Valuation (1.31.19}

The S&P 500 closed yesterday at 2,683.8 which is an advance of about 7.44% for the year.   This also represents a gain of about 1.81% from when we last reviewed these numbers back on November 11, 2018.  Below is our current valuation analysis.    Current Street estimates for the S&P 500 have come down significantly for 2019 and are around 170.00  At this point we are using a number of 168.00 for the S&P 500 for 2019.  We will basically split the difference for this analysis and use a midpoint average of 168.75  for this analysis.  We are currently using a mid-point $178.70 for a rolling estimate out  to the end of 2020.    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 $168.75. {Year End 2019}

Current PE:                       15.90% {PE has increased from previous review of 15.02}
Earnings Yield:                   6.29% {down from previous review of 6.65%}
Dividend Yield:                  2.06% {Yield has advanced from previous  1.92%}

Current Expected Price Cone of Probability {COP}:   2,500-2,875 for 2018.  2,700-3,050 for 2019. 

Rolling Four Quarter Estimate for the S&P 500, Our Midpoint Estimate $178.70:

Current PE:                     15.01% 

Earnings Yield:                 6.07% 
Dividend Yield:                2.06.% {Estimated}

The current yield on the 10-year US Treasury is 2.73%.  That is a decrease from our last update when the 10-year US Treasury was yielding 3.07%.  

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    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Back early next week.  

I will be updating this monthly in 2019.

Polar Vortex

We've been getting prepared for and dealing with this round of cold weather we're now having here in the Midwest so I'll publish a few thoughts today and hopefully be back on a more normal schedule sometime this week.

First, I am amazed at how much press time has been spilled all over the country on how cold it is here.  Yes it's cold and yes we're setting records but I'm now going to let you in on a secret....IT GETS COLD IN THE MIDWEST IN JANUARY!  While the degree of the weather is unusual, it is not uncommon for us to have a snap this time of year of below zero days.  

In the same vein the folks who are extrapolating huge economic losses from this better think again.  Yes, as in any weather event there are things that possibly won't be made up.  A conference scheduled for today and cancelled might not br rescheduled for example, but most spending right now is deferred spending.  This is a two or three day event.  We're not dealing here with the aftermath of a hurricane.  By this weekend here it's supposed to be in the 40s.  Ignore the economic doomsayers on this.  Also the fact that the worst of this is hitting early in the week this time of year makes this in my eyes more of a nonissue economically.  Put it simply Monday, Tuesday and Wednesday are not big entertainment days in Chicago in January.  I'm guessing that's the same in most parts of the midwest as well.

Stocks are poised to have a great January assuming we don't have a complete meltdown in the next two days.  Most major indices are up 6-9% for the month and therefore for 2019.  Of course if 2018 was a 13 month year instead of the usual 12 then most indices would be more or less flat.  My guess is that we're trading about where we would have back in December without all that late year nonsense.  Movement going forward will be based on market fundamentals and earnings for the rest of the year.

Stocks have seen a large amount of earnings compression in the past four months.  Probability suggests a lot of the bad news has been priced into stocks.  

There is very little chatter about how stocks could ramp if we come up with a trade deal with the Chinese.

Probability also suggests a rangebound market in at least the first part of 2019 until some of these issues are resolved.

Will try to post tomorrow based on weather.

World Growth Estimates

Here's the IMF's latest estimates of world economic growth for 2019 and 2020.  What these numbers show is growth that is remarkably constant for the next two years, somewhere between 3.5 and 3.6%. I'm putting these up because if almost everyday you can pick up a paper or watch the business news and everybody is screaming recession.  Well these numbers don't look like a recession to me.  These numbers smack of stability.  At one time we'd call these Goldilocks numbers.  That is these would show a world economy neither growing to fast too be overheated or too slow so we're worrying about a recession.  True, you can find in these numbers some parts of the world that are doing better than others and it is possible that any single country or region could fall into a recession but that is the case at any given period.  There will always be an outlier.  But that shouldn't take away from the overall picture which is showing slow but stable growth for the next two years.

Now the best argument to these numbers is that the IMF is being too optimistic and there is that possibility.  Things can change and predicting the future is hard.  However, current economic stats are more supportive of what the IMF is showing than what the more pessimistic pundits are predicting.  Right now I'll side with the IMF until the data tells me otherwise.

And one last thing.  If these numbers are even close to correct then probability would suggest that stocks are undervalued on a longer-term basis.  Maybe not so much in the near term as we are overbought, but one can make a positive argument for equities when looking at these numbers on a 18-24 month basis.

I have to be out early next week.  Will post here next Tuesday, Wednesday and Thursday.

Link:  Capitalspectator.com: Macro Briefing-22 January 2019

If 2018 Had 55 Weeks.

If 2018 had 55 weeks instead of the normal 52 that we all learned in school then 2018 would have been a basically flat year, at least through last Friday.  Those circled areas on the above chart tell the story.  We opened last year on the S&P 500's ETF, SPY, at 266.86 and went out on Friday 266.46.  Add in last year's dividends and we're actually in the green on a total return basis.  Of course that's not the way it works but it does show you how violent December's decline was and how rapidly we've rebounded from those levels.  

My early guess is that we're range bound for some time now.  Unfortunately nobody knows what the range will be or if that analysis is correct.  Absent a further decline in economic fortunes, probability would suggest the more likely scenario is we trade for some time between 260-285 on SPY.   Probability would also suggest we end the year higher than where we left off after 2017's thrashing.  It would also suggest that if there is going to be a sustained move higher it might come later in 2019.  Of course anything could happen.  This is just a modeling analysis on probabilities of what has the potential to occur going forward.

More grim economic forecasts could bring that range to a lower level over the course of this year.  A good guess, and remember this is a guess, would then be roughly 235-270 on the same index.  The 235 level being approximately where we found support in December and 270 is a band of resistance on the chart.  By-the-way you can double-click on the chart to make it larger.  Also the chart is from Tradingview.com, although the annotations are mine.

Finally those that follow these things for a living would argue that we at some point need to retest December's lows.  Just note there have been many instances of a V-bottom {the name for the chart pattern we saw in December-a rapid decline followed by a similar move straight back higher} where the lows were never revisited.   I think we're at least going to see at some point a bout of profit taking.  It's been too big of a move off the bottom for some of those that were buyers a few weeks ago not to think about taking something off the table.  A full retest of the bottom is about a 50-50 proposition in my book.  Even if we don't go all the way back down there probability suggests we could see a decline in the 245-250 level on the SPY.  That would be a pretty normal retracement of this most current move.   Of course I'm not saying any of this will happen.  I'm just trying to project out levels that investors can be review if some of these things were to occur.

Regardless of the next move, many would now argue that the easy money off of that bottom has likely been made.  Basically anybody who bought stocks all of last year is right now losing money and the theory has always been that these disgruntled buyers could become sellers the closer they are to being made whole.  We call that resistance and there's a year's worth of it higher that we're going to have to churn through now.  Of course we'll have to see how the trading takes us.  Earnings should start giving us a clue towards the future.  Also we're overbought now on a short-term basis by our work.

Back Thursday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Positions can change at anytime without notice.

Asset Class Forecasts

Here's a 7-year real return asset class forecast from GMO LLC.  Overall I tend to be somewhat suspicious of these sorts of charts and I think it would be interesting to see how forecasts from 4-7 years ago looked versus actual returns.  My guess is they would not have pegged US stocks to have performed as well as they actually have during that time.  I'd also be willing to hazard a guess that the real return for US large cap companies will not be the negative 2.5% that the author is forecasting above.  

On the other hand I have no problem believe that bonds might post negative returns during that time and I think they might be spot on in their analysis of better performance from international related equities.  International markets always seem to look cheap relative to the US.  I've been saying that for years.  Maybe now is the time when these markets start to take on the leadership mantle.

Also note that these are the 7-year forecasts as of December 31st after our most recent sell-off.  I haven't looked but I wonder what this same analysis was showing say last summer.  Seems to me those real returns might have been even worse back then. 

Back midweek. 

*Long ETFs related to US and international equity markets in both client and personal accounts.

Link:  Advisorperspectives.com: 7-Year Asset Class Forecasts Increase After Steep Market Declines

Go Read!

Things I'm currently reading.

Visual Capitalist.com:  Forecasting the Investing Habits of the  Millennial Generation.

The Economist:  How the Shutdown is Affecting America-Day 19.

Valuewalk.com: Top 10 Largest Economies by 2050:  Emerging Nations to Dominate.  {According to this article the US will by then have the 3rd largest economy.}

Longreads.com:  In China, Searching for Mysterious Gaps in the Family Tree.

Back Friday.

Government Shutdown {A Repeat}

Came across this oldie about the Government Shutdown related to the Affordable Care Act back in 2013.  I'm going to reprint parts of it below because things are no different now than they were back then in terms of how this plays out as political theatre.  Substitute Wall for Affordable Care act and you'll see why I don't think things are all that different. The most important point is the paragraph on American Kabuki.  The original article can be found here.

Government Shut Down......Or Why I Seem to Be the Only Person in the World Not Worried About This!!!!

From 10.01.2013

"So both the financial and regular news industry have nothing else to discuss than the government shut down today and the subsequent debt ceiling debate.  You would think from their constant braying on the subject that an asteroid was approaching earth, ready to extinguish life as we know it.  I'll tell you right now that based on what we currently know this shouldn't be a big deal for the economy.  There's one way it could be.  I'll get to that at the end of the bullet points.

Economic Debate:   American Kabuki.  A Kabuki dance is an activity or drama carried out in real life in a predictable or stylized fashion {thanks Wikipedia for the definition}.  We've seen this act before and it always ends up with the political folks who've taken away the punch bowl getting hurt.  In this case as is usual, it's the Republicans.  Look we live in a country where nearly half of us receive some type of governmental aid.  This includes everything from social security to farm subsidies as well as unemployment benefits.  You can't cut off this economic spigot too long before there's some form of blowback out in the hinterlands.  At the same time certain Republicans backed themselves into a corner with their objections to the Affordable Care Act so that it was next to impossible for them back down prior to the shut down.  Now that we've actually gone over the cliff so to speak, expect the grown-ups in both political parties to take charge and get a deal.

Wall Street is Concerned-Not!  Pundits will tell you that the markets are very concerned about this.  .. The reason for this is that Wall Street assumes a deal is going to get done.....Underneath the hood economic conditions continue to improve.  That should be supportive of equities as long as this doesn't last too long....

The Caveat:  Humans Sometimes Don't Behave Rationally.  The above assumes that a deal on both the debt ceiling and budget gets done in I'll say the next two-three weeks.  It doesn't have to happen all at once but I'm basing these probabilities on all of this being out of the way by mid-October.  If for some reason these issues go longer than this, if for example the Republicans are willing to commit something close to political suicide over Obamacare {The Affordable Care Act} then all bets are off and you could see potential problems.  Probability suggests that won't happen.  Probability also suggests that stocks are a better buy on any further sell off arising from the shut down and debt ceiling debates."

Back Wednesday.

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

Thoughts {01.11.19}

Markets are opening in the red for today.  Probably to be expected since we've been up five days in a row.  Of course a lot can happen between now and the end of the day.  The action so far in 2019 is the exact opposite of last December.  Then stocks opened higher and traded lower as sellers came in during the afternoons.  The last two days we've seen attempts to sell early in the day then the buyers come in so we'll see how the day closes. 

We are seven trading days into the new year and stocks have been trading very well.  Seven trading sessions don't make a year but if we could magically annualize the calendar forward then stocks would be annualizing about a 42% gain for the year!  That is unlikely to occur but the action is more positive so far in January.  

Stocks are up better than 10% from their lows on Christmas Eve.

And if we could roll the calendar back so that yesterday's close was the 12.31.18 final print then the major US indices would have traded flattish for 2018.  Shows you the incredible volatility we've seen in stocks.  Also shows you that investor returns are best judged over longer periods of time.

My guess is stocks are trading about where they should've closed at the end of 2018 if all the algorithmic nonsense and end of the year redemptions hadn't come in selling markets when there were no natural buyers around to absorb the supply.

Back early next week.

Chart Talk {01.08.18}

This chart is from Tradingview.com although the annotations are mine.  Also you can double-click on this chart to make it larger if you want.  What I didn't include on the chart above is any reference to that violet trendline that almost intersects the chart and sloping higher from left to right.  That trendline marches off the 2009 lows.  Note how each time we've come down to that line only to bounce off of it as the market resets itself.  Many investors will gear their attitudes regarding the markets by whether or not this trend can remain in place.

Back Friday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication. 

How Asset Classes Performed In 2018

Graph above is from Visual Capitalist and it's one of many I could show you that attempts to illustrate how various asset classes did last year.  The short answer is all asset classes except cash lost you money in 2018.  Last year was the perfect storm for what could go wrong almost everywhere.   Longer term of course the equity asset classes listed above have done very well, especially since the 2009 March bottom.  However, stocks don't go up in a straight line and last year was a perfect example of that.

*Long ETFs related to all of the equity classes listed above in both client and personal accounts.

Fighting The Flu Bug

I've been dealing with a bout of the flu yesterday and today so I'm going to post a few quick thoughts.  

The issues facing stocks right now are a noxious brew of uncertainties that started building up last summer and finally came to a head in September.  These run the gamut of Federal Reserve policy on monetary tightening, the government shut-down, trade relations though principally at this moment with China, slowing earnings and whether or not the economy is decelerating.   Investors have been sellers because the crystal ball has been so cloudy on this front.  My current thought is that this is a bit over done but sentiment is brutally negative right now and is likely to remain that way until we see some clarity in these issues.   As these issues either get resolved or understood there is a higher probability of a fairly significant snap-back rally in the markets.  Of course that could be from lower price levels.

If earnings come in close to estimates than stocks are trading with about a 14 PE right now.  If we see no earrings growth in 2019 then stocks have a PE somewhere between 15 and 16 times next years earnings.  That is not expensive if the earnings are there.

Foreign equities were the worst performing group last year.  In 2017 they were one of the best.  It's hard to say what 2019 has in store for them but so far many foreign sectors have been acting better on a relative basis.  Need to pay attention in case we're starting to see a change of leadership on that front.

You will hear all sorts of pronouncements on what is going to happen next to stocks.  Many get on TV and proclaim they know the next direction.  Most of those "talking heads" are telling you now that the market is definitely going lower.  Maybe it will or maybe we're seeing a market trying to stabilize right now.  The reality is that nobody knows for sure where prices are going in the short run,  including me.  Instead of making pronouncements designed to generate headlines we make probabilistic assessments of what we think might happen.  Right now those assessments say there is a higher probability that we could go lower in the short-term.  Probability suggests stocks might try and retest those Christmas Eve lows.  I also think however there is a higher probability that stocks show nicely positive returns by the end of this year as long as earnings don't deteriorate too much in the coming months.  

Back early next week.  Hopefully I'll be over the flu by then.

A Few Quick Thoughts

The headlines will say that last year was a lost year in terms of investing.  The reality is that if 2018 had ended in in August then most of the world would be reporting nice gains instead of losses.  The market's decline was due to investor uncertainty on a whole host of fronts.  We listed some of those back in December.   We'll revisit them again in the coming weeks as they haven't gone away.  Markets hate uncertainty and until some of this is cleared up we're going to have to get used to the volatility.  

The economy is in better shape than the markets.  I also don't believe based on what we know today that we are headed into a situation similar to 2008-2009 because the financial system is in much better shape than it was back then.  Again this is something we'll discuss going forward.  

I haven't had time to look too deeply in the numbers in terms of asset performance but let's just say it was punk.  Early reads and back of the envelope calculations look like a diversified portfolio of assets lost somewhere between 6-10% last year on a total return basis.  Only three sectors in the S&P 500 posted positive returns in 2018.  These were Utilities consumer discretionary and health care.  Owning an equal weighted basket of the index lost you on a preliminary basis abut 7% last year.

International markets, which were some of the biggest winners in 2017 probably posted the worst losses last year.  On average these look to have been down in excess of 10%.

I'll be back with more in the coming days.  I will be back posting here on Friday.

*Long ETFs related to the S&P 500, international markets and health care in client and personal accounts.

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.

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 or one for you to tell me what you think of me!

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.