Solas!

Quarterly Letter To Clients Part V

2012-02-17T04:16:00.000-08:00

Today we'll finish up our discussion on what if things are getting better?

A change in investor sentiment: We noted back in October that investor sentiment was extremely negative. This is still the case as the amount of money pulled out of mutual funds in 2011 ran at a very high rate which accelerated into the fourth quarter. Much of that money has flowed into bond funds that are now paying historically low yields. The S&P 500 now has a dividend yield not that much different from the 10 year US treasury. This massively negative sentiment recalls the top of stock prices in March of 2000 when fund flows into equity mutual funds reached record proportions. We are not the only ones to notice this. As we were putting the finishing touches on this letter, the financial magazine Barron’s arrived on our doorstep. This was its cover:

Bespoke Investment Group's co-founder Justin Walters framed it this way, “Things in the U.S. aren’t nearly as bad now as they were back in 2008 and early 2009, but don’t try and tell the retail investor that. They’re truly spooked.”2.

This mood has also hit Wall Street as 2012 is one of the few years in memory where investment analysts have collectively been taking down their forecasts. The poor sentiment amongst Wall Street professionals likely means that most negative investment scenarios have been priced into stocks. It could take potentially little in way of good news or an improving market to ignite a massive reallocation out of low yielding bonds into stocks.

Finally looking under the hood: The 20^th Century experienced three Bull markets: {1919-1929-“Roaring 20’s”, 1947-1965-post-war boom and 1982-2000-the technology or “Long Boom” period}. Each of these periods ended up being the beneficiary of an earlier expansion of research and development {R&D}. This expansion largely resulted from earlier investments made as a result of war or in the case of the Long Boom an intense period of international political hostility {the Cold War}. That R&D ultimately found its way into civilian applications. Home refrigeration for example became available to the larger American public in the 1920s largely as a result of technologies developed to feed troops during World War I. Technological advances developed throughout the Cold War and systems developed from the space race {an offshoot of the Cold War} were the seed monies that built much of our economic expansion between 1980 and 2000. We have been fighting wars in some form now since 2001. There is massive R&D, particularly regarding miniaturization, of all sorts of military systems-think of drone aircraft for example. Much of this R&D will likely enter the civilian economy in the future. Areas that have already benefited from this include technology, medical devices and energy equipment. Everybody can see the technological benefits that smart phones and tablet computers are bringing about but most don’t see the technical advances in energy development {think fracking} and biotechnology that are becoming hot growth areas in our economy. If much of this paragraph looks familiar that’s because we first wrote about this to you back in October, 2010.3. Stocks are up nearly 11% since this was written.

2. Source Bespoke Investment Group. 2011 ETF Performance

3. Solas! October 28, 2010, page 3.

Quarterly Letter to Clients Part IV

2012-02-16T04:13:00.000-08:00

What if things are getting better? We believe that investors have ignored the possibility that things could get better. Here are a few things to consider:

The economy: Economic data has been getting better. 4th Quarter GDP for instance came in at just under 3% {although the higher inventories imbedded in that number are a concern}. Many other measures of economic growth have also flashed positive signs in the past three months. Improved housing data, improved unemployment claims and some of the best auto sales in nearly four years point towards an economy that is growing. That growth undoubtedly is not as high nor growing as rapidly as most would like to see. But given the headwinds we have faced and continue to face, it is perhaps as good as we are going to see at this point of the cycle. I think it is possible that we will be surprised by how strong economic growth has been by this time next year. Also, corporate balance sheets are in excellent condition. S&P 500 companies likely grew their earnings by nearly 17% in 2011.

Europe & China: The European situation seems to be improving. The massive low cost funding coming from the European Central Banks, a more technocratic government in Italy and more a conciliatory tone from the Germans seems for now to have stabilized that situation in regards to Italy and Spain. Greece remains a problem but the main issue seems to be containing the crisis to Greece and so far that seems to be working. Recent data out of China supports the fact that the Chinese may have engineered a soft landing for their economy, a precursor to stronger growth there in 2012.

An accommodative Federal Reserve: The Federal Reserve signaled this week that it will keep interest rates virtually at zero through 2014. This is positive for several reasons. First a lower cost of money is often seen as economic stimulus. Lower interest rates makes stocks more attractive on a risk basis as well. The nearly two trillion dollars sitting in money markets or bank deposits earning essentially nothing might be persuaded to begin looking for higher returns if rates stay this low. That two trillion could be a powder keg ready to ignite stocks if things break the right way.

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

Bonds

2012-02-15T07:34:00.000-08:00

You probably know that I don't see much value in bonds right now. It appears that Warren Buffett shares my views {or I'll defer to age and billions of dollars in the bank and say that I share his thoughts on these}, calling bonds among the most dangerous of assets regarding inflation. I get to the same point he does but perhaps in a different way by simply saying that if I can buy a 10 year US Treasury for almost the same yield that I can get on the S&P 500 which also has the potential to grow over the next 10 years, then why would I want to own bonds.

I found this article today on bond math via a posting over at Abnormalreturns.com that might illustrate this even more.

The author of Econompicdata calls projected five year bond returns in the 4.5%-6% range "wishful thinking." Here's their logic:

"The chart {above} shows that yield to maturity is awfully accurate in predicting five year forward returns for the aggregate bond index (this is because 5 years is roughly the universe of US bonds' duration). The unfortunate part is the current yield to maturity is a measly 2.06% as of yesterday's} close.

What does this mean? It means that investors should not expect more than 2% annualized from your bond allocation over the next five years, UNLESS you are willing to reach for yield via lower quality credit, non-US exposure, or increased duration. It also means that if you have a 60% equity / 40% bond allocation, to reach an 8% all-in annualized return your equity allocation needs to return roughly 12% / year over the next 5 years. In addition, it likely means that correlation between bonds and equities are likely to increase over this time frame during times of turmoil, as bonds don't have room to appreciate in a flight to quality (more on that here). In other words... don't expect much help from bonds..."

Link: Econompicdata: Some More Ugly Bond Math

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

Quarterly Letter to Clients Part III

2012-02-15T05:10:00.000-08:00

Today we will finish up the discussion on market valuations that we began yesterday. What stands out for us from yesterday's chart is that stocks are currently trading at levels similar to the Gulf War low back in 2003 and not that much above the generational lows of March, 2009. Historical studies of PE ratios suggest that the S&P 500 index has on average traded between 14 and 16 times their forward looking estimates on a PE basis. We also compute that the average earnings yield on the S&P 500 since 2000 to have been 5.70%. Using these metrics and a midpoint 2012 earnings estimate of $104 on the S&P 500 then on a historical PE value the market could trade between 1,442 and 1,648. To bring the earnings yield back down to its historical levels the S&P 500 would need to trade this year to around 1,750.

Keep in mind that these are historical observations, likely skewed by the fact that stocks were very overvalued throughout the first half of the last decade. Probability suggests that a year end 2012 price value north of 1600 is highly unlikely. However, this sort of exercise does show you that based on what we know today, the valuation potential for equities is still very attractive on a multiyear basis.

This kind of data reflects many of the fears that investors believe could affect stocks in the coming year. First and foremost are the unfolding events in Europe. I think it will be very unlikely to completely undo the Euro. The European nations resemble a large dysfunctional family where the members don’t like each other very much but regardless are stuck together whether they like it or not. They might kick Greece out, but my guess and bet is that the Euro survives intact. Irrespective of what I think it will be the actual events over there that impact markets. The effort by various entities over there to inject capital and backstop the individual countries and banks has so far this year been a positive impact on markets.

There are other things concerning investors. The volatility of the past few years has been very frightening. US economic growth has been anemic. High unemployment and the housing crisis are constantly in the news. The poisonous atmosphere and gridlock in Washington shows no signs of abating. Washington’s policies are seen by many as being largely anti-business and if you are not a fan of the President then you cannot be happy about the current state of the Republican campaign. However, much of this already discounted and investors are ignoring some very positive developments.

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

{Tomorrow we begin a discussion on what if things are getting better.}

Happy Valentine's Day

2012-02-14T13:47:00.000-08:00

This isn't in English but it won't matter, especially if you have a daughter {or two like me}. The quality could be better as well so apologies in advance.

Happy Valentines Day to the Bean and the Evil Twin!

Muscawama!

Oh and a special shout out to Mrs. E. and the Monk as well!

Quarterly Letter to Clients Part II

2012-02-14T04:57:00.000-08:00

Today we are publishing our 2nd installment of our Quarterly letter to clients. Part I was published yesterday. Today we begin a discussion on market valuations. We'll finish this part up tomorrow.

Are stocks cheap? Part 2: We will argue again that based on what we currently know that stocks are cheap and probability indicates stocks have the potential to be significantly higher at the end of this year. {For somebody else’s view on this click here for a Bloomberg article on stock valuation.}

We will start by using this chart which we recently posted on line. You can go here and double click on the chart if you would like to see a larger and more readable version of what is included here. The chart shows over a decade's worth of price earnings ratio {PE} comparisons and earnings yield comparisons for the S&P 500. We use the earnings yield when doing basic analysis because it is a quick way to take the earnings of a particular asset, in this case the S&P 500, and tell you what percentage its earnings are yielding in relation to the its price. It is also the inverse of the PE ratio. Since you need a magnifying glass to read the data in the chart, I’ve reproduced it and color coordinated it in the table below:

S&P 500 Earnings

Period Price PE Yield Comment

Fall 2000 1517 28 3.70%

Fall 2002-Spring 03 848 13 6.90% Gulf War low.

October, 2007 1549 19 5.30%

March, 2009 666.79 10 9.80% Generational low.

01.01.2012 1257.50 12.5-13 7.7-8.0% Estimates on year end 2011

01.26.2012 1313 12-13 7.5-8.2% Estimates on year end 2012

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

Quarterly Letter To Clients Part I

2012-02-13T04:44:00.000-08:00

Image: Napoleon’s Retreat From Moscow Adolph Northern

Today we will begin publishing our most recent investment letter to clients. Look for the rest of it over the course of this week!

Solas!

A long Journey To Nowhere

January 27, 2012

2011, the year of the Euro’s retreat! Stocks gained nearly 8% into early May and then gave it all back through the rest of the year. Markets could never shake off the fallout from the Japanese tsunamis, worries about a slowing world economy or the acrimonious relations between the Congress and the President which led to a downgrade of US credit ratings in August. But the event that defined the last five months of 2011 and did the most damage to world markets was the continued debt related problems in Europe, the threatened loan defaults by Greece and the concerns that Greece’s problems would migrate to other countries such as Italy and Spain.

The year that never was! The S&P 500 proceeded to lose a bit over 20% over the summer before rebounding to close basically unchanged for the year. It was the highlight of 2011. The MSCI world index fell by 8.5% last year. China, Brazil & India all lost between 18% and 23%. Developed countries such as Italy {down 25%}, France and Japan {both down around 18%} and Germany {Down 15%} offered no safety. Hedge funds collectively lost 6.4%.1. Here at home, as measured in the performance of their various related ETFs, the S&P midcap index lost 3.4%, the Russell 2000 lost 5.74% and the average stock on the New York Stock Exchange lost 5.93%. Even Warren Buffett was not immune from the market’s depredations as his company, Berkshire Hathaway lost over 4%.

We started the year with a series that asked whether stocks were cheap. We thought then that S&P 500 had the potential to trade between 1,350 and 1,400 by year’s end. We lowered those projections back in early October to a range of 1250-1300 largely because we felt that the market was running out of time to reach those upper limits. At the time the S&P 500 was trading around 1100. We also noted in that same piece that we believed that stocks have the potential to trade between 1350 and 1450 by year end 2012. As we discuss in a future post, we see nothing at this juncture to cause us to rethink that assumption.

Humans divide time into periods such as years and decades. Markets are not bound by such things. They will move as is their wont in fits and starts {both good and bad}. They will meander across time periods until they get to where they need to be going and only a higher power {or randomness if you don't believe in such things} knows when that might occur or how long it will take to get there. There may have been artificial constraints such as tax selling and year end window dressing that held the market back at year’s end. Certainly there has not been enough different news that warrants why the market would have currently advanced over 4% since we've turned the pages into a new year. If 2011 had been eight trading days longer then our revised high end target of 1300 would have been realized. Ultimately things like valuation and fundamentals matter to investors. Stocks came into this year cheap, trading somewhere between 12-13 times what ought to be the final S&P 500 earnings number for 2011. They have probably now started to play catch up to where they likely should have been a few weeks or months ago.

{Tomorrow we'll begin a discussion on whether stocks are cheap}

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

1. Forbes Magazine, Chasing the Mirage of Hedge Fund Returns. January 23, 2012.

Next Week

2012-02-10T06:43:00.000-08:00

A small note: Next week we are going to serially publish our latest investment letter to clients.

Investors Hate Stocks!

2012-02-10T04:52:00.000-08:00

From Bloomberg: {Excerpt with my highlights}

Stocks Least Loved Since ’80s on U.S. all of Worry

By Nikolaj Gammeltoft, Inyoung Hwang and Whitney Kisling - Feb 6, 2012

The Standard & Poor’s 500 Index’s best start in 25 years is doing little to restore Americans’ confidence in the stock market. The benchmark gauge for U.S. shares has climbed 6.9 percent in 2012, the most since it rose 14 percent to begin 1987, data compiled by Bloomberg show. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999. Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.....

....Sentiment has deteriorated even as the S&P 500 rose 99 percent since March 9, 2009. The 106 percent expansion in U.S. earnings during the last nine quarters, the most since 1987, helped fuel the rally. For the period ended Dec. 31, 67 percent of companies in the S&P 500 beat analyst profit estimates as earnings advanced 3.3 percent. Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. Withdrawals were $135 billion last year, the second-highest total after 2008, the ICI said.

Concern European leaders will fail to keep Greece from defaulting, the May 2010 flash crash in which $862 billion was erased from equities in less than 20 minutes and some of the most volatile markets on record last year helped spur the withdrawals. Of the more than $11.1 trillion that was wiped off U.S. shares between 2007 and 2009, $8.1 trillion has been restored.

“The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.”

Money managers haven’t kept up with the S&P 500’s advance. Hedge funds declined 5 percent in 2011, the third year of losses since 1990, according to Chicago-based Hedge Fund Research Inc. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999.

Valuations have fallen even as the S&P 500 rallied 21 percent since the end of 2009 because profits increased five times as fast. The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009. The ratio slipped as low as 10.2 at the end of the 17-month bear market in 2009, when the S&P 500 declined 57 percent.....

....Rallies have faded since 2000, when the dot-com bubble drove the Dow Jones Industrial Average to a record high. The gauge peaked at 11,722.98 that year, and has risen above and then fallen below that level seven times since. It ended at 12,862.23 on Feb. 3, up 5.3 percent so far this year. The past decade parallels the span between Dec. 31, 1964, and the end of 1981, when the Dow added less than 1 point after surging interest rates diminished the appeal of equities. While the 115-year-old stock gauge ended the period at 875, it ranged between 577.60 and 1,051.70. After stalling for 17 years, the U.S. stock market staged the biggest bull market in history through early 2000, driving the Dow up 15-fold from its low point in 1982. The surge coincided with a decrease in the yield on 10-year Treasuries to 6.68 percent from 13.55 percent. The rate was 4.21 percent at the end of 1964, and it peaked at 15.84 percent in 1981. On Feb. 3, the figure was 1.92 percent.

Falling interest rates failed to lift stocks in the last decade as the S&P 500 slumped 12 percent from its high in March 2000. Equities slipped as the global economy experienced two financial crises, including the worst recession since the 1930s. Growth in U.S. gross domestic product averaged 2 percent a year between 1999 and 2011, compared with 3.6 percent between 1964 and 1981, and 3.3 percent from 1981 and 1999, according to data compiled by Bloomberg.

The retreat leaves stocks in position to rally because so many bearish investors can be lured back to equities and the market is cheap, according to Scott Minerd, the chief investment officer of Santa Monica, California-based Guggenheim Partners LLC, which oversees more than $125 billion. “Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call,” he said. “Even if we had a 50 percent increase in multiples, stocks would still be cheap.”

Link: Bloomberg: Stocks Least Loved Since 1980's

My Comment: Investors are as wrong footed now as they were in 2000 when everybody loved stocks, in 2003 when everybody hated them and in March 2009 when many were saying that the S&P 500 could go to 300. In the meantime so much money {trillions of dollars} is either sitting in cash or in low yielding fixed income that the ability to ever make any money from those investments is problematic. At some point a good portion of that money is likely to be engaged again in the equity markets. For many of course it will probably be after stocks have had a much higher run up than we've seen now. Still that money is the fuel that could keep a sustained bull market in place for at least a few years!

*Long ETFs related to the S&P 500 in client accounts. Long ETFs related to the Dow Jones Industrial Average in certain client accounts.

an tSionna {02.09.12}-The Dow

2012-02-09T05:37:00.000-08:00

A friend asked me to post a chart of the Dow Jones Industrial Average. This is frankly not an average I pay much attention to as it is to narrowly focused for my work {although as you can see from the disclosure I have some clients who own this ETF}. Chart is a weekly of the Dow Jones Industrail Average ETF {DIA}. That triple top implies higher prices at some point if the index can break through resistance. Careful here though because it's overbought like everything else.

BTW I was asked why most of the time I show charts of the ETFs instead of the underlying indices and the reason for that is the ETFs are something that investors can actually buy versus their index counterparts. Also these big liquid indices rarely stray too much from their underlying net asset values.

*Long ETFs related to the Dow Jones Industrial in certain client accounts.

an tSionna {02.08.12}

2012-02-08T06:47:00.000-08:00

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

Job Trends

2012-02-07T06:43:00.000-08:00

An update on jobs trends from Chartoftheday.com. "{On Friday}, the Labor Department reported that nonfarm payrolls (jobs) increased by a significant 243,000 in January. Today's chart provides some perspective on the US job market. Note how the number of jobs steadily increased from 1961 to 2001 (top chart). During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961). More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend. In fact, the current number of US jobs is still below its 2001 peak."

Link: Job Trends.

Once Upon A Time

2012-02-06T18:51:00.000-08:00

In a far away land, a long time ago....so long ago that the writer of this blog hadn't even been born....

A Princess....

....climbed up a tree in Kenya, went to sleep amongst the animals and in the morning when she awoke.....

emerged from the branches a Queen.

60 years ago today.

Elizabeth II, Dei Gratia Britanniarum Regnorumque Suorum Ceterorum Regina, Consortionis Populorum Princeps, Fidei Defensor

“There is a thing called knowledge of the world, which people do not have until they are middle-aged. It is something which cannot be taught to younger people, because it is not logical and does not obey laws which are constant. It has no rules...."

T.H. White, The Once & Future King

Link: The moment a princess became a queen.

It's Halftime America

2012-02-06T06:52:00.000-08:00

This was my favorite commerical from yesterday! But then again I generally like anything Clint Eastwood's done {except the Bridges of Madison County!}.

an tSionna {Nasdaq Composite}

2012-02-06T06:45:00.000-08:00

This is a montly chart of the Nasdaq Composite. The chart doesn't indicate that and I forgot to state that when I was putting this together.

*Long ETFs related to the NASDAQ 100 {QQQ} in client accounts.

PreMarks {02.06.12}

2012-02-06T06:43:00.000-08:00

Markets have opened a bit lower today. This probably shouldn't be much of a surprise given how overbought we've become. Foreign policy may dominate for a little while now. Issues are Syria {potential civil war}, Egypt {potential civil war-arrest of American citizens}, Iraq {potential civil war}, Iran's nuclear program and Greece is back on the front table as the debt negotiations seem to have stalled out.

Markets are probably in need of a pause and this would be as good an excuse as any for some profit taking.

Out Tomorrow

2012-02-02T07:23:00.000-08:00

I will be out tomorrow on a series of appointments so there will be nothing here until Monday. See you then!

Facebook vs. Google

2012-02-02T07:22:00.000-08:00

All sorts of chatter yesterday afternoon and this morning about the upcoming Facebook IPO. I have no opinion about Facebook as a stock. I have a facebook account which I set up after attending an interactive media seminar a few years ago for marketing purposes. I soon found out that most of the people that inhabit that world are not interested in what I have to offer so I mostly stay away from it, although I occasionally go to it to stay connected to family and some long lost friends. I have 72 friends after 4 years. My bride, who just set herself up on it a week ago, already has that many. My youngest daughter {the Evil Twin} has over 400 friends! I'm not sure I know that many people!

Jeff Matthews, over at his Killer blog Jeff Matthews Is Not Making This Up , has a great post on whether Facebook is killing Google. It is too long to excerpt here but everybody interested in Facebook, the company and Facebook, the stock ought to go read this.

Incidentally the one thing I've never been able to figure out, especially when it comes to young people, why so many are so interested in making every aspect of their private lives public forever!

Audi Conjures Up Melville

2012-02-02T07:06:00.000-08:00

Great new Audi commercial inspired by Herman Melville's Moby Dick.

"Over 30 years ago, Audi pioneered permanent four-wheel drive with Audi quattro®. Today it's the world's top selling AWD system. But sadly for one tormented soul, its legacy is more a source of humiliation than celebration. Inspired by one of the all-time classics in American literature, Audi re-imagines Herman Melville's epic struggle between obsessed sea captain and elusive white whale to bring the legend of quattro® to life!"

*Long a 10 year old Lexus.

an tSionna {02.02.12}

2012-02-02T06:24:00.000-08:00

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

Groundhog's Day

2012-02-02T06:05:00.000-08:00

If I ever quit my day job {some of you might think I ought to do that sooner than later} I'm going to write a book on different historical threads. In that regard we'll for a second take a respite from our day jobs of keeping our pulse on the market and make a brief comment on Groundhog's day, the annual fest where a groundhog is fetched from its hole to see whether it will see its shadow or not. This supposidly determines whether we'll have 6 more weeks of winter. Groundhog's day also just happens to fall upon the same day as....

.....Candlemas, a day that the Christian Church has traditionally celebrated the Presentation of Jesus at the Temple ....

....Candlemas was grafted on the ancient Celtic custom of Imbolg {or Imbolc}. A celebration of the beginning of spring, althought warm weather is usually months away in Chicago!

For the record Punxsutawney Phil , who seems to be the official groundhog for all things Groundhog's Day saw his shadow this morning so we're going to have six more weeks of winter!

Codladh samh!

{Sleep well Phil!}

Barron's Round Table

2012-02-01T04:15:00.000-08:00

Every January Barron's Magazine has a roundtable of noted investment sages give the world their take on what they see for the coming year and then they generally offer a list of stock recommendations. Below are their results for 2011. I thought I would do as I have periodically in the past a report card on how they did.

To arrive at my results I simply take the percentage results for each stock in the recommended portfolio add them together and divide by however many names are included under a particular person's recommended list. For example Mario Gabelli had 11 picks so his total return was measured by me adding up the percentage gains/losses he incurred in 2011 and dividing by 11.

One other caveat with this sort of portfolio view is that it makes the assumption that you would hang on to all of these names for the entire year. It is likely that these investors would perhaps in the real world have sold some of these names as the year progressed. Never-the-less Barron's makes the assumption that these names are held for the entire year so here are the results from last year's roundtable:

Scott Black: 8 Recommendations -13.63% return.

Abby Joseph Cohen 8 Recommendations - 2.68%

Marc Faber 20 Recommendations -14.26%

Mario Gabelli 11 Recommendations 6.07%

Bill Gross 2 Recommendations 8.35%

Fred Hickey 5 Recommendations 9.24%

Archie MacAllaster 6 Recommendations -27.82%

Oscar Schafer 5 Recommendations - 6.14%

Meryl Witmer 5 Recommendations - 3.94%
Felix Zulauf 5 Recommendations -13.28%

Average Return: -5.809%

*Source: Barron's, January 16, 2012. Page 31.

Lá Fhéile Bríde

2012-02-01T03:08:00.000-08:00

The Feast of St. Brigid.

Valuation Slump.

2012-01-31T07:10:00.000-08:00

Bloomberg article from yesterday about the long valuation slump of US equities. {Excerpt with my highlights.}

U.S. Stocks in Longest Valuation Slump Since Nixon

QBy Inyoung Hwang and Whitney Kisling

Valuations for U.S. equities have been stuck below the five-decade average for the longest period since Richard Nixon’s presidency, a sign investors don’t trust earnings even after a three-year bull market. Analysts estimate profits in the Standard & Poor’s 500 Index will reach a record $104.78 this year after increasing 125 percent since the end of 2009, the fastest expansion in a quarter century, according to data compiled by Bloomberg. American companies are boosting income so much that even after stocks doubled, the S&P 500 hasn’t traded above its 16.4 mean ratio for 446 days, the longest stretch since the 13 years beginning in 1973.

Battered by the 14 percent decline in the S&P 500 since 2000, the worst financial crisis since the Great Depression and the so-called flash crash 21 months ago, investors are staying away from stocks, even after record profits, 10 quarters of U.S. economic growth and promises by the Federal Reserve to keep interest rates near zero through 2014. Of the $37 trillion erased from global equities in the credit crisis, $24 trillion has been restored.....

......The S&P 500 trades for 13.7 times profits. It was last above the mean valuation since 1954 on May 13, 2010, less than a week after $862 billion was erased from U.S. equity values in 20 minutes, data compiled by Bloomberg show. The slump has surpassed the two longest periods of the last quarter century, in 2008 and 1988.

Profits for the 169 companies in the S&P 500 that reported earnings since Jan. 9 have risen 3.2 percent from a year earlier and beat analyst projections by 2.9 percent, the data show......Companies in the S&P 500 earned $657 billion in the first nine months of 2011, including $225.2 billion between April and June, the most for any quarter in at least 12 years. That’s 72 percent more than the comparable period in 2008. U.S. GDP, which grew at a slower-than-forecast 2.8 percent rate in the fourth quarter, totals about $13.4 trillion, data compiled by Bloomberg and the Commerce Department show.....

....The last two times the S&P 500 slumped below its historic average, equities rallied. The benchmark index is up 42 percent since it climbed above the five-decade mean in June 2009. It spent 14 months below the average level from August 1988 through October 1989 before quadrupling within eight years starting in October 1990, data compiled by Bloomberg show.

......Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. The U.S. economy has expanded by an average of 2.4 percent a quarter since 2009. While that helped push the S&P 500 up 95 percent, the index’s price-earnings multiple is down 43 percent. The decline is part of a decade-long retreat in U.S. equity valuations since the S&P 500 peaked at 31.2 times earnings in December 1999......

....Customers of U.S. stock mutual funds have pulled out more than $146 billion since May 2010 as the S&P 500’s valuation shrunk by as much as 33 percent.The longest valuation slump lasted from June 1973 through January 1986, according to data compiled by Bloomberg. The start coincided with the Watergate scandal that led to Nixon’s resignation and the Arab oil embargo, marking the end of a three-year bull market as shares declined 32 percent over 16 months.....

......Analysts say the current slump is different from the one that started more than 38 years ago. Equities face less competition from fixed-income investments and inflation compared with the 1970s and 1980s. The yield on the 10-year Treasury note peaked at a record 15.84 percent on Sept. 30, 1981. The consumer price index surged during the oil crisis in 1973, rising from 2.7 percent in June of 1972 to 12.3 by the end of 1974. It peaked at 14.8 percent in March 1980. Today, the 10-year yield is 1.89 percent and touched an all-time low of 1.67 percent four months ago. Consumer prices increased 3 percent from the previous year in December, according to Labor Department data......

Link: Bloomberg: Valuation Slump.

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

PreMarks {01.30.12}

2012-01-30T06:25:00.000-08:00

Markets are starting out with a general risk averse tone as market participants remain somewhat disappointed in the progression of the Greek bond swap talks. Of course we've been highlighting for a while now that the market is very overbought so it's possible that Greece is just the excuse for what now ought to be some consolidation. Having said that, the markets have started something like 3-5 days in the red only to turn around later in the day as buyers came in. It's possible that end of the month seasonality will prop us up through tomorrow. We'll just have to wait and see.

Hedge Fund Performance

2012-01-30T06:20:00.000-08:00

Good article at the online edition of Forbes on hedge fund performance.
{Excerpt with my highlights.}

Chasing the Mirage of Hedge Fund Returns

Hedge Funds had another rocky year in 2011, down 6.4%, as measured by the Dow Jones Credit Suisse All Hedge Index. And yet industry assets under management have climbed back to $2 trillion, having reached $2.1 trillion in 2007 before plummeting in the 2008 market crash. After reading Simon Lack’s just-published The Hedge Fund Mirage (John Wiley & Sons), one wonders why the assets continue to flow in. Here’s how the book begins: “If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good.”

Lack is an industry insider,.........he eventually came to the conclusion that: “While the hedge fund industry has generated fabulous wealth and created many fortunes, it has largely done so for itself.”

Lack notes that the industry is full of super-smart investors, some of whom have been able to generate superior returns. The problem is that a few dozen have produced most of investors’ returns, and as with actively managed mutual funds, it’s difficult to identify the strong performers in advance. Moreover, the persistence of compelling relative performance is not strong, market inefficiencies can quickly disappear, and the investing rewards are heavily skewed in favor of the managers. As a result, the average hedge fund investor has not done as well over the years as the numbers might suggest.

Funny Numbers

To test his thesis, Lack deconstructed industry performance data.

The HFR Global Hedge Fund Index puts the industry’s annualized return from 1998 to 2010 at 7.3%. In Lack’s mind, those return figures are distorted by several factors. One is that these returns are calculated on a time-weighted, rather than asset-weighted basis. As he shows repeatedly in the book, both fund and industry performance suffers with growth in size.....In other words, the index numbers overstate the strength of hedge fund performance due to stronger results in the early years when hedge funds and the industry itself were both smaller.

So Lack performs his own asset-weighted calculations (similar to the internal rate of return methodology of measuring private equity or real estate fund performance) using BarclayHedge data to measure how the average investor—as distinct from the average fund—has done. He argues that hedge funds are similar to private equity funds in that the hedge fund manager (who holds himself out as providing absolute, uncorrelated returns) has control over when to take clients and to commit their capital. Therefore, he feels that returns should be calculated using private equity industry standards versus mutual fund industry ones.

His conclusion: from 1998-2010 the index returned only 2.1% annualized on a money-weighted basis, not 7.3%. During that time frame, he estimates that hedge fund managers earned $379 billion in fees, while “real investors” earned only $70 billion in profits. Thus, the operators earned 84% of the investment profits and investors only 16%. But wait, there’s more. These figures don’t account for fund of funds, which add another layer of fees and through which around one-third of hedge funds are purchased. Including these brings industry fees up to $440 billion, or a whopping 98% of the profit pool, leaving only $9 billion for investors.

And to add insult to injury, Lack notes that HFR Global Hedge Fund Index returns are also overstated due to statistical biases such as “survivorship” (lousy performers shut down or stop reporting) and “backfill” (strong performers start to report). Academic estimates are that these statistical biases of self-selection (reporting is optional for the largely unregulated hedge fund industry) add 3-5 percentage points to index returns. Adjusting for these biases, Lack estimates that from 1998-2010 investors collectively lost $308 billion in hedge funds while the industry earned fees of $324 billion......

Link: Chasing The Mirage of Hedge Fund Returns

PreMarks {01.27.11}

2012-01-27T06:20:00.000-08:00

Some thoughts as we end the week and close in on the end of the month.

Stocks are up nearly 5% for January. Now I'll make the argument that stocks basically waited until January to achieve what should have been their 2011 fair value. In other words if 2011 had thirteen months we would have been where we should have been at years end. Having said that 5% is an awful lot in a very short period of time. Annualized, markets are looking at a nearly 60% gain run rate for 2012. That's probably not going to happen.

Stocks are very overbought by our shortest term readings. Some other statistics that are short term negative. Both the percentage of stocks that are trading above their 200, 50 and 40 day moving averages have now reached levels that have historically been troublesome for stocks advancing. At the least stocks usually need a pause at these levels. Investor sentiment has also shifted much more bullish in the past two weeks.

Markets opened higher yesterday and then reversed pretty hard. That's often not a good sign. Earnings season has been mixed although much of this was probably already factored in. Investors have also likely brushed off corporate cautiousness so far this year as that had been telegraphed in the past few months.

Stocks are showing a lower open today. The official reason will be that the 4th quarter GDP print at +2.8% was below expectations of +3.0%. However, it is the mix of those components that is likely the cause of the disappointment and not the slight miss. Inventory accumulation accounted for a far greater contribution to the final number and final sales were up by only 0.8%. That is the real reason that we're going to start the day lower.

While news out of Europe has been mostly positive since we turned the calendar, the fact that there is no settlement to the Greek negotiations looks like it is starting to wear on investors over there.

The playbook says that it is prudent to play a bit more defense in the next few weeks as markets are showing every indication that they ready for a pause. I still think that dips in the markets should be bought in 2012 because I think longer term on both a fundamental and valuation basis stocks are attractive. However, nothing goes up in a straight line. In terms of market direction, we'll wait and see what our indicators say in the days and weeks ahead. Shorter term though these are flashing caution.

How Investment Pros Should Think About The Future

2012-01-26T08:25:00.000-08:00

Saw this over at the The Big Picture Blog the other day and thought I would quote it. This is a common sense approach since all investing is the process of making certain bets about the future. Marks succinctly says what most of us try to convey to clients all the time.

“I confess, I think about the future. So do my colleagues. If someone who’s spent decades investing doesn’t have an opinion about what lies ahead, there’s something wrong. I believe our clients want us to apply the benefit of our experience in gauging and reacting to the opportunities and risks that lie ahead.

But I have a mantra on this subject, too: “It’s one thing to have an opinion; it’s something very different to assume it’s right and act on that assumption.” We have views on the future. And they can cause us to “lean” toward offense or defense. Just never so much that for the results to be good, our views have to be right.”

-Howard Marks, Oaktree Capital Management

January 10, 2012

Link: The Big Picture-Opinions About The Future

BTW posting may be a bit light over the next couple of days as I have to be out quite a bit seeing people.

A Decade of Earnings PE and Earnings Yield Comparisons

2012-01-25T06:13:00.000-08:00

Here's a decade's worth of Price to Earnings ratio {PE}comparisons and earnings yield comparisons for the S&P 500. A few things.

1. I didn't include it on this chart but the comparable numbers for year end 2011 likely were a PE ratio between 12.5 & 13 times 2011 earnings. The Earnings yield was likely between 7.7% and 8%. These are estimates as the final S&P earnings will depend on the 4th quarter results which are still being reported.

2. Historically since about 1980 studies suggest that stocks have traded between 14 and 16 times their forward looking estimates on a PE basis. Since year 2000 the average earnings yield on the S&P 500 has been 5.695. Using these metrics and a midpoint 2012 earnings estimate of $103.00 on the S&P 500 then the historical looking value of the market would be between 1,442 and 1648. To bring the earnings yield back down to its historical levels the S&P 500 would need to trade this year to around 1750.

Keep in mind that these are historical observations, likely skewed by the fact that stocks were very overvalued throughout the first half of the last decade. Probability suggest that a year end 2012 price value north of 1600 is highly unlikely. In other words don't use this sort of backward looking analysis to project some pie in the sky end of the year number for stocks that likely will not occur. However, doing this sort of exercise does show you that based on we know today the valuation potential for equities is still very attractive on a multi year basis.

See here for my source of the S&P data. I'm assuming this information is accurate but I cannot guarantee the source.

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

Earnings: A Follow-up To Yesterday

2012-01-24T07:45:00.000-08:00

As a follow-up to yesterday's post the folks over at Chart of the Day show in the chart above the earnings projection for year end 2012 S&P 500 earnings. Note how quickly profits recovered from their cyclical lows in 2008-09. Here's their take on this:

"Today's chart provides some further perspective into the past and future trends of 12-month, as-reported, inflation-adjusted S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 pre-financial crisis peak and then, beginning in Q1 2009, quickly surged back to near record levels. This begs the question; will corporate earnings make new record highs? As today's chart illustrates, based on the latest S&P 500 earnings estimates (see red line), earnings are expected to make new, inflation-adjusted record highs during the first half of this year. Considering the current global economic environment, this is indeed quite an achievement."

Link: Chart of the Day: Earnings

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

an tSionna {01.20.12}

2012-01-23T07:43:00.000-08:00

Here's an updated chart on the S&P 500. In regards to our earnings targets for last year, I thought I'd do a quick review. We started the year in an essay on whether stocks were cheap by thinking that stocks could trade by year end 2011 between 1350 and 1400 on the S&P 500. We lowered that end of year projection back in early October to a range of 1250-1300. The S&P 500 reached its high water mark for the year in early May when it closed at 1362. From there stocks declined almost 20% into the fall and ended virtually unchanged around 1260. Since October, stocks have retraced much of that decline and are now trading around 1315.

Humans divide time periods into things like years and decades but markets are not bound by such things. They will get to where they need to be in fits and starts {both good and bad} and only a higher power {or randomness if you don't believe in such things} knows when that might occur. There may have been artificial constraints such as tax selling and year end window dressing that held the market back in the last few weeks of 2011. Certainly there has not been enough different news so far that warrents why the market would have kicked up over 4% since we've turned the pages into 2012. Ultimately things like valuation and fundamentals matter to investors. Stocks came into this year cheap, trading somewhere between 12-13 times what ought to be the final S&P 500 earnings number for 2011. They have simply now started to play catch up to where they likely should have been a few weeks or months ago.

Back in that December 2010 piece linked above we said the following:

"One final thought. If we assume that the economy continues to grow at these projected rates then you are looking at 2012 estimates of potentially $100 and $104. Should these numbers come to pass then you are looking at fair value estimates out there of $1,350-1,550 by year's end 2012."

If anything consensus estimates are even higher now for 2012, so we'll stand by that range for now by year's end with a current midpoint estimate of 1475. We'll detail how we are getting there and introduce a 2013 estimate at a later date.

From where we started the year, a market that has the potential to trade around 1475 by year's end has the potential to increase about 17% on a price basis. If you add in expected dividends for 2012 and dividends received in 2011 and divide that return by two {in order to make up for our basically lost 2011}, then stocks over that period of time have the potential to compound at around a 10% rate for both 2011 and 2012.

We'll see what happens. More on this subject soon.

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

Two Articles Everybody Should Read!

2012-01-23T06:39:00.000-08:00

A couple of articles I think you should read! Neither of these pieces will make you a dime today but both are important in my opinion as I think they go a long way towards laying bare some of the major problems in both our economy in the country today. Both are too long for me to put on the blog. I'll give you the main thesis as an excerpt below but you need to read the articles to get the full flavor.

The first from the New York Times discusses how the US lost out on iPhone work. What this says about American economic competitiveness versus Asia is disconcerting.

"When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president. But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States? Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas. Why can’t that work come home? Mr. Obama asked. Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest. The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products......."

The second article deals with the new American divide. It is a Saturday essay in the opinion section of the Wall Street Journal. In an essay entitled The New American Divide, author Charles Murray discusses how the "American Dream" seems to have gone away as the working class falls further away from institutions like marriage and religion and the upper class becomes more isolated. While I'm not sure how new the divide between American social classes is and I'm not sure that the article {which is a preview of a book the author has written on the same subject} covers all these bases, I do think he hits on some major themes that on a societal basis are hurting us. An excerpt that basically states his thesis:

"When Americans used to brag about "the American way of life"—a phrase still in common use in 1960—they were talking about a civic culture that swept an extremely large proportion of Americans of all classes into its embrace. It was a culture encompassing shared experiences of daily life and shared assumptions about central American values involving marriage, honesty, hard work and religiosity.

Over the past 50 years, that common civic culture has unraveled. We have developed a new upper class with advanced educations, often obtained at elite schools, sharing tastes and preferences that set them apart from mainstream America. At the same time, we have developed a new lower class, characterized not by poverty but by withdrawal from America's core cultural institutions."

At any rate go read these articles. Like I said they won't make you any money in the markets today but they should at least get you thinking.

an tSionna {01.21.12}-Technology

2012-01-21T06:21:00.000-08:00

In a post on Thursday, the folks over at Bespoke Investment Group noted that "the S&P 500 Technology sector has gotten off to a great start to 2012. While it has gotten a bit overbought in the short term, the sector is closing in on a key resistance level that bulls would love to see broken. This resistance level is the sector's pre-financial crisis closing high of 441.36, which is just 1.59% away from where the sector is currently trading."

*Long various technology ETFs in client accounts.

Link: Bespoke & Technology.

A Kodak Moment

2012-01-20T06:52:00.000-08:00

Eastman Kodak filed for bankruptcy yesterday. Kodak was done in by the digital age. But for many of us over say age 40, Kodak prints and films defined our lives. Here are a couple of old Kodak commercials that eulogizes a bygone era. If the young man in the first commercial looks familiar that's because later in life Mark Hamill became Luke Skywalker in Star Wars.

an tSionna {01.20.12}-Gold

2012-01-20T06:17:00.000-08:00

*Long GLD in certain client accounts.

It's an RIA World!

2012-01-20T05:30:00.000-08:00

Great article on the growth of the RIA industry. An RIA stands for Registered Investment Advisor. That's what I am! {Excerpt with my highlights.}

It’s Our World, Everyone Else Just Lives In It.”

By Josh Brown

......Investment Advisory in general, and the independent variety in particular, is the only finance-related business that’s seen assets under management (and by extension – fees) grow over the last five years. Like a gleaming, late-model luxury sedan casually rolling past the flaming wreckage of post-credit crash Wall Street, our disassociation with the broken down vehicles littering both sides of the highway is simply impossible to ignore.

We are doing better than the bankers (who are being laid off by the tens of thousands globally) and better than the traders (who are having their lungs ripped out by algo-driven toaster ovens five days a week) and better than institutional brokers (who are watching their per-trade commissions now dwindle down into strange, new increments like nano-pennies per share).

And we are most certainly prospering more than retail brokerage. A casual look at the DART reports (daily average revenue trades) from the major online brokerage firms paints a picture of apathy and non-engagement now that all the really active amateurs have moved on to currency and forex as their poison of choice.

I’d also note that we are doing far better than our second cousins in full service retail brokerage in the asset-raising department, but that would be like me telling you that water’s wet – no need to rehash the undeniable secular shift happening there. Jeff Benjamin from Investment News tells us that by the end of 2010, total industry assets were above 2007 pre-crisis levels ($11.2 trillion) but that wirehouses have seen their assets drop during that same period from $5.5 to 4.8 trillion. Five years ago the wirehouse held 50% of the industry’s total AUM {my note-AUM stands for Assets Under Management}, today it’s 43% and dropping – and this includes the $300 billion from BofA that became wirehouse assets as a result of the Merrill Lynch acquisition, without those the picture would be even worse!

But here in RIA-land we’re the Belle of the Ball right now....A recent report and breakdown of new client assets at TD Ameritrade really hammers this home…

From Registered Rep:

TD Ameritrade continued to rack up double-digit asset growth in the first quarter ending Dec. 31, the company said today. TD Ameritrade Holding Corp.,.....reported $10.2 billion in net new assets for the quarter, up 11 percent on an annualized basis…60 percent of those assets came from new advisors on TD’s institutional platform…

Meanwhile, RIAs appear to be contributing to higher revenues at the custodian. TD said asset-based revenues accounted for 55 percent of last quarter’s $653 million in net revenues;....

I can’t think of an example of this kind of growth happening anywhere else in the realm of finance – at least on this scale.......

Now, there is a great deal of irony in the fact that the online brokers have become an indispensible tool for the brokers-turned-advisers they used to do battle with. Having put the retail broker out of business thanks in part to commission deflation, firms like Schwab and TD and others have now become the custodian partner to those former brokers, many of whom are now at RIA firms serving as investment adviser representatives (Series 65′s).

But this partnership between former foes has allowed RIAs to raise more new money than hedge funds, mutual funds, broker-dealers.....

Link: It's an RIA world!

My note: Perhaps it has something to do with the fiduciary aspect that RIAs bring to the table. We serve no masters but our clients!

an tSionna {01.19.12} Bonds-A Topping Pattern?

2012-01-19T07:42:00.000-08:00

This is a chart of the iShares 20 year + treasury ETF {TLT}. I put this up because it comprises a treasury portfolio of the longest dated bonds an investor could hold. You can see that back in the summer the price of TLT exploded to the upside as investors fled from risk assets into the perceived safety of US Government bonds. Interesting isn't it that investors went here to hide even as S&P downgraded US debt in the fall!

Since then though TLT has spent all this time going nowhere. In fact it's chart characteristics and money flow data are strongly suggestive of a security in a topping pattern. That is it is trading in a manner where there is a higher probability that its next move will likely be a decline. Year to date it has now fallen a little over 1.5% while stocks on average are up 3%.

Intuitively this makes sense simply given how low yields are and how much money {read trillions of dollars} have moved into perceived safer assets. Some German Bunds for example currently have a negative yield. The current yield on 30 year treasuries is just a bit over 3%. I've stated this before but here is what a low yield like that means. Investors are so worried about economic growth and how it will affect their capital that they are willing to take a rate of return over the next 30 years that on an after tax basis and when adjusted for inflation will likely give a negative return. Meanwhile there are many good quality stocks and ETFs that yield as much as the 30 year treasury or even more.

So far stocks have had a pretty good January. What we may finally be seeing is a shift in asset allocation into more riskier assets. That is a move away from bonds and into stocks. It's early in the game but if this is starting to occur and especially if the economy truly is on the mend then expect to see interest rates start to rise this year. If that is the case then this security is vulnerable to a correction.

*Long TBT- the Proshares Ultrashort 20+ year treasury ETF in certain client and personal accounts.

an tSionna {01.18.12}

2012-01-18T08:15:00.000-08:00

Look at what has quietly been pushing up against a post 2008 crash high. It's the Nasdaq 100 {Symbol QQQ} You can see this pretty clearly in this weekly chart below:

Here's the daily view of the same thing going back about 18 months. Remember you can double click on these charts to make them larger.

*Long ETFs related to the Nasdaq 100 in client accounts.

an tSionna {01.17.12}: Two Charts

2012-01-17T06:20:00.000-08:00

Weekly Chart of the S&P 500 as represented by its ETF-SPY. You can doubleclick on these charts to make them larger.

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

Virus

2012-01-13T09:37:00.000-08:00

Came in this morning to find that some of my systems had been invaded by a virus. No posting today as a result. I have a few things in the hopper for the next couple of weeks that I hope you find of interest. Next post will be Tuesday as the markets are closed on Monday for the Martin Luther King holiday.

Performance in 2011-More Numbers

2012-01-12T07:02:00.000-08:00

More numbers from the year that wasn't.

"Equity mutual funds had their worst year since 1997 relative to the Standard & Poor’s 500 Index, as record-high correlation and price swings made it harder for money managers to pick stocks.

Among about 4,100 funds that invest in large-cap stocks, 17 percent beat the benchmark index for U.S. equities last year, the least since the 12 percent recorded in 1997, based on data from Chicago-based Morningstar Inc."

Link: Bloomberg: Mutual Funds

An Interesting Statistic

2012-01-12T06:57:00.000-08:00

CNBC just reported that through yesterday the markets are up year to date the most since 2006. That was a pretty good year for stocks as I recall

A Thought About Financial Advisors

2012-01-10T06:46:00.000-08:00

From a blog I've started to follow called iheartwallstreet.com: {Excerpt with My highlights}

Seduced By Complexity

Advisors propose complex solutions that raise more questions, making people feel like they’ve opened a Pandora’s box. But why?

By Carl Richards, CFP

Making smart decisions about money is rarely easy. It’s why people look to advisors in the first place. But often we as an industry make things worse. Instead of making things simpler, we propose complex solutions that raise more questions, making people feel like they’ve opened a Pandora’s box. But why?

The financial-services industry uses complexity as a sales tool. Like other sales-oriented industries, it uses the tactic of creating a problem, then providing the solution. To that end, the industry has identified as its main value proposition access to information and transactions, then presents this access as the solution to clients’ money questions. Think back to the early 1990s, before the Internet. It was a challenge to get basic information like a stock quote and almost impossible for people to calculate how their investment accounts had done at any of the major brokerage firms. The financial-services firms were the gatekeepers to information, and they’d set themselves up as the interpreters of that information.

Often, we think that if we have a complex problem, the solution should be complex, too. Some people in professional service industries view complexity as some sort of intellectual gift.....{T}he goal isn’t to search for the simplistic answers but instead to avoid being seduced by the idea of complexity. For too long, we’ve been accustomed to the idea that financial products, financial plans, and investments need to be complex in order to be effective. So, we start to reject some of the simple, basic concepts that will actually be far more effective in helping people make smart decisions about money.

.....I’ve noticed that despite claiming the goal of simplifying people’s lives, we sometimes are scared that people won’t value and pay for that type of advice.....Often the very things that will make the biggest impact on our clients’ financial lives are simple, but not easy. Saving more, spending less, even asking for simpler solutions are all things we can do. But we often pass them by because we’ve bought into the idea that our value hangs on being the gatekeeper to the complex. But complexity isn’t the silver bullet to financial questions. Isn’t it time we help people discover the simplicity on the other side of complexity?

Link: Seduced By Complexity

Comment: I will return to this theme later this year as I think this is a very important concept for investors to understand.

an tSionna {01.09.12}

2012-01-09T05:08:00.000-08:00

Chart of the S&P 500 ETF Spyder trust-SPY. While it may not feel like it to most of us given the fact that there was so much churning around last year, the index has actually been in a bullish mode since it bottomed out last summer. In fact SPY is up over 13% since it bottomed back in the first of October and is up over 6% since Mid-December.

The fact that the market has entered a previous level of congestion from where it's had trouble advancing and the fact that it is now overbought in nearly every time frame we measure suggest the probability of at least a pause or a slight pullback in this current advance. On the other side of this argument would be the seasonal factors currently at play as January is typically a strong month for stocks. We will let our indicators be our guide and watch to see how this develops in the next few weeks. I think though {for reasons that I'll detail in the next few weeks and also based on what we currently know} that pullbacks in the market are better to be bought in the next few months than to be sold.

However given the move we've had and the nature of the markets at this juncture we will move our shortest term indicator down a notch to Net Market Neutral. We have been Net Market Positive on the markets short term since October 6, 2011 . Please go here for a definition of what these terms mean. Please also note that this change only reflects our thinking to our shortest term indicator and that both are intermediate and longer term indicators are still Net Market Positive. This also currently reflects that we are pretty fully invested for clients at this time. It does not necessarily mean that we are sellers here or that we have developed a negative view of the markets.

Happy Birthday Davie!

2012-01-08T06:48:00.000-08:00

David Bowie turns 65 today. Bowie is perhaps not known for traditional music but back in 1977 he teamed up with Bing Crosby for this Christmas classic. Since we're still close enough to the holidays, I thought we'd throw this out there for your entertainment. Happy Birthday David and Merry Christmas Mr. Lawrence.

"The truth is of course is that there is no journey. We are arriving and departing all at the same time. " David Bowie

Performance in 2011-Some Notes.

2012-01-07T09:49:00.000-08:00

A few other factoids and performance figures on the year that wasn't.

Hedge Funds- in aggregate data through November, 2011, multi-strategy hedge funds had lost 4.7% for the year. {Source Goldman Sachs Investment Outlook-page 33, data supplied by Investment Strategy Group, Barclay's Capital}.

Mutual Funds- CNBC reported on Friday that 48% of portfolios missed their benchmarks by over 2 1/2% or 250 basis points in 2011.

Berkshire Hathaway- {Warren Buffet's holding company as measured by the A shares} lost 4.72% in 2011.

General Electric- on a price basis lost 1.53% in 2011.

*Long shares of GE for certain clients in portfolios, Berkshire Hathaway is a component of various ETFs we own for clients and personally.

Performance in 2011 World Stock Markets

2012-01-07T09:22:00.000-08:00

From The Economist website: "IT HAS been a poor year for the markets. The MSCI world stockmarkets index fell by 8.5% in 2011, and the index for developed markets fell by 7.6%. The euro area's biggest economies fared particularly badly, with markets in Italy, France and Germany down by 25%, 17% and 15% respectively. But the prize for the worst performing of the stockmarket indices we track each week goes to Greece, which decreased by over 50% during the year. Venezuela's stockmarket did best, thanks to economic growth, high inflation (consumer prices increased by over 28% in the year to November), a thin market and the hope that Hugo Chávez’s presidency is reaching its end. Only four other markets, in Indonesia, America (Dow Jones Industrial Average and S&P 500) and Malaysia, ended 2011 higher than they started it."

Link: The Economist-World Markets

See my disclaimer below for this post as well.

Performance in 2011-Average Stock

2012-01-07T09:12:00.000-08:00

One thing I should have highlighted in that previously posted table that the NYSE Composite has traditionally been associated with the average stock. Bespoke's data shows that the average stock as represented by that index lost 5.93% this year.

No positions in stock index mentioned in this post.

Performance of ETFs In 2011

2012-01-07T09:08:00.000-08:00

The folks over at Bespoke Investment Group published last week a handy year end performance matrix for many of the major asset classes represented by their ETFs.

They have put it together this way. "The left side of the table highlights all US based ETFs, which clearly outperformed the foreign ETFs shown in the top right corner of the table. The top performing ETF on the entire list was the 20-Year+ Treasury ETF (TLT) with a gain of 28.82% in 2011. The worst performing ETF was natural gas (UNG) with a decline of 46.09%."

Link: 2011 Key ETF Performance

A note: We own many of the ETFs listed in this table in both client and personal accounts. It would be too cumbersome for us to list every single security. You can contact us if you would like to know whether we own certain issues at this time.

Bear Markets

2012-01-06T04:43:00.000-08:00

Chart of the Day work from a couple of weeks ago:

"{This} chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. The current Dow rally has followed a somewhat middle of the road path and has most closely followed the post dot-com bust rally of the Nasdaq that began back in 2002. If the current rally were to continue to follow the post-massive bear market rally pattern, the market would have to work its way higher during much of 2012."

Link: Bear Market Rallies

*Long ETFs related to the Dow Jones Industrial average in certain client accounts. Long ETFs related to the NASDAQ composite in client accounts.

10 Things Investment Pros Do That Amateurs Don't! {Repeat}

2012-01-05T05:05:00.000-08:00

This advice I think it also bears repeating at least annually.

1. Pros always have cash

2. Pros tend to worry less about the day to day with stocks and try to focus longer term.

3. Pros try not to invest in things they don't know.

4. Pros recognise that not everything is analyzable.

5. Pros are as concerned with the downside as the upside.

6. Pros always look; they never avert their eyes from a downturn.

7. Pros accept that not everything works or is going to work at once.

8. Amateurs are worried that they aren't making enough but pros are worried that they are making to much money.

9. Pros do their homework.

10. Pros know things go wrong. They are more likely to cut losses and let profits run.

Bogle Editorial {Repeat}

2012-01-04T05:58:00.000-08:00

We ran this editorial article written by John Bogle a few years ago in the Wall Street Journal here is a link to the original article. I think this bears repeating about once a year as it's advise is classic. {Highlights are mine!}

Six Lessons for Investors

Be diversified and don't assume past performance will continue.

There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:

1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street's 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor's 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.

Reality: the S&P closed the year at 903, with reported earnings estimated at $50. Strategists aren't always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003. Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street's payroll don't survive for long.

2) Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some "dry powder" in their portfolios.....With all the focus on historical returns that greatly favor stocks, don't ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong.

3) Mutual funds with superior performance records often falter. Last year was an extreme example. With the S&P 500 off 37% for the year, Legg Mason Value Trust fell by 55%. Fidelity Magellan Fund, after a good 2007, was off 49%. Funds managed by proven long-term pros felt the pain -- Dodge and Cox Stock down 43%; Third Avenue Value down 46%; CGM Focus down 48%; Clipper down 50%; Longleaf Partners down 51%. (Full disclosure: Four of Vanguard's actively-managed equity funds also lagged the market by wide margins.) Only time will tell whether the disappointing shortfalls experienced by these and other funds will be recovered in the future, whether the skills of their managers have atrophied, or whether their luck has run out. Whatever the case, chasing past performance is all too often a loser's game. Managers of funds seeking market-beating returns should make it clear to investors that they must be prepared to trail the market -- perhaps substantially -- in at least one year of every three.

4) Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually.....As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%. Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks.

5) Look before you leap into alternative asset classes. During 2006-07, equity mutual funds focused on developed international markets and emerging markets provided strong relative returns to U.S. stocks. During that period, U.S. investors made net purchases of $285 billion in mutual funds investing in non-U.S. stocks, and liquidated on balance some $35 billion from funds focused on U.S. stocks. This extreme example of "performance chasing" at its worst is hardly defensible. But, disingenuously, it was touted by fund marketers as adding "non-correlated assets," or "reducing volatility risk." In 2008 -- with non-U.S. developed market funds falling by 45% and emerging market funds tumbling by 55%, we learned once again that, just when we need it the most, international diversification lets us down. Commodities were no different. As the global recession developed, commodity funds sank, the largest such fund tumbled 50%. Always keep in mind: When the investment grass looks greener on the other side of the fence, look twice before you leap.

6) Beware of financial innovation. Why? Because most of it is designed to enrich the innovators, not investors.....Our financial system is driven by a giant marketing machine in which the interests of sellers directly conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win. ....While the events of 2008 reinforced that message, perhaps these stern and oft-repeated lessons of experience will help investors avoid similar mistakes in 2009 and beyond.

My Comment: I'm not sure I completely agree with Bogle on point six. After all it was financial innovation that gave us index funds of which his Vanguard group is a huge investor. I think I'd rather say beware of financial innovation that has not been around long enough to withstand the test of bull, bear and sideways markets.

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

Solas! Republishing Introduction. {Revised}

2012-01-03T06:48:00.000-08:00

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.

Merry Christmas

2011-12-25T06:43:00.000-08:00

Merry Christmas to all!

Christmas Eve

2011-12-24T16:48:00.000-08:00

Merry Christmas!

Thank You So Very Much

2011-12-23T03:29:00.000-08:00

To all my clients, friends of my company and readers of this blog:

Usually you receive a holiday card from me. This year I’m doing something different. You see 2011 has been the 10th anniversary of Lumen Capital Management, LLC. When I embarked on this journey I could have hardly imagined that I would be working through such a tumultuous time! Looking back, I’m amazed at how quickly it all went! When I started this adventure my children were eleven, eight and six. Now my oldest is preparing to graduate from Providence College, I have a freshman at Butler University and my youngest just received her driver’s license. I have now watched many of my client’s children grow up as well! There is also something my father told me years ago.

My Dad was a country lawyer in Union City, Indiana. His was the most retail variety of law that could be practiced. He did everything from wills to divorces, business law to DUI work. Add a bit of criminal work and a little work for the county and you would have his business. He kept “farmer’s hours” on Saturday until he was sixty. That meant his office was open Saturday morning when farmers traditionally came into town. As such my Dad dealt with everybody. I believe I inherited my love of people from him. Dad gave me four pieces of advice when I started out as a stock broker, long before I ever hoped to build my firm.

“Be the best you can be at what you do, be frank, be honest and if possible do business with people you like.”

I have tried to follow all four of his lessons, particularly when it comes to liking my clients. Words alone will never convey how honored I have felt over the years for the opportunity to do business with you. Many of you have been with me through some very troubling financial times in the markets so thank you for your continued trust and support.

We're going to take a little time off between Christmas and New Year's. Many years ago I was a student in Vienna, Austria. I always promised myself if able that I'd take my kids someday to a few of my favorite spots over there. I'm keeping my word this Christmas as I'm taking my family to parts of Germany & Italy. Since both countries are ground zero for the debt issue over there, I'll report back what I learn in January. Posting is going to basically be non-existent over the next two weeks unless some major issue comes up. We'll pick this up again sometime in early January.

Once again please let me say thank you for the opportunity to serve you during these past ten years. For what it’s worth in the business department I think this next decade will surprise us in a more positive manner! Hopefully I will be writing a similar letter to this on the anniversary of my 20th year in business as well. I hope you have a merry holiday season this year. It is also my hope that 2012 is joyous and profitable for both you and your family.

By the way, I often putter around my office on Saturday mornings as well!

Very truly yours,

Christopher R. English

Then:

Now!

Mortgages

2011-12-22T10:25:00.000-08:00

Bespoke Investment Group comments on the continued decline in mortgage rates:

"It's been an epic ride down for mortgage rates over the last decade, and the 4% mark has finally been broken. Below is a chart of Bankrate.com's national average for the 30-year fixed mortgage rate. As shown, the rate is now down to 3.92%. No one can blame high interest rates for the weakness in housing, that's for sure."

My comment: Rates may be low but as anybody who's tried to get a mortgage can attest, banks have no interest in making loans except to people with stellar credit. I have a friend who's trying to sell his home and at least two offers have fallen through because the buyers can't get financing.

Link: Bespoke: Mortgage Rates

A few Quick Reads.

2011-12-22T05:18:00.000-08:00

Here's a few quick link reads for you today.

1. Hedge funds end 2011 with a wimper. {Wall Street Journal-Subscription required}. According to the Journal all seven trading strategies tracked by the Dow Jones Credit Suisse "Core Hedge Fund Index" are showing losses as of Wednesday, Dec. 14, with the entire index dropping nearly 8%.

2. A Boom in Shale Gas? Credit the Fed {Washington Post}

3. Investors continue to lose faith in stocks. {CNBC} Just over a week ago, equity mutual funds globally had the second-biggest one-day outflow of money in 2011, capping four straight weeks of net redemptions, according to data from EPFR Global.

Worldwide, investors have yanked $34 billion out of equity funds this year and put $75 billion into bonds. {This for what it's worth I think has the ability to be a bigger picture story in 2012. So much money has left the markets and is essentially earning nothing on the sidelines that any little spark could really ignite a rally if investors decide that they're willing to take on a bit more risk next year.}

Ex-Dividend

2011-12-21T13:52:00.000-08:00

A quick housekeeping note: Clients may note unexplained swings in ETFs over the next several days. That is likely due to many going ex-dividend for their final payments in 2011. Stocks will generally decline by the price of the dividend on the day they go ex-dividend. Case in point Vanguard MSCI Europe went ex-dividend today. That means people that bought yesterday or before are entitled to the most recent dividend by the ETF. Since it is scheduled to payout $1.908 in dividends on December 28 the stock will normally drop by the amount of the dividend. Take that out of the equation and VGK was down about .16 cents on the day.

*Long VGK in client and personal accounts.

ETFs: Thoughts

2011-12-21T06:08:00.000-08:00

Morningstar article on 9 Things We Learned About ETFs in 201. {Excerpt with my highlights.}

ETF adoption continues unabated....we continued to see more and more adoption and more and more mainstreaming of ETFs as core portfolio holdings and also as tactical trading tools.

....{R}isk is everywhere. There was a lot of discussion about derivatives in funds or synthetic ETFs in Europe, all of it on the backdrop of the continuing liquidity and banking crisis happening in Europe. At the end of the day, risk is everywhere, and risk equals return.......{P}eople are very risk-averse right now, but also that there is a problem in the dialog that all risk is bad. And that's not true, because risk has to equal return. So, if you don't want any returns, then you won't take on any risk. But if you do want some returns in your portfolio, you have to take on some risk to do that. Keep in mind that there are no riskless returns, but there are returnless risks, and you need to be able to separate the two.

Staying with that risk theme......We saw tremendous amount of inflows into low beta, low volatility strategies where investors are clearly looking to tamp down market volatility, while still getting some equity risk and therefore equity return.

.....{I}ncome was one of the huge drivers in ETF new product launch success and general flows overall. Dividend-themed income funds, low volatility funds which kick-off a nice dividend stream. Also dividend-themed income funds that move beyond just U.S. large-cap dividends, but also international.....Investors--especially, ETF investors--clearly are looking for income.

On that theme of income, one of the other more interesting trends is the move into non-U.S. debt. ....The U.S. investor is also looking to diversify their fixed-income portfolio away from traditional dollar-valued bond areas and into some of these more diverse, different currencies and really different economies and different government backing those things.

Another trend that we see in 2011 is actually the arrival or the continued arrival of the alternative tool ETFs. .....{W}hat we really saw in 2011 is the continuing launch of these very specific, risk-mitigating tools or exposure tools. Things like the factor-products launch by Russell and continuing launches in VIX products, in other products that help to manage duration risk on the fixed-income curve. None of these ETFs are really designed to be held per se forever or as part of a core, but they are meant to be tools implied to reduce risk or fill out exposure gaps that we see out there. So, we continue to see that evolution. I think a lot of people forget that the first ETFs, back in 1994, were the on-exchanging of a very simple structured product. And what we're seeing now is the fifth and sixth generation of structured products moving onto the exchange. ... A lot of these funds and the techniques they employ have been used by institutional investors for years, if not decades. And now they are moving onto the exchange in a low-cost way for investors of all sizes to be able to employ in their portfolio risk management.

One of the other things I think that was most notable in 2011, is that there was a lot of noise about ETFs ... creating market volatility or raising correlations, and that's true whether it was just regular ETFs or leveraged ETFs, in particular. So, one of the things we learned was that in 2011 we had a Congressional hearing based on a lot of these accusations more or less, and the funny thing is, nobody showed up to it..... We had testimony from the NASDAQ exchange, BlackRock iShares, and a member of the SEC. None of it was really new information. Actually, I think a lot of it confirmed that ETFs are not the cause of volatility.....

We also learned that price continues to matter in ETFs....We've also seen fund companies and ETF providers cut their fees in order to make their products more palatable and more usable. We've also seen the entrance of some more low-cost [providers]...So, price continues to matter. We continue to see money flow to lower-cost ... options. But what we learned in 2011, as well, is that while expense ratio is important, we want to make sure people understand that that's just part of all the costs that go into it. And you have to think about the liquidity effect, and you also have to think about tracking error and tax efficiency when we look at the total ETF cost structure that's out there.

Last but not least in things we learned in 2011 is that ETFs are evolving, and the use of ETFs is evolving in a major way. What I'm talking about here is the use of ETFs in solutions, and that is managed portfolios.....

Link: Morningstar: 9 Things We've Learned About ETFs in 2011. {Subscription may be required.}

Happy Hanukkah

2011-12-20T15:59:00.000-08:00

Happy Hanukkah. Best wishes and prosperity for 2012.

65 Years Ago Today

2011-12-20T06:35:00.000-08:00

It's A Wonderful Life made its debut 65 years ago today at the Globe Theatre in New York City. While the film has become a Christmas classic over the years, it opened to mixed reviews back then. According to an article in Wikipedia, "Bosley Crowther, writing for The New York Times, complimented some of the actors, including Stewart and Reed, but concluded that "the weakness of this picture, from this reviewer's point of view, is the sentimentality of it — its illusory concept of life. Mr. Capra's nice people are charming, his small town is a quite beguiling place and his pattern for solving problems is most optimistic and facile. But somehow they all resemble theatrical attitudes rather than average realities."1.

If you've grown up or lived for any length of time in the Chicago area and you've never seen this movie then you must never watch TV.

1.Wikipedia It's a Wonderful Life.

an tSionna {12.20.11}

2011-12-20T06:21:00.000-08:00

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

Long Term Interest Rates

2011-12-19T05:16:00.000-08:00

Chart of the Day today gives us a longer term perspective on interest rates.

"For some perspective on all-important long-term interest rates, today's chart illustrates the 112-year trend of the 10-year Treasury bond yield (thick blue line). As concerns over government debt as well as a struggling global economy have increased and fears over inflation diminished, investors have moved towards safety resulting in a significant decline of the 10-year Treasury bond yield. The 10-year yield has declined a fairly dramatic 300+ basis points (i.e. 3%) since the peak of the credit bubble. This decline has brought the 10-year Treasury bond yield to a 112-year monthly low. It is worth noting, however, that the quarter-century downtrend of the 10-year bond yield remains intact and will remain intact even if the 10-year yield were to drop significantly below 1.5% over the near-term."

Comment: 10 year rates below 2% are saying that investors have so little confidence in the US economy over the next 10 years that they are willing to accept a rate of return that will likely yield a negative return after taxes and inflation during that time period for the surety of a return on their principal. Meanwhile the yield of the S&P 500 is roughly 2% and has the capacity to gain in value during that same time period.

Link: Long Term Interest Rates

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

Doug Kass: 10 More Reasons To Buy American

2011-12-16T06:01:00.000-08:00

We excerpted a post by noted investment writer & investor Doug Kass over a month ago where he made a strong argument to Buy American. Kass is back with some more reasons to buy our markets. Below I've excerpted a piece from an article he originally penned for Real Money Pro {subscription required} and later posted here at thestreet.com. {My highlights in green!}. Here it is:

"Europe's economies are moving in reverse -- at best, a deepening recession is in the cards. (Europe used to rule the world, but it no longer dominates.) The U.S. economy is moving forward, with a 3%-plus real GDP for fourth quarter 2011 expected and growing signs that the domestic recovery will be self-sustaining (albeit, at a moderate pace).

I believe, more than ever, that the events over the past decade have highlighted the likelihood that the U.S. stock market will be favored among most other investment markets in the world. As I have written, the U.S. stock market has become the best house in a bad neighborhood. Below are 10 reasons for my optimism.

U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.

U.S. banks are well-capitalized, liquid and deposit-funded. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world.....

U.S. corporations boast strong balance sheets and healthy margins/profits. Our corporations are better positioned than the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock-solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.

The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)

The U.S. is politically stable. ....Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.

The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)

The U.S. is rich in resources.

The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.

The U.S. dollar is (still) the world's reserve currency that is far more solid than the euro.

The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

In summary, conditions that have evolved over the near- and intermediate-term have conspired to favor risk assets in the U.S. over many other areas of the world. In the period ahead, look inward (not outward), as I expect a powerful reallocation trade out of non-U.S. equities into U.S. equities.

Buy American, I am."

Doug Kass writes daily for TheStreet's premium service Real Money Pro.

This Movie Had It's Premier 72 Years Ago Today!

2011-12-15T16:50:00.000-08:00

Movie premiered in Atlanta. The audience is alleged to have booed when Sherman's troops burned the town. Elsewhere off in Europe, a real war was waging that winter!

Tough Year.

2011-12-15T07:09:00.000-08:00

It's been a tough year as of yesterday with the major averages down between 2-6% for the year now. Foreign markets have done much worse all on average down well into the double digits. I thought I'd give you an idea how various other institutions, companies and asset classes have done. Analysis does not include dividends that have or will be paid out between now and year end.

-Berkshire Hathaway {Warren Buffett's company} down 6%.

-Hedge Funds {the folks who keep 20% of profits in a good year} see here. On average most of these asset classes are down for the year as well.

-Jim Cramer's Action Alert's Plus: -12.48% {Source Data supplied by Action Alerts Plus-Subscription required}

-Some well known mutual fund managers:

Bill Miller, who has been managing the $921 million Legg Mason Capital Management Opportunity Fund (LMOPX_) since 1999, has seen his mid-cap value fund tumble 36% this year.

Ken Heebner, manager of the $1.8 billion large-growth CGM Focus Fund(CGMFX_) since 1997, has lost 27%. Heebner's $1.8 billion CGM Focus Fund(CGMFX) has plummeted 28% this year, Heebner, who's managed the fund since 1997, is known for having years in which the fund has rocketed more than 50% on outsized bets on targeted industries such as commodities or technology.

The $7.5 billion Calamos Growth Fund(CGRRX_), run by a large team including family members John P. Calamos Sr., John P. Calamos Jr. and Nick P. Calamos for 21 years, has dropped 11% this year. Like other large, known funds, the performance is better over a longer period, particularly 10 years.

Data Source: Thetreet.com-Fund Managers Who Should Hang Their Heads.

General Electric. -7.98%.

How have we done for clients? While I never discuss specifics, I will say that on average we are down for the year in client accounts as of last night. We are down in line with most of the major averages but not down as much as the most extreme. Translation: On average we are down a bit more than that 2.5% which is where the S&P 500 traded as of last night but on average not down the 6-7% which is where some of the more volitile major averages are currently trading. {Note these results are not audited although I am willing to discuss and offer the evidence as to how I came up with that number if anybody is interested. Also these numbers will likely change between now and year end-so treat it simply as a snapshot in time.}

Everybody has been predicting a Santa Clause rally. So far we haven't seen that. We'll have to see what transpires in the next several weeks. So far the 'jolly old elf" has brought nothing but coal.

*Long ETFs related to the S&P 500 in client and personal accounts Long GE in certain client accounts as well as a legacy position or as an unsolicited position.

War Is Over

2011-12-15T06:30:00.000-08:00

The war in Iraq ends today, in time for the holidays. Here's John Lennon singing Happy Xmas (War is Over). You can read a history of this song here.

Everybody Using A Broker Should Read This.

2011-12-15T06:21:00.001-08:00

The Most Dependable Wealth Managers In America

I'd add that most of the fellows I know that are retail brokers are pretty good at what they do. They do have to fend off their managers and branches most of the time.l

an tSionna {12.14.11}

2011-12-14T06:39:00.001-08:00

US Dollar breaks out. Could make it harder for our exporters as it makes our goods more expensive but great for anybody going abroad.

Chart courtesy of Bespoke Investment Group on 12.14.11

Higher GDP Than Expected in Q4

2011-12-13T06:38:00.000-08:00

A nice explanation from Calculated Risk: about the numbers behind the expected increase in 4th quarter GDP this year.

"From the WSJ: Economy Poised for Growth Spurt, but Risks Abound {Subscription Required} 'Forecasting firm Macroeconomic Advisers on Friday raised its estimate to 3.7%, from 3.5%, while Goldman Sachs has raised its target to 3.4% from the 2.5% it was predicting two weeks ago. Nomura Global Economics lifted its target from 3.7% to 3.9%, which, if achieved, would match the fastest quarterly growth of the recovery.'

It does look like GDP growth will be slightly above trend in Q4, but this is still weak growth considering all the slack in the economy. Back in Q4 2009 and early 2010, real GDP increased at around 3.8% annualized for a few quarters, but almost all of that growth was from increases in private inventories (a classic inventory cycle). This quarter most of the increase will be from final demand.

However some of this "growth spurt" is just a bounce back from earlier events - auto sales have finally recovered from the impact of the tsunami, and consumer and business spending have bounced back a little from the threat of a U.S. default in August during the debt ceiling debate. And recently personal spending has been increasing faster than personal incomes, and the saving rate has been declining. That isn't sustainable.

Also, there are significant concerns about the first half of 2012 both from the European financial crisis and from fiscal tightening in the U.S. (fiscal policy in the U.S. will subtract from GDP in 2012 even if the payroll tax cut is extended)."

My Comment: All that being said S&P 500 earnings for 2012 right now are clocking in at an estimated 100-102 per share. These so far are not pie in the sky numbers but reflect roughly about 7% earnings growth for next year. That number is also a traditional rate at which earnings grow. At 1224 where the S&P closed yesterday that reflects a market trading with a forward PE of between 12 and 12.5 next years earnings. Assuming these numbers are good{and that could of course change over time}, then stocks could show a potential return from here between 6% and 25% next year. That last number assumes that everything goes completely right for the market in 2012. That return doesn't include dividends. A good 4th quarter is a nice tailwind as we head into 2012.

Now as always there's a lot that could go wrong with this market and there is no law that states these numbers won't get cut or that Europe won't trump valuation again next year as it has here since this summer. But a market trading with a yield in excess of 2% with short term rates well under this number and an earnings yield of nearly 8% points to a market that is cheap by historic valuation standards. We'll see how it goes into the new year.

Link: Better GDP in 4th Quarter.

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

Out Today

2011-12-12T06:42:00.001-08:00

Business will keep me away from posting today. I'll be back in front of the screen bright and early tomorrow!

One Of The Best Beer Commercials Ever

2011-12-09T06:57:00.000-08:00

an tSionna {12.09.11}

2011-12-09T06:51:00.000-08:00

We first flagged that we thought we'd initially have trouble at this resistance level shown in the chart above here on Monday.

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

Inflation's Effect on Portfolios

2011-12-08T05:32:00.000-08:00

A very good article on the effects of inflation on portfolios published over at a blog I've started reading called Abnormal Returns. {Excerpt with highlights and a comment at the end.}:

Inflation is Still the Silent Killer By Tadas Viskanta

The goal of every investor is to generate real, after-tax returns. Pretty simple stuff. The financial media spends most of its time talking about nominal returns. In a very real sense inflation and taxes play just as important a role on investor outcomes. We don’t spend a lot of time talking about inflation rates and tax laws because the evolve much more slowly than market returns. Therefore our attention is drawn to market returns which as we all know are volatile. It therefore is easy for investors to become complacent about inflation. (Let’s leave aside taxes for this discussion.) Ever since the end of rampant inflation in the 1970s and early 80s, inflation by and large has been off the table as a issue for investors and the economy.....

....This view of inflation unfortunately misses the bigger picture. 2%, let alone 3%, inflation over the lifetime of an investor compounds at a pretty good clip. Mebane Faber at World Beta in the chart below shows the difference between a 9.4% nominal return and the returns less 3% inflation. As you can see the difference this makes compounded over a lifetime of investing.

Faber goes on to talk about the challenge inflation poses to investors in balanced portfolios, let alone those trying to make a go of things in cash equivalents:

"Even investing in a 60/40 portfolio is only expected to return around 3% a year in real terms while STILL exposing investors to 70% losses. These strategies should all be seen as simply strategies to keep up with inflation. That is depressing of course, but true. The worst outcome is the cash under the mattress strategy which will expose the investor to anywhere from 2% to 7% losses per year. You may not notice the effects, kind of like a boiling frog, but at some point you look back and say, “wow, I remember when a Coke cost 25 cents….”

A lot of investors these days are holding large cash balances in the hope of riding out current market volatility. The problem is with the return on cash hovering around 0% in nominal terms and -2% in real terms, if you believe the inflation expectations, this puts investors in a pretty deep hole......Inflation never really went away as an issue for investors. What went away are decent, low-risk options to try to keep up with inflation. The Fed’s policy of zero interest rates has made difficult choices for investors. Unfortunately no let up seems imminent. All the while inflation is still the silent killer of investor portfolios, compounding away in the background.

My Comment: Many investors are afraid of the market volatility which has increased in recent years. They automatically look for ways to avoid this and still have some sort of nominal rate of return after inflation. They most often look to what is perceived to be risk free investments such as government bonds or less risky investments like other bond instruments or annuities. In my mind there are two issues here. The first is that many of these so called risk free or less risky investments turned out to be much more dangerous than people thought. There are many folks that purchased annuities today for example that have no idea how close some of the underlying companies that guaranteed these investments came to going out of business in the 2007-2009 period. Often as with annuities, they also pay substantial real and hidden fees for this perceived level of protection that eats away at what they might otherwise have been able to have saved.

The second issue is what price people are paying for this so called security. A 10 year US Treasury bond today yields 2.06%. A 2 year piece of the same paper pays 25 basis points {1/4 of 1%}. Money market accounts are worse, basically yielding nothing. On an after tax basis and assuming a 2% inflation rate, investors are basically losing money by losing purchasing power when they hold these investments. As an aside and as I've noted before, when you hold a piece of paper that basically gives you the right to lose money via purchasing power for 10 years, you are basically saying that you have so little confidence in economic prospects over the next decade that you are willing to lose money slowly for the chance to get back all of your principal amount {absent its loss of purchase power} on some distant date.

I understand people's concerns and current distrust of stocks and I'm not advocating that every bit of a person's assets should necessarily be tied up in the markets. But many people need to gain some balance and perspective about this issue which judging by the trillions of dollars locked up in money markets is still sorely lacking by investors.

Finally as an aside the one thing forgotten by investors is that money markets, {unless they are backed by government securities} are not normally guaranteed by FDIC and they are run by investment companies in the business of making a profit. The yields are so low on money markets right now that many firms make no money on these and run them simply as a courtesy to clients who invest in other higher yielding funds with these firms. If rates stay low into perpetuity look for firms to try to find ways to make money off of these accounts or perhaps get out of that business entirely.

USS Arizona-Video

2011-12-07T09:39:00.001-08:00

This film was found back in 2001. It shows actual footage of Arizona's destruction from 12 seconds into this video. The sound apparently is dubbed.

Still At Sea

2011-12-07T08:06:00.000-08:00

USS Arizona {BB-39} departed Naval Station Pearl Harbor 0806 hours Hawaii time December 7, 1941. Sill listed at sea these past 70 years by the United States Navy.

Times Article On Angela Merkel

2011-12-07T07:16:00.001-08:00

Pretty good New York Times article titled Angela Merkel Brinksmanship For A Debt Crisis. Here's an excerpted part of the article.

"At critical junctures throughout the crisis, Mrs. Merkel has resisted appeals to appease the financial markets by lowering borrowing costs. Instead, she has wielded the pain of soaring interest rates as a cudgel to extract painful changes — and demand leadership changes — in countries like Greece and Italy that have proven resistant to those changes in the past. It is a clever strategy, one that allows her to juggle divergent interests at home, where the German people do not want her offering more guarantees of taxpayer money to combat the sovereign debt crisis, and abroad, where they are begging her to do so. It is also highly risky.

If the euro is preserved and Europe moves toward a more unified future, Mrs. Merkel will probably win the lion’s share of the credit, perhaps one day being hailed as Europe’s savior. But if her prescriptions turn out to be inadequate, she could reap the blame for presiding over the collapse of the euro, with untold consequences for the world economy. Either way, Mrs. Merkel, a steely champion of austerity and fiscal discipline, seems to have assumed the nickname of her 19th-century predecessor Otto von Bismarck: the Iron Chancellor."

I have a feeling where going to be paying a lot more attention to Germany in the coming years. It is increasingly a country that is leaving the shackles of its past behind. In that regard I'll tell you a short story. Several years ago we hosted an exchange student from a smaller city in Bavaria for a long weekend. Since I speak a little German {from a former life as an exchange student living in Vienna, Austria} I ended up being her tour guide of Chicago for three days. Over the course of that period at some point the war came up and this was her thoughts:

"I know Germany did horrible things during the war. We accept them and are truly sorry for them. However, my grandparents were children during the War. My parents were born after the War and I certainly did not do or condone these things. While I wish those things had never happened, it's not my fault."

I sometimes think we forget that just as our veterans or people with direct experience of the war are dying so are those in Germany, Italy, Japan and the other countries that were directly involved in World War II. It's a brand new world. What was old is new again and we here in the US need to adjust to that.

I will be in Germany over part of the Christmas holiday and will report back on what I find when I'm there. Also going to be in Italy which is now ground zero for the debt crisis and will bring back my thoughts from there as well.

Irrational Exuberance

2011-12-07T05:59:00.000-08:00

I almost forgot that Monday marked the 15th anniversary of Alan Greenspan's Irrational Exuberance speech which suggested that stocks were overvalued. Here's what he said in a speech before the American Enterprise Institute on 12.05.1996.

....."Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?..."

Source: http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

Greenspan was right in the long run. According to Greg Mankiw the return on the U.S. stock market has been 5.55 percent in that time period while the the return on the U.S. bond market has been 5.98 percent. But he was wrong in his timing as stocks would continue to advance for almost 2 1/2 more years and advance a bit over 100% during that period.

Best Market Opportunities In A Half-Century

2011-12-06T07:13:00.000-08:00

Everybody should read this Barron's interview interview with veteran investor Joe Rosenberg for a concise and well thought out argument on why stocks are cheap. It was published in that paper over the weekend.

Market Breadth

2011-12-06T06:30:00.000-08:00

From Bespoke Investment Group:

"After last week's and today's rally, 81% of the stocks in the S&P 500 are back above their 50-day moving averages. While the index is having trouble breaking above its 200-day, underlying breadth has not been an issue. Both big rallies since the start of October have now seen much larger than normal stock participation, which is something the bulls can hang their hats on."

According to Bespoke, the sectors with the best breadth are Energy, Financials, Industrials, Materials and Utilities. Sectors that are weaker include Health Care and Telecom.

Link: Bespoke: Sector Breadth

*Long ETFs related to the S&P 500 in both client and personal accounts. Long certain energy, financial, industrial material, utility and healthcare ETFs in certain client and certain personal accounts.

Unemployment

2011-12-06T05:48:00.000-08:00

Chart of the Day with a longer term look at unemployment. Their chart and their commentary below.

"{On Friday}, the Labor Department reported that the unemployment rate declined significantly to 8.6% -- the lowest level in 32 months. For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate since 1948. As today's chart illustrates, the unemployment rate has been generally trending lower. However, the pace of that overall downtrend has been significantly slower than what has typically occurred following previous peaks in the unemployment rate. Though, following the previous two recessions, it did take much longer than normal for the unemployment rate to peak. While the significant decline in the unemployment rate for the month of November is a positive step, it is worth noting that the current unemployment rate remains at a level that was surpassed only during two previous periods (1975 and 1982-83) over the last 60+ years."

Link: Unemployment Since the 1940's

an tSionna {12.03.11}

2011-12-05T05:46:00.000-08:00

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

State Farm's Tribute to 9/11.

2011-12-02T06:51:00.000-08:00

State Farm commemorated the 10th anniversary of the 9/11 attacks in New York with this tribute. State Farm partnered with award-winning director Spike Lee and used a song originally sung by rapper Jay-Z and singer Alicia Keys titled "Empire State of Mind" . Nearly 150 school children (ages 8-11) from the New York City area visited four firehouses and thanked the firefighters during the commercial.

If you have the time watch the behind-the-scenes video on the shooting of this commercial with commentary by director Spike Lee. Behind the Scenes: Empire State of Mind.

PreMarks {12.02.11}

2011-12-02T05:46:00.001-08:00

The market is set to spike higher here at the open on benign to perhaps better than expected employment statistics and more indications out of Europe of an increased willingness to come to grips with their debt problems. Yesterday there was one economic statistic that really caught my eye. Apparently car sales in the U.S. are soaring. Apparently it was noticed over at Bespoke as well.

Bespoke says that "On a seasonally adjusted annualized rate, sales rose to 13.59 mln, which is the highest total since the 'cash for clunkers' program in the Summer of 2009. Outside of that one month in August 2009, you have to go back to June 2008 to find a higher monthly reading. Even the luxury sector saw strong growth. Sales of BMWs rose 15%, while Mercedes sales rose 55%!"

I've been saying for awhile that I think the economy is doing better than most people think and that stocks are cheap. This is pretty good supporting economic data. While on the one side average fleet ages on cars continues to get older and so there is a replacement factor that needs to be understood. However, cars still are for the most part a discretionary purchase especially those in the luxury category. You have to be pretty confident about your own personal job prospects right now if you're out purchasing a new car. If you add that with the so far much better than expected early holiday season sales, it's becoming pretty undeniable that things for now are perking up. I think that besides Europe this evidence is what has pushed the markets substantially higher this week.

Link: Bespoke: Car sales.

Leon Cooperman's CNBC Interview

2011-12-01T06:26:00.000-08:00

Busy morning and going to be out much of the day. I wanted to follow-up on the piece I noted yesterday on a public letter that Leon Cooperman of Omega Partners sent to President Obama. He also did a follow up interview with CNBC yesterday. Follow this link: CNBC-Cooperman. Pay attention at the end to the very practical and common sense proposals he has for fixing the economy.

More tomorrow.

Rip Van Winkle

2011-11-30T14:41:00.000-08:00

Doubleclick on chart to make it larger.

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

All or Nothing Days Continued.

2011-11-30T14:36:00.001-08:00

One last thought on all or nothing days. If we get those 69 days this year that means that approximately 27% of all days in 2011 have had a day with the advance/decline line +/- 400. More than have the days since the beginning of August have traded this way. Wow!!!!!

All or Nothing Days

2011-11-30T06:24:00.000-08:00

From Bespoke Investment Group, another "all or nothing day":

"This is getting to be more common than uncommon. With a net daily advance/decline (A/D) reading of 484 today, the S&P 500 had its 60th all or nothing day of the year, and is now on pace for 69 all or nothing days in 2011. For those unfamiliar with the term, an all or nothing day occurs when the net daily a/d reading of the S&P 500 is +/- 400 or more. Of the 84 trading days since the start of August, 43 of them have been all or nothing days."

My comment: It looks like we are going to have another one of these today. This is the modern reality I think. Money simply wants into these markets or it wants out. Decisions are made before the opening now and at the close. On Monday the market had a plus 2% move at the open and never came in. If you wanted to buy this market, you had to do it last Friday right before the close. This binary type market is driving traders nuts but longer term investors should just accept it for what it is and learn to live with it just as we are having to learn to live with higher volatility.

Link: Another All or Nothing Day.

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

Leon Cooperman's Plea For A More Civilized Debate

2011-11-30T06:15:00.000-08:00

If you have the time today bustle on over and read Leon Cooperman's plea to the President to civilize the economic and tax debate. Mr. Cooperman wants debate not demagoguery. So do I!

Link: Cooperman: Please Mr. President.

More on 4th Quarter Seasonality

2011-11-30T06:10:00.000-08:00

The The Big Picture had this statistical comment on market gains in the 4th quarter {October 1-December 31} the other day:

"Surprising data point about Q4 market numbers: From 1990-2010, the fourth Quarter has produced gains near 5% — that nets a return higher than the cumulative return first, second and third quarters combined (3.5%). Consider it a variation of Sell in May."

Link: 4th Quarters are Da Bom

PreMarks {Central Bank Edition}

2011-11-30T06:04:00.000-08:00

Futures are flying this am on news of a coordinated world-wide central bank intervention to inject liquidity into banks. Couple that with end of the month pressures and better ADP employment numbers and you have the basis for what ought to be a good day. Assuming this holds and the Europeans give off even an a small amount of ability to work together on their debt problems then you have the basis for what could be the start of an end of the year rally now.

Remember. There are many people in my business that need that end of day print on 12.31.11 to be much higher than it is now in order to get paid. I expect those people to start doing what they can to run the market for the next three weeks or so.

More later.....

Happy Thanksgiving

2011-11-24T04:55:00.000-08:00

You had to have been born in a certain time and place to remember "The Munsters" and commercials such as this. Enjoy a Thanksgiving walk down 'Memory Lane". Happy Thanksgiving everybody!

Super Committee One Last Satirical Look

2011-11-23T05:16:00.000-08:00

Out To Grandmother's House

2011-11-22T04:27:00.000-08:00

We're going to be taking some time off this week as we do the traditional Thanksgiving thing. We'll pick things up next week. We'll break away from the food table though if anything important comes over the transom.

Happy Thanksgiving!

Are Stocks Cheap? This Writer Thinks So.

2011-11-22T03:42:00.000-08:00

Good Smart Money article that does a much better job talking about how the market is cheap. It is what I was trying to show here. {Excerpt with my highlights}

Panicking About the Markets? Read This -- Now

While the Dow plummeted nearly 250 points Monday, consider that many high-quality blue chips are on sale, and getting cheaper. By BRETT ARENDS

No wonder markets are tanking. The financial crises, here and in Europe, are terrifying. Just ask anyone on Wall Street. The super committee has broken apart in failure. The US budget process is in disarray. Meanwhile, across the pond, who knows what will happen next? The euro could fall apart. The banks could collapse. This could be the next Bear Stearns -- or the next Lehman Brothers. OMG! This is no market for anyone but professional traders, right? I mean, ordinary mom and pop investors should run for the hills, hide in a cave, and put all their money in a sock.

Right? Bah. This is exactly why so many people are still so hard up. They don't know how to invest. They don't know how to handle the markets. And they certainly don't know how to handle the headlines. Do yourself a favor. Stop worrying.....Take a deep breath. And give some thought to buying some good, high quality blue chip stocks. Yes, today. Thanks to the crisis, they're on sale. And they offer a compelling investment for all but the most risk-averse.....

....Only you know how your financial situation is fixed. You wouldn't want to invest money you will need in short order. And you may also fear that you already own too many stocks at your stage in life. But you don't need to overthink this too much either. Could the European crisis get much worse? Certainly. Could the stock market fall much further? Sure. Could we enter another recession? Yup. Let's even accept that it's a good possibility. I make no guarantees -- none -- about what will happen in the next few weeks or months.....But so what? You make money buying good quality securities when they are cheap, not by predicting the market's next twist or turn.

The reality is that fears about the European crisis have already driven down stock prices a long way -- including those of many strong, stable companies that will weather crises just fine. So in many cases you are simply getting a very good deal. Investing in a crisis is simple, because there are cheap stocks all around. It's investing in a boom that's hard.

Take a look at the iShares Global 100. It's made up of companies...{that} have operations all over the world. They are fabulously profitable. They are reaping big profits in western countries, and rising profits in the emerging markets of Asia, Africa and Latin America. Higher-risk financial stocks make up just 12% of the total. Yet the dividend yield on this fund, even after deducting the 0.4% management fee, comes to 2.9%. To put that in context, a ten-year Treasury bond is only paying 2%. Plenty of {the fund's} stocks, individually, are yielding better than 3%. Quite a few, especially in Europe, are yielding better than 4%.

Stocks go down as well as up. But over time, they have tended to rise. And, also over time, dividends have generally risen faster than inflation. Bond coupons do not. That means blue chip stocks offer you some protection against inflation. Regular bonds don't. They put you at risk from inflation.

Study after study shows that when it comes to stocks the public typically does the wrong thing at the wrong time. They sell in a crisis, when shares are cheap and a good buy. Then they wait till prices have boomed and they start buying again. That's why they dumped huge amounts of stocks during the financial crisis, in the fall of 2008 and the winter of 2009. Data from the Investment Company Institute, a body that represents the mutual fund industry, shows they have been dumping stocks again recently.

Look at what this means. Dalbar, a financial research firm in Boston, does a study every year which compares what the average mutual fund investor actually earned with what they should have earned. Over the past 20 years, says Dalbar, someone who just invested $1,000 in the Standard & Poor's 500 index and left it there, reinvesting the dividends, would have made about $4,750 in profits. The average investor in an equity mutual fund over that period? They made $1,000. No, really. A fraction of the total. After accounting for inflation, the average investor barely broke even. No wonder everyone hates stocks. From 2000 through 2010, the stock market went nowhere. But Mom and Pop mutual fund investors lost billions, because they bought at the wrong time and sold at the wrong time. There's an obvious conclusion. Someone else made that money. Sophisticated investors. The ones who bought when others were selling in panic, and then sold when others were buying too greedily. The blue-chip iShares Global 100 has fallen 20% since late May.

Analysts at GMO, the upscale investment firm in Boston, reckoned even a few weeks ago that a basket of high quality U.S. and international blue chips would earn you about 5.5%, plus inflation, over the course of the next seven years. Their numbers are only a guess, but they are based on some common sense assumptions and cautious forecasts. Based on the sell-off last week, the prediction should now be around 6%, plus inflation. To put this in context, cash and bonds are paying you less than inflation. And even a thirty-year mortgage is only costing you 4%, before inflation.

Link: Panacking About The Markets-Read This Now

*No positions in the ETF or the mutual fund mentioned in the original article. The stocks mentioned in the article are also positions held as components in various ETFs in which we invest.

Super Committee I Was Wrong

2011-11-22T02:58:00.000-08:00

A final post-mortem. I was wrong. That wouldn't have changed my investment stance but I was wrong in thinking these fellows would behave rationally and with the best interest of us in mind. It's important in my business to admit when you made a bad call. On this I was on the wrong side of the fence.

Super Committee-A Thought

2011-11-21T07:14:00.000-08:00

Today's first post may seem kind of silly given the apparent failure of the super committee to come to a deal over the weekend. Let's just put a few thoughts in on that.

1. Deadline is Wednesday. Also deadlines can be usually be extended. In fairness there may be something in the legislation that originally set up the committee that precludes that. I haven't looked.

2. Automatic cuts of 1.2 trillion set in in 2013 if the committee does nothing. These cuts are so draconian that it is likely that some kind of deal will be crafted later on.

3. The best thing might be for political deadlock to set in and have Congress do nothing. Washington Post columnist E.J. Dionne calculates how a Congress that sets on its hands could save over 7 trillion dollars in the next decade simply by doing nothing.

4. Things are pretty gloomy and investor sentiment is beyond poor. Yet stocks are cheap. Investor sentiment strikes me as in the necessary stage that often sets up a rally.

We'll see how the rest of the week plays out. I will say that at this point it looks like the super committee is done and I'd say that the blame will be marginally cast more towards the Republicans than the Democrats. That may be enough to get us some movement at this late date. We have till Wednesday.

Seasonality

2011-11-21T05:06:00.000-08:00

You're going to hear a lot about market seasonality if you pay any attention to the investment news between now and the end of the year. Terms such as the "Santa Claus Rally" have been coined to describe what usually happens between Thanksgiving and New Year's Eve. I did a quick snapshot of the S&P 500 to see how markets have performed recently during this period. I picked 2008 as a start date simply because that's the year from my perspective when the entire investment landscape changed. There would not be enough data points to reach any solid conclusions about this period if longer dated studies hadn't already confirmed the statistical upward bias to stocks during this time.

Since 2008 stocks have been up each year, averaging by my work just a bit under 8%. That number is skewed by a 16.30% return in 2008. The other two years at 1.84% and 5.73% respectively average just a little under 4% for the period.

A 4% gain would imply a year end price on the S&P 500 of 1264 from Friday's 1215.65 close while an 8% gain would place us closer to many analyst's fair value target of 1310-1320.

One note of caution if we see no rally. The year where this pattern was most recently broken was 2007 when stocks lost nearly 5% between Thanksgiving and the new year. That of course presaged a horrible 2008.

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

"The Date"

2011-11-18T06:21:00.000-08:00

I like commercials, infomercials, etc if they are well made and tell a story. This Heineken add fits into both categories. I'm told it is a take off from a 1965 "Bollywood"-{That is it's Indian made} movie called Gumnaam. Enjoy! You can watch the original scene that inspired the commercial below.