Bond Yields

 The 10-year US Treasury bond trades at basically just under 1% right now.  That's up from a .75% yield last fall but nothing for most investors to get excited about.  A 30-year US bond yields slightly over 1.65% right now.  A million dollars invested at such rates would yield less than $10,000 a year in income for the 10-year bond and about $16,500 on the 30-year instrument.  Such low yields are one of the reasons that stocks can trade at valuation levels that would normally be worrisome.  At what level do interest rates become a problem for the stock market and the economy?  I don't know and obviously right now that seems like a problem off well into the future.  But think about it for a second.  We have borrowed trillions to fight the virus and will ultimately end up borrowing trillions more.  At what point do the public debts of the US start to concern the investment community.  My guess is you have to see the 10-year well over 2% and the long bond nearing 4% for bonds to start becoming serious competition for stocks.  That's probably not going to happen anytime soon.

When you buy bonds at such low yields you are saying that you are willing to park your money in an investment that will likely not even keep up with inflation over the life of the bond just to get your principal back.  Contrast that with a simple S&P 500 ETF.  These currently have dividend yields slightly under 2% with a chance to also see those dividends grow over time.  You also get the potential for growth when the economy improves that has historically been in the 4-6% range.  If I had that choice then to me the obvious longer term choice is the ETF.  You do, however, have to be able to live with the market's volatility.  If you've done a proper asset allocation and have a solid understanding of your own personal risk/reward scenario this volatility is easier to live with.

Happy New Year to all!  I'm hoping 2021 will be a much better year for all concerned.

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

Happy Holidays!

 Happy Holidays From Lumen Capital Management

 

I know we are in strange times right now.  However, I believe better times are coming next year.  This holiday season is going to be so different for many of us, but get through it we will.  I am increasingly of the belief that we will feel as if we've endured a great and powerful thing after the storm around us  blows over.  It is my hope that we emerge a better society from having made it through this plague.  

In spite of our strange circumstances it is my fondest wish for you to have a most joyous holiday season as well as a prosperous and healthy 2020. I am honored to serve you, my clients, every day and I thank each and every one of you for your continued trust and support. I also look forward to catching up early in 2021. I leave you now with one of my favorite comments from Warren Buffett since they are as relevant today as when they were first uttered.

 

“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities — Treasuries, for example — whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

 

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”  {*}

 

(*) http://www.businessinsider.com/warren-buffett-on-risk-and-volatility-2015-4

I am going to take some time off to rest and recharge the batteries over the holiday season.  I'll be radio silent on this blog until January unless something comes up requiring some commentary.  I look forward to resuming posting next year.  Happy holidays, stay healthy and God bless! 

Chris

Annus Horribilis, Annus Mirabilis: Reflecting On 2020

By Christopher R. English, President of Lumen Capital Management, LLC

Somebody emailed me a few months back saying they’d like to return 2020 as a defective product. I’m guessing most of us would agree with that sentiment. While 2020 has been a year of horror and has highlighted both the best and worst in human nature, it’s also been a year of marvels.

Unsung Heroes

First, let’s remember some of this year’s heroes: our medical professionals and first responders. Our medical workers have plodded along for months, going into places and situations the rest of us cannot or would not go, often with few tools and little knowledge of the virus they were battling or the right treatments to give their patients. Even though they haven’t beaten COVID-19 yet, the odds are turning in their favor. We know much more about the virus now than we did last winter, we have better therapies available, and there’s a vaccine being distributed as we speak. How well it will work and when we’ll all have the opportunity to receive it is anybody’s guess, but it is a glimmer of hope in an otherwise dark time. 

The grit and sacrifice of our medical workers and first responders should be remembered. Let’s also acknowledge that many of these folks are young and undergoing a trial by fire unmatched in nearly 100 years. My daughter has a dear friend who’s a nurse on the front lines of this thing. She made a comment to me last spring that I’ll never forget: “I’m scared every day when I go to work, but I go to work anyway. If I don’t, who will?” Leave it to that young lady to define courage for all of us.

Next come our police, firefighters, and all those who’ve struggled in the public sphere trying to hold the system together, often with proverbial duct tape and glue. Police officers endured a particularly horrible year. While there may be issues with policies and a few bad apples in their ranks, it is also important to recognize that many of those officers take their duty to serve and protect seriously, sometimes to the point of giving up their lives. 

Next come educators and those dealing with young people, especially in disadvantaged communities. Teaching and trying to learn from home is hard, and our teachers had to learn on the fly how to make it work. There’s no college coursework or preparation on how to educate during a pandemic. To all these people, we owe our thanks while also acknowledging the role parents played. There’s no parenting playbook for this experience either.

Losses And Gains

Most of this horrible year has been defined by what we have lost. First and foremost are the lives lost, now numbering in excess of 300,000. That’s more than have died in all our conflicts since World War II. We can add in the hours of sleep lost worrying about family and friends we know to have the virus. We can also count all the jobs the virus has taken away from us. You can make many things up in life, but it’s hard to make up time, so account for the lost time with friends and loved ones. You cannot recoup the graduation a child never had, the grandchildren not seen due to the risk to the grandparents, or the wedding that never was. Celebrating the holidays over Zoom is not the same as being there in person. Sadly, when these events resume, many will find an empty chair at the table, a casualty of the virus. I believe we’ll have a better appreciation for everything that went away in 2020, as well as time with family and friends. You never value what you’ve had until it’s gone or almost lost.

Yet 2020 has also been a year of marvels. The fight against COVID-19 has been likened to a war. The skills and technologies from our past wars have always been adapted to the civilian economy, helping it to grow. So it will be from our battle against the virus. The rapid development of a vaccine for the coronavirus is a scientific wonder. Its story will be added to the other great feats of American and international ingenuity. My guess is the breakthroughs from this new development in vaccine technology will yield great benefits in the years ahead. People and businesses have adapted to this brave new world by employing new techniques and ways to work that would have seemed unthinkable a year ago. It is said that six years of advancement in productivity and new processes have been developed in six months. Likewise, individuals have adapted to Zoom parties, online ordering, telemedicine, and mail-in voting. These skills will not be unlearned in the coming years.   

In other marvelous news, we are one step closer to sending citizens back to the moon in a few years, likely ushering in another golden era of space exploration. The year also saw advancements in 5G technology, advancements in gene therapy, further developments in electric batteries for cars, and drone technology. Clean energy is becoming an international priority. Both the U.S. and the Chinese have experienced significant progress in developing nuclear fusion that is harnessing the power of the sun to develop cheap, clean energy. 

In a year of marvels, young people were still willing to take that leap of faith and say, “I do,” marrying in spite of all the uncertainty out there. I see many young people pushing strollers. There’s not yet a baby boom from this pandemic, but I’m guessing we’ll see an explosion of newborns in the next couple of years as the uncertainty of this time eases off. Finally, I’ve marveled at the children from my neighborhood who have seemed oblivious to these hard times as they cavort in and out of each other’s yards. They’ve had a year without adults organizing all their extracurricular activities and have been forced to make up their own fun. I’m guessing they’ll look back on this period a bit more fondly than us adults. Those same children I see running around have the potential of living into the 22nd century. It is very likely that their grandchildren will have the opportunity to immigrate to the moon or Mars during their lifetimes. Truly, we may be on the verge of a wondrous age. 

Markets In Review

The stock market rallied last winter, endured a massive sell-off when we went into lockdown in March, and subsequently defied expectations by rallying in the months since. It will finish positive for 2020 unless something unexpected happens. While the average stock has not performed as well as the tech-laden major indices, I believe these underperformers will rally next year as the economy opens up. Here’s why I think that: help is coming in the form of vaccines, better treatments for the sick, more testing, and adaptive behavior by the public. This relief is the primary logic for why markets have rallied even when the news has been so grim. When it comes, and when the worst of the virus is behind us, I believe we’ll emerge knowing we’ve endured a great thing. That being said, nobody who goes through a significant crisis in their lives comes through it unscathed. It will be the same with the rest of society. The world will never look exactly like it did before the lockdowns last spring. What will pass for normalcy going forward is unclear. However, my guess is that as a society, we’re going to feel like we’ve weathered the passing of a massive storm, and if we can face down the virus, we can tackle other significant issues as well. That confidence will also trickle down into the economy. I think we’re going to be surprised at the rapid pace of economic recovery and growth over the next few years. 

The Question Of Unity

Finally, one of my overarching themes this year has been that there’s more that unites us as a nation than most in the press and in politics would have us believe. It is perhaps hard to believe right now, but I think that everything from a recognition of some of the inequalities in our country, to the confrontation of things many have turned away from for years, to our election results demonstrates that the center held in 2020. Sometimes it barely held, but hold it did. That is also something marvelous and worth celebrating.   

Looking Ahead With Hope

Thank you for indulging my meanderings off the beaten investment letter path a few times in the past year. Again, I will stress that it’s in my Midwest roots to carry a higher degree of optimism about the future. It is almost impossible for me not to be excited given the advances I am seeing in all sorts of fields around the globe, and I’m also optimistic about the generations of young folks coming up behind us “boomers.” 

It is a very American trait to view progress optimistically, and many of the things I see are exciting fields of investment, so perhaps the two go hand in hand. What I can never stress enough is how immensely grateful I am that you allow me the opportunity to work with you and your investments. I consider myself so fortunate to know each and every one of you. I look forward to catching up in the new year, this time in person! Until then, from myself and my family, I wish you the happiest of holiday seasons and a prosperous 2021. Reach out to me at 312.953.8825 or lumencapital@hotmail.com if you need anything.

Happy holidays! Stay healthy and God bless!  

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 312.953.8825 or emailing him at lumencapital@hotmail.com.

Covid

Posting has been light around here due to Covid related issues and this is nothing more than a quick update.  Neither my bride or myself has come down with Covid, but we have been dealing with family members who currently have the virus.   My concerns have been with them before writing on this blog.  One person, who really gave us a scare I think is on the mend.  The other is so far coping well, or so it seems.  

A back of the envelope calculation gets me to around 100 people that I personally know or know of that either has the virus or knows they've been exposed to it.  That's just a quick count.  My guess is if I wanted to put in the effort I could find more.  I know of two people that have died.  One was in his 80s and the other a few years younger than me.  Both I am told had underlying conditions.  

The death toll we are told is over 300,000 now.  My guess is the number is higher with others to be reclassified later as Covid related.  That number, which will continue to climb in the coming weeks, now exceeds all American dead in every war since World War II.  

People ask me how the market can go up in the face of such grim statistics and that is because the market looks towards the future.  Simply put, investors see the other side of this with the coming of the vaccine and that future looks brighter than what we're dealing with now.  I believe tomorrow will be better as well. 

Like I said this is just a quick update.  I will try to get back later this week.

Still Listed 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.

Essential Workers.

 

So the priority of people who are going to get this first round of vaccines are medical personnel and people like my mother in long-term nursing facilities.  The thinking seems to be that the next batch of people to get vaccinated will be those who are considered essential workers.  Those of us that are healthy and sit behind desks with the ability to work virtually look like we're going to be on the tail end of this.  Of course this makes sense.  A good way to envision this is if you have to stand for for your job then you're going to have priority over the majority of us that sit and stare at screens all day.  A standing job means a syringe stab in the arm!    I have no problem with this at all.  

The graph above give's you some idea of where those jobs may lie.  Even in these job classifications you have to think there's going to be some levels of priority.  I'd think a meatpacker will be offered the vaccine before a barista at your local coffee shop.  

The scuttlebutt is saying there will be enough doses for everybody who wants the vaccine to have it by June.  I'd make taking the vaccine mandatory.  That's probably why I'm not in government or politics.  What it should do is help firm things up on an economic basis as the vaccination process commences.  That would be good news on many fronts and is a nice headwind for markets in 2021, assuming the vaccines work as hyped.

Back middle of next week.

Chart Link:  Vanguard: "Quantifying the Future of Remote Work"

Why Markets Are Moving Higher

I am constantly asked how stocks can move higher in the face of all the terrible news we've seen since last winter.  I know we've discussed this before but I'll say it again.  Markets discount future action.  It's not that the present isn't important, but markets look towards the future and right now when investors look out into the new year here's what they see.  

First they see a world that slowly starts to inch its way back to whatever normal looks like in about six months after people start to get vaccinated for Covid.  There's going to come a time next year when enough folks have been vaccinated that we'll be able to open bars, restaurants, cruise lines sports arenas etc.  That plus the combination of all that money sitting in people's bank accounts is likely to cause a huge surge in consumer spending probably by next spring or early summer.

Second investors see for the most part political uncertainty removed from the equation for the next few years.  Mr. Biden is a known commodity to the markets and his early moves so far signal moderation.  That's something investors can live with.

Third you will likely have another stimulus package coming this winter along with further mediations in debt payments, rent and mortgage foreclosures etc.  This will keep liquidity in the system until the economy gets back on its feet.

Finally, and this is something you can't measure I think you're going to see increased optimism as the news on the virus front gets better next year.  You can't measure hope but a positive environment is something necessary for investors to feel comfortable holding equities.

Now as I've said before the news on Covid is going to be grim for the coming months. Infections and death tolls are going to continue to rise.  The weather in the north won't do any of us any favors until next spring.  But with the spring is going to come I believe a renewed sense that we've seen the worst of this thing and licked it.  Stocks think so to and that's why they continue to move higher.

PS as I'm writing this there's word on the wires of a 908 billion dollar bipartisan stimulus proposal being offered in the Senate.