Thoughts {01.31.17}

Trump added to what many see as a chaotic beginning to his administration, by firing his acting Attorney General last night over her refusal to close the nation's borders under the provisions of his executive order.   Trump's actions since becoming President have been frenetic and are as polarizing to the opposition on the left as some of the executive orders former President Obama issued were to the right.  

The markets had a bad day yesterday, declining a bit over a half percent.  Some of that was surely based on the President's actions but stocks had become very overbought as well.  In that context  they might have used any excuse yesterday to sell off.  It is hard to read anything into these short term gyrations, particularly since the heavy lifting on economic policy hasn't yet been laid out.  Congress is also going to have a say on those policies.

I am amused by the folks who seem to think I am either for or against the President so let me state what I am trying to do with this blog.  Like most Americans I have political views.  I believe my views are like most Americans somewhere between right and left.  To paraphrase former President Obama my politics runs more towards purple than any deep shade of red or blue.  However,  I am old enough now to know that others might not feel that way about how I see the political world.   Because I am writing a blog about the markets, I strive as much as humanly possible to keep those beliefs out of my writing.  I talk about the political arena solely to explain how I perceive events or political escapades or world realities will impact market returns.  I could for example say that the Affordable Care Act {or Obamacare as it is more popularly known} has serious financial issues that need to be restructured.  I can also say that it's too bad that there was not more of an attempt by the Democrats to develop more of a bi-partisan consensus when it was voted into law.  Neither of those statements would in my mind be political as Obamacare has a serious funding problem and the Democrats had no real interest in brings Republicans on board at the beginning of the Obama Presidency.  Republicans would have likely done the same to their opposition if the tables had been turned.  The Republicans now control the executive and the legislative branches of our government and will likely pass their economic programs with little or no help from the Democrats.  That's just the nature of our winner-take-all system of government.  I can also say it's too bad the GOP will look for as little input as possible here as well.

I may strive to be neutral but the press, particularly the coastal based major media outlets, has no such compunction.  The press hates Trump. Probably only Richard Nixon has been loathed more by the "4th Estate".   He made them look bad during the campaign by exposing their biases along with Wikileaks.  They will do everything they can to bring him down now.  I caution you on this not because I want to influence your views but because the press will distort almost every aspect of whatever economic plan the President puts forward.  Regarding that pay attention to how the market reacts, not necessarily on any given day but over a series of weeks.  If the plan is promising economically then stocks should react positively.  For example any overhaul of the tax code is going to have winners and losers, with those on the losing end squeaking the most in public.  Those cries of anguish will be presented in a manner to appeal to the basic instincts in their audience.  They won't tell us anything about the long-term potential positives that might result from the changes.  Those changes and how they impact our economy must be our litmus test in regards to the markets.  These changes, for good or bad, are what will drive market returns in the years to come.  

Thoughts {01.30.17}

Well that's certainly been a tumultuous first week of the new Trump Administration wasn't it!  While the media has been focused on the new policies and inevitable mistakes coming out of the White House, the markets have been focused on the economy.  In case you're wondering how that's doing. I'll characterize it as more of the same.  We're muddling along with things getting slightly better.  GDP growth came in for the 4th quarter at 1.9%.  That's 1.6% growth for 2016, the 11th year where annual growth failed to reach 3%.  Obama becomes the first President ever to fail to reach the 3% hurdle during his Presidency.  Not sure how much of that is his fault but it is a fact that on his watch the economy consistently failed to reach this milestone.

The market's have so far shrugged off the early going Trumpian contretemps.  In fact all of our major stock market indices are up since the Inauguration.  I wonder though how long investors will be willing to look through all of this.   Unless we start to see some progress on tax reform and some of the other economic issues investors care about we might see markets wobble a bit.  Futures are weak this morning as this is being written.  However, stocks are overbought by our work short-term and this could be an excuse for some profit taking regardless of the headlines.

All new Administrations make mistakes as they become accustomed to power and their new roles.  Remember though that the major conduits of news in this country absolutely hate Trump and they will do what they have to do to paint everything he does in a negative light.  Remember that as we focus on what matters to the markets.  Markets will care about economic results for the most part.

Without much fanfare the yield on bonds has been rising.  We've seen the yield on the 10-year Treasury rise almost a 100 basis points or one full percentage point since last summer.  A big chunk of that gain has come since the election as this chart from Bloomberg shows:

At some point rising rates become competition for stocks as yields become more competitive with stock market potential returns.  Also take a note that the Federal Reserve meets this week.

Chart Talk {01.26.17}

Here's Chart of the Day's take on the duration and quality of this current bull market.  I will have more to say on this next week.  Below is the chart and their comments on the subject.

"With the S&P 500 once again in record high territory, today's chart provides some perspective on the current rally by plotting all major S&P 500 rallies of the last 86 years. With the S&P 500 up 107% since its October 2011 lows (the 2011 correction resulted in a significant 19.4% decline), the current rally is above average in magnitude and the second longest rally since the Great Depression."

Notes:
- A major stock market rally has been defined as a S&P 500 gain of 30% or more (following a correction of at least 15%).
- The S&P 500 was not adjusted for inflation or dividends.
- Selected rallies were labeled with the year in which they began.
- There are 252 trading days in a year (100 trading days equal about 4.8 calendar months).


Here's a link to  Chart of the Day's main site.

Back Monday.

*Long ETFs related to the S&P 500  in client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

Valuation {01.25.17}

The S&P 500 closed yesterday at 2,280.10 which is a gain of slightly over 1.8%  for the year without factoring in dividends. This represents a gain of 4.28% from a market close of 2,186.48 from when we  last reviewed these numbers back on  September 6, 2016.  Below is our current valuation analysis.  We are using a current earnings range of $130-133 with a mid-point of $131.50 on the S&P 500 for 2016.  Earnings estimates have been revised since our last review to reflect 2017 estimates.    We also use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite.  Black means unchanged.

Our Midpoint S&P 500 Earnings Estimate of $131.50. {Year End 2017}

Current PE:                     17.33% {PE has declined from previous review of 17.81}
Earnings Yield:                 5.76% {up from previous review of 5.94%}
Dividend Yield:                2.06% {Estimated and up from previous of 2.05%}

Current Expected Price Cone of Probability {COP}:   1,950-2,500.  

Rolling Four Quarter Estimate for the S&P 500, Our Estimate $131.50:

Current PE:                     17.33% 

Earnings Yield:                 5.76% 
Dividend Yield:                2.06% {Estimated}

The current yield on the 10 year US Treasury is 2.50%.  That is an increase of 97 basis points since the last time we did this review.    

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

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

Chart Talk {01.24.17}

The S&P 500 ETF {SPY} last made a new high on December 13, 2016.  It has since then traded in a very narrow range of roughly 3 points.  I thought it would be interesting to show how certain other major indices have performed during the same period.  You can double-click on this chart to make it larger.

Mega-cap, mid-cap ETFs along with ETFs related to the Nasdaq have shown positive returns during this period.  The S&P Equal Weighted index {RSP} has shown the worst return, likely due to its energy exposure and the rest is more or less inline with SPY.    

What resolves this narrow range, either to the downside or a break-out above is anybody's guess at this point.

*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

Thoughts {01.19.17}

Jack Ma, the founder of Alibaba thinks the United States went wrong over the last 30 years by focusing too much on war and Wall Street.  I know a lot of folks that would agree with him on that.

Bloomberg has an article on "Ranking the Obama Economy".  In it they rank the performance of the US economy under the last six US Presidents. That would be President Obama back through President Carter.  Under their criteria Obama ranks 2nd.  By their analysis best through last is the following:

Clinton

Obama

Reagan

George H.W Bush

Carter

George W. Bush

Interesting that a couple of Democrats have done better than Republicans.  Of course Presidents have sometimes only marginal impact on the economy and not all of it's gains or losses are their doing.  Clinton was the beneficiary of a wonderful stew of technological advances that came to fruition when he was President and not all of the 2007-09 depression can be laid on the feet of George W. Bush.  However, as we close the books on the Obama years I will repeat what I've said countless times on this blog that things have steadily been getting better.  We can all have an honest debate on how much of that credit he deserves and we can have an honest debate on the quality of the American economy today.  But President Obama leaves his office tomorrow with things significantly better than they were the day he took the oath.  The US stock market has seen a significant increase under President Obama as well.  It can be easy to find fault in what any President and President Obama is no exception to this rule.  Even he has acknowledged mistakes.  But on the metric of the economy, the evidence says things are better.  If we are to damn him for his faults then we must also acknowledge his achievements.  On the economy, things definitely improved during his term.

There is room to improve the economy.  It is better but too many folks are working low skill, low pay jobs.  Also there is an economic uncertainty about where we are that is a leftover from the Great Recession.  This will be the responsibility of the  man who takes office as the 45th President at noon tomorrow.

Finally I would say something about tomorrow's inauguration.  Whatever faults the United States has, and God help us we as imperfect beings have many, tomorrow an incredible thing will happen.  Precisely at noon in Washington DC the most powerful man in the world will transfer that power, that imperium, to the victor of last November's election.  He will not call out the vast resources of the Federal Government in order to remain in power.  The military will stay in its barracks or continue fighting our wars or do the job of protecting its new Commander-in-Chief.  Regardless of what one thinks about Donald Trump, tomorrow at noon he will become our President.  This transfer of power is one of the truly remarkable gifts of our Republic.  Even though mandated by the Constitution, this precedent of a peaceful transfer is a gift to us from none other than George Washington himself.  It has been followed in both peace and war by every President since.  Tomorrow we will see a continuation of a process and institution as old as the country itself.

Whether you are a staunch Trump supporter or not, or whether you are as the many, many millions of us caught somewhere between hope and fear remember this on the morrow: we salute the office of President of the United States and not the man.   We will have time to argue and parse through President Trump's new policies starting next week.   There are many who have legitimate concerns about Mr. Trump's new policies.  Others of us simply have issues with  Mr. Trump as a human.  That is OK as well.  A robust society needs legitimate debate amongst people of good will.  Tomorrow, however, is not that time.  It is a day to celebrate the United States of America.  

As such, and solely on the basis of the health of our Republic and not in regards to any person's politics,  I would ask you at noon tomorrow {as the Constitution mandates} to at least pause and acknowledge the office of the Presidency.  At the end of the day as Benjamin Franklin put it, "We need to hang together or most assuredly we will hang separately".  We can all start fighting again next week.  Tomorrow, regardless of politics or beliefs, let us toast our new President in the ancient manner.

"God bless President Trump and God bless the United States of America."

And I will add God bless to each and every one of you as well.  

Back Tuesday next week.  I have to be out on Monday.  

*Alibaba is likely a component of indices we own in client and personal accounts.  We do not own shares outright in the company in either client or personal accounts.

Chart Talk {01.18.17-Historical Chart of Interest Rates}

Above is a long term chart of historical interest rates using the US Government 10-year bond.  A few thoughts when looking at this chart.

1.  Best trade ever would have been to lock long term returns back in the early 90s by buying as much of the US Treasuries as you could afford.  Of course back then inflation was running near double-digits, the economy was in the dregs and things didn't look so great from a geopolitical standpoint.  Then this fellow from the outside named Reagan became President.......

2.  Even with the backup in interest rates since last summer we are still trading at historically low levels.    

3.  There is a fear among investors that interest rates are going to move higher in the next year.  This fear has been reinforced by the Federal Reserve who has said they are going to raise interest rates at least three times this year.  What nobody seems to be really considering is that after some bump in rates we might just simply trade in a range, maybe between 2-3%, and trade in that range for some period of time.  From the late 1930s to the 1960s interest rates barely budged.  Why can't it happen again.

4.  A slight rise in interest rates could be a positive.  It would give investors a bit more of a return on their savings and shouldn't put to much of a crimp on economic activity.  It might also send out a positive signal that the economy is doing better.  It would definitely aid those who need income in retirement.

Link:  Tradingeconomics.com. "United States Government Bond Yields {Historic}"

Chart Talk {01.17.17-Ten Year Expected Returns.

Here's a chart of ten year expected returns for equities as compiled by Research Affiliates.  You can make this bigger by double-clicking on it.  For those of you new to this sort of things the real expected return for each market or asset class is referenced to the left {Y Axis} and annual volatility is the horizontal reference {X Axis}.    Notice foreign markets show expected annual returns substantially better than what the US is expected to post during this time period, albeit with more volatility.  

This is one of the reasons that I think portfolios should have some exposure to foreign markets and why many of our client portfolios have some exposure to these markets in the form of ETFs.  I say this even though overseas markets have mostly disappointed over the last several years.  At some point their turn will come.

*Long various overseas markets via ETFs in both client and personal accounts although positions can change at any time without notice or dissemination on any other form of electronic media.

Thoughts {01.12.17}

Watched the Trump "Presser" yesterday.  Anybody who doubted that things were going to be different when Trump becomes President had those hopes shattered yesterday.   Trump waived off those nasty allegations against him out of Russia, while managing to trash drug companies and CNN at the same time.  For good or ill there's a new sheriff coming to town.

With the exception of the medical sphere markets shook off that whole spectacle out of New York yesterday.  As I pointed out in our last "Chart Talk" post, a lot of stocks quit going up in Mid-December and are now just marking time.  The question is are we pausing before we breakout to new highs or is this a topping process before we see some sort of correction.   Indicators are mixed right now and it seems we could go either way as we move into the new Administration.  One thing that I do think is different is that I believe if we get some sort of sell-off then  based on what we know right now that investors would be inclined to buy that dip.  I will expand on this in a future post hopefully next week.  

Go read Howard Marks of Oaktree Capital here.  You should read Howard all the time as he's one of the brightest minds in the business, but his latest comments on expert opinions is a must.  Here's some of it:  

"The opinions of experts concerning the future are accorded great weight . . . but they’re still just opinions.  Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it.  This year’s election season gave us plenty of opportunities to see expert opinion in action."

Investors are always looking for the unknown event that might hit their portfolios.  These so called "black swans" are the subject of many investment pieces and prognostications  that come out this time of year.  Of course the nature of a black swan is that it is something largely unforeseen so in many aspects most of the writing on this subject is largely a waste of time.  At any rate I'll give you my potential black swan.  However, mine is probably not something for 2017 but an event that has the potential to occur somewhere in the next two to three years....Mexico.  If Trump succeeds in cutting off the economic and human lifeline that the United States is to Mexico then the country could be embroiled in an some combination of  an economic, social and political crisis.  Venezuela may be a closer event to this but it's not as close to us and isn't as tied to our economy as Mexico.  Again this is a subject I'll expand on at a later date.

Back Tuesday.  Monday is a holiday and the markets are closed.

Chart Talk {01.11.17}

Above is the current chart of the S&P 500 ETF, SPY.  The chart is from Tradingview.com and you can double-click on it to make it larger if you would like a better view.  There are a couple of things to note here.  First is that while there has been great fanfare concerning stocks since the election, the S&P 500 now has basically gone nowhere for almost a month.  It last made a new high on December 13, 2016 and has basically been consolidating in a narrow range since then.  The other thing to note is that we are overbought.  I would add, however, that the overbought condition is slowly being worked off by this sideways consolidation.

What remains to be seen is whether what we see in the chart above represents some sort of topping pattern to the major indices or is simply a pause from which we go forward to new highs.  Only time and more economic data is going to give us the answer to that question.

*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.

ETF Returns {International}

Below are shown various international ETFs we cover in our universe.  Once again we are using the performance return capabilities from Stockcharts.com.  We have also included at the far left the S&P 500 ETF for comparison.  You can double-click on this chart to make it larger.  If you invested abroad last year then the place to be was in emerging markets.  Of course they also had a horrendous 2015 from a performance standpoint.  Relative to the United States, the rest of the developed world underperformed. An equal weighted investment in all of these ETFs, held for the entire year would have shown appreciation of roughly 11.6%.  Investors scared off by the volatility and poor 2015 performance in emerging markets would have settled for a return of approximately 5.25% from the rest of the developed world using the same investment 

perimeters. 

*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

Back Wednesday.  

ETF Returns {Market Sectors}

Below, and again using the performance return capabilities from Stockcharts.com, are various sector ETFs that are in our investment universe for sector investment strategies. At the right on each chart is the S&P 500 ETF for comparison.  You can double-click on each chart to make it larger for easier viewing.  The year was bifurcated.  Non-cyclical, more defensive names did not do as well as the more cyclical names in the market.  The exception here was the utilities sector {think higher dividends- which corresponds to how ETFs with higher payouts performed in 2016} and the financial sector.  Banks can thank Mr. Trump's election for their outperformance.  Most of their gains came after the election, a theme you'll see in the next chart as well.  Health care took it on the chin again in 2016.  

The more cyclical sectors of the market were the areas that really shined last year.  Again most of their performance came in that explosive rally that occurred after the election.  Energy, the best performing sector last year, began rallying earlier in the year as the price of oil recovered from a disastrous 2015.  

*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

ETF Returns {Total Return}

Above, and again using the performance return capabilities from Stockcharts.com, are various ETFs we cover in our Total Return strategies.  The application shows that that an equal weighted portfolio of just these ETFs held for the entire year returned 17.35% in 2016.

*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

ETF Returns {Major Indices}

Above is a chart derived from the performance chart application over at Stockcharts.com.   It shows how some of the major market indices we cover performed in 2016.  The only market cap ETF missing on this chart is the Russell 2000 and according to Stockcharts.com's performance chart that index returned 21.59% in 2016.  An equal weighted investment held for the entire year comprised of all the stocks shown above plus that Russell Index would have averaged an 11.70% return.

*Performance data comes from the performance chart utility developed by Stockcharts.com.  While we assume their data is correct, we make no claims and cannot be held responsible for the accuracy of these results.

**Long various indices shown above in both client and personal accounts.  Please note these positions can change at any time without notice on this blog or on any other form of communication including written and electronic.

Cone of Probability

We are not in the business of making assumptions here at Lumen Capital Management, LLC.    Our system uses a probabilistic assessment that weighs market evidence based on three factors, fundamentals {both market and individual sector}, valuation and money flow analysis.

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

Solas! An Introduction

Solas!

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

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

What this is:

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

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

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

A place to discuss the investment process.

What this is not:

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

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

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

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

And anything else that I might think of going forward.

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

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

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