you will find similarly invested funds you are looking at paying $16 on average in fees in an ETF versus an average $101in a passively managed mutual fund or $130 in an actively managed fund.  Also remember that many mutual funds are closet indexers anyway.

You can follow this cost comparison down by each category and there seems to be no group where mutual funds hold the cost advantage. Also note that most mutual funds haven't outperformed their investment benchmarks in years!

Back Monday.

Still At Sea

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea by the United States Navy.

Lest we forget.