Lakefront Partners Daily Blog

Lakefront Blog 12/01/2011

2011-12-02T08:25:00.001-05:00

Jobless Claims: Jobless claims came in slightly worse than expected today. Continuing claims, as shown below, have remained relatively flat and in a tight range for most of the year. Today’s numbers, although slightly worse than expected, had little effect on the market.

Continuing Jobless Claims (Four Years)

ISM Manufacturing: The ISM Manufacturing survey for November showed a slight tick up. This index has remained above 50, which is the “Mendoza line” for growth, since August 2009. Like the jobless claims data, this did not affect the market much.

ISM Manufacturing (Since 2001)

Most U.S. economic data has been better than expected. Generally, however, the market has been more concerned with what is occurring in Europe.

Construction Spending: Construction spending was slightly better than expected for October. Looking at year-over-year comparisons, construction spending is now back to flat. The chart below illustrates how construction fell off a cliff in 2006 and starting at the beginning of 2010, started to become “less worse.” Whether we will be able to say it is getting “better” remains to be seen.

Construction Spending (YOY Δ% Since 1994)

November: November proved to be another interesting month. Although the final result for the major indices was relatively benign, in the last ten days of the month, there was plenty of volatility. During those ten days, the S&P 500 dropped eight percent and then rallied almost eight percent.

Market Today: The market ended the day relatively flat. The intraday volatility was only about one percent, which is lower than most days we have seen. It appears that after yesterday, the market took a breather. Most sectors I follow were mixed.

Have a good day! Brent

Lakefront Blog 11/28/2011

2011-11-29T08:13:00.001-05:00

Black Friday: Other than the usual trampling incidents at Wal-Mart, Black Friday appears to have been strong this year. According to the National Retail Federation, compared to last year, retail sales grew 16.4% in the four days beginning with Thanksgiving. Online sales were strong, too. In the past, Friday was always the big day for traditional retailers and Monday was dubbed “Cyber Monday.” Now, it is not as true. My initial guess is that it is because of the predominance of hand-held devices. People no longer need to plant themselves in front of a computer to go online shopping. I know this first hand from the random emails I get about apps being purchased on my children’s iPad and iTouch. Of course, it always seems to be an accident.

Europe: European stocks experienced their biggest increase in two months. Investors speculated that European policy makers are intensifying their efforts to contain the crisis. The US retail news likely helped European stocks as well.

Powerball: Three Connecticut men went in on one Powerball ticket for 33.3 cents each. They ended up winning $254 million in the biggest Connecticut payday ever. Incidentally, they are investment managers who live in Greenwich. I wonder if people will start sleeping in tents at the lottery offices?

Market Today: The market was very strong today, ending a seven day losing streak for the S&P 500. The propellents were the strong holiday sales and slightly better news out of Europe. Every sector I follow was up, and stocks were up across the board.

Have a good day! Brent

Lakefront Blog 11/22/11

2011-11-22T16:22:00.001-05:00

Insider Activity: In the past two weeks, I have noticed a lot more insider selling and few insider buys. It appears that after earnings, many insiders are taking the opportunity to lighten up on their recently strong stock.

Super-Committee: The congressional super-committee failed to agree on budget cuts yesterday. Yesterday’s move down in the market appeared to be mostly due to the politicians’ inability to agree on a solution. It was one of the few recent days that Europe was not the catalyst for weakness. Our fate seems to be in the hands of these people:

GDP: Third quarter GDP was revised slightly downward from 2.5% to 2.0%. This was a slightly negative force on the market today. Even considering the downward revision, last quarter still represents a tick up from Q2. Interestingly, the trough in 2008 was deeper than every other recession in the past fifty years.

GDP (15 years)

Market Today: The market was slightly weak today on the GDP news and a bit of a hangover from the super-committee failure. As usual, there was intraday news regarding Europe which temporarily helped the market.

Have a good day, and happy Thanksgiving!

Brent

Lakefront Daily Blog 11/15/11

2011-11-16T07:47:00.001-05:00

Factoid: According to Nielson, vinyl record sales are up 41% year-over-year.

ECO: There were a few economic releases today. PPI was a bit tamer than expected, retail sales were stronger than expected, and the Empire Manufacturing survey was stronger than expected. So, for today, the economy is doing slightly better than expected. Obviously, this all takes a back seat to the events taking place in Europe.

PPI (YOY Since 1948)

Mid-Day Rally: The market experienced another mid-day rally day. These have been pretty common lately, often due to better than expected (or less bad) news out of Europe. The chart below, which shows intra-day movement over the past twenty days, illustrates the fact that only six days have closed near the lows. Meanwhile, fourteen of the last twenty days have closed near the high of the day.

S&P 500 (Intraday – 20 days)

Market Today: The market wavered between negative and flat through the first half of the trading today as investors largely overlooked positive economic news. Around noon, however, news out of Italy moved stocks higher through the close. Mario Monti, who will replace Silvio Berlusconi as Italy’s Prime Minister, is reportedly set to present a new government to battle the country’s debt crisis. All sectors participated in the rally, with noticeable strength in technology stocks.

Have a good day! Brent

Lakefront Daily Blog 11/08/11

2011-11-09T10:02:00.001-05:00

Restaurants: I keep noticing restaurant stocks that have been very strong. To verify this observation, I looked at the S&P 1500 Restaurant Index shown below. As you can see, this index has been in a very consistent uptrend since the market low in 2009. Interestingly, this group has been somewhat immune from the recent market turbulence and is currently trading at new highs.

Restaurant Stocks (Since 4/2009)

Europe: Europe continues to have a strong influence on the U.S. stock market. Today, Italy’s Prime Minister said he would resign once an austerity plan is passed. With this news, the market rallied almost two percent intraday.

Oil: All of the headlines out of Europe have pushed this to the background, but since October 5, Oil has rallied from $75 to $97 per barrel.

Oil (One Year)

Market Today: The market wavered around flat today until news came out of Europe this afternoon of Berlusconi’s resignation. All sectors ended up on the day and I noticed particular strength in the homebuilders.

Have a good day! Brent

Lakefront Daily Blog 11/3/11

2011-11-04T08:03:00.001-04:00

ECO: There were a number of economic releases today. Since Europe is currently in the spotlight, these did not seem to have much of an effect on the market, and probably won’t be tomorrow’s headlines. Nonetheless, nonfarm productivity, initial jobless claims, continuing jobless claims and factory orders were all a little bit better than expected. The ISM non-manufacturing survey was slightly worse than expected, but still above 50, which is the benchmark for growth or contraction.

Europe: The main news out of Europe today was a surprise 0.25% rate cut by the European Central Bank. Additionally, the debt plan seems to be back on track for now.

MLPs: Every day lately, I hear people talking about MLPs (Master Limited Partnerships). Is this a sign the area has been over-invested in? Or is this just the beginning of something bigger?

Gold: The entry about MLPs above reminded me of Gold. People have been talking about Gold for a long time now. Obviously the inputs on Gold prices are quite different than MLPs, but Gold has continued to power higher. Interestingly, it has continued to trade within the channel I have brought up in the past:

Gold (Three Years)

Volatility: I have been hearing a lot of people talk about the incredibly high volatility that the market is currently experiencing. It has seemed elevated, but not high compared to periods like 2008-09 and 1999-2002. Looking back at rolling five week periods in the market as shown below:

S&P 500 Volatility (Since 1990)

Market Today: The market opened higher this morning and continued up throughout the day. The driving factor behind the market strength today was, not surprisingly, Europe and progress toward a Greek bailout. Biotech is the only sector I follow that showed any weakness today.

Have a good day! Brent

Lakefront Daily Blog 10/31/11

2011-11-01T08:24:00.001-04:00

Northeast Ohio Rally: From the low, the index of northeast Ohio stocks has rallied almost thirty percent. This index has moved very similarly to the Russell and other broad indices. It is good to see our companies participate in the rally, this has not always occurred in the past.

Bloomberg NE Ohio Index (One Year as of Friday)

MF Global: MF Global filed for bankruptcy today in what is said to be the 8^th largest bankruptcy in U.S. history. Evidently they had made big bets on European sovereign debt. The company is run by Jon Corzine, who is the former governor of New Jersey and Co-Chair of Goldman Sachs. As the chart below shows, equity investors in MF were dumping the stock in the days before this announcement. Interestingly, the company issued debt not long ago, and the ratings agencies considered it “investment quality.”

MF (One Year)

Factoid: According to CNBC, Las Vegas has the highest per capita shrimp consumption in the U.S. This is probably a misleading statistic. I would be willing to bet that the average Las Vegas resident does not eat more shrimp than people in other places. My guess would be the high shrimp consumption has more to do with Vegas’ extremely high tourism component and the fact that those tourists are all eating their meals in Casinos. If this is true, then Las Vegas should have high per capita readings in lots of other categories.

I find this interesting because I think people are often mislead by statistics without really understanding the way they are calculated. If you polled all the people who watched that piece on CNBC, I would bet most of them would say that Las Vegas residents tend to eat more shrimp that people in other cities, even though it probably is not the case. This is a pretty harmless statistic, but think about how many opinions are formed based upon statistics that are misleading if the listener/reader does not understand how they are calculated.

Market Today: The market was weak throughout the day and closed at its lows. Investors reacted to a headline out of the China that the country could not be a “savior” for Europe. The news from MF Global did not help the market, but it seems Europe continues to dominate investor sentiment. Despite finishing on a negative note today, October was a very strong month for the market. The S&P 500 and Russell 2000 finished up 11 percent and 15 percent, respectively.

Have a good day! Brent

Lakefront Blog 10/25/2011

2011-10-26T09:05:00.001-04:00

Housing: The Case-Shiller housing index for August was slightly better than expected. As the chart below shows, aggregate housing prices have been floating in this range for about three years.

Case-Shiller Home Price Index (11 Years)

Consumer Confidence: Consumer Confidence for October was worse than expected. This indicator has been trending down for most of the year. The worse than expected reading did not affect the market, however.

Consumer Confidence (Six Years)

Netflix: Netflix dropped 35% today after they lowered expectations and said they lost roughly 800 subscribers. This stock has now lost almost $12 billion in market capitalization and has moved from over $300 to the mid $70s. Interestingly, but not surprisingly, a whole slew of Wall Street analysts downgraded the stock today, after telling investors to buy when the stock was over $300. Maybe this will end up being a time to buy the stock?

NFLX (One year)

Earnings: Earnings have been generally good. But, there have been some major disappointments like NFLX. As I write this, Amazon is trading down $40 after hours.

Market Today: The market opened down and weakened steadily throughout the day. Europe was once again in the forefront of the headlines as EU finance ministers further delayed debt-crisis discussion.

Have a good day! Brent

Lakefront Daily Blog 10/21/2011

2011-10-24T08:58:00.001-04:00

October: If October ended today, this month would be one of the strongest Octobers since 1928 and the strongest since 1982 for the S&P 500. The other strongest Octobers were followed by a strong market in the following year.

Earnings: Most people would credit the recent rally in the market to subsiding fears related to Europe, but there may be another less publicized reason for the strength. While the media may not be highlighting this, earnings season has been good. So far, 106 companies in the S&P 500 have reported. Three times as many companies have surprised on the upside versus the downside, 75% are exhibiting positive earnings growth, and the growth rate so far in EPS is almost 14%. The table below breaks down earnings season by sector; so far, every sector is surprising on the upside:

AAPL: I noticed Apple was down again today in a strong market. This has not been a common occurrence, but has happened more recently. We looked back and found that in the past five years, up until this month, when the market is up more than 1.5%, Apple had been down only 8.6% of the time. Interestingly, in the past month, Apple has been down 50% of the eight days the S&P 500 has been up 1.5% or more. Is this a sign that Apple is beginning to weaken and may not show the same relative strength versus the market as it has over the past several years or is it just a short-term anomaly?

Market Today: The market was strong today on good earnings and optimism regarding a European debt crisis resolution. Sectors were up across the board with notable strength in homebuilders and healthcare stocks.

Have a great day! Brent

Lakefront Blog 10/18/11

2011-10-19T07:42:00.001-04:00

Homebuilding: The National Association of Homebuilders Market Index ticked up this month. This index, which measures homebuilder sentiment, is still at very low levels. However, the tick up caused investors to be optimistic that that there may be some light at the end of the tunnel for homebuilders. As of 3:15 most homebuilding stocks were up roughly 10+%. From the bottom, the index of homebuilding stocks that I follow is up 25%, but still down almost 25% from the beginning of the freefall that began in July.

NAHB Homebuilding Index (Seven Years)

Bad, but less bad: This seems to be the theme today. The homebuilding news was bad, but less bad, and bank stocks are strong today because the Bank of America earnings release was bad, but less bad.

Europe: Late in the day, news came out that France and Germany agreed to increase the size of the European rescue fund. This added fuel to an already strong day. On the news, the markets quickly added 1+% to their gains on the day.

Crocs: After warning that results would not be as strong as expected, CROX dropped almost forty percent today. This is a good example of what can happen when disappointments occur in stocks where expectations were very high.

CROX (One Year)

Market Today: As I alluded to above, the market was very strong today. Better than expected economic news began the rally, which was then fueled by positive news out of Europe. All sectors I follow were strong, with homebuilders and financials particularly grabbing attention.

Have a good day! Brent

Lakefront Blog 10/13/11

2011-10-14T07:50:00.001-04:00

Odds Calculation: You might have noticed in this week’s Crain’s they mentioned my blog calculation from October 5, and had a professor come up with the odds of two days being closing at the same price to be one in 22,310,976. Looking at the professor’s calculation, I believe she was statistically trying to answer a different question than I posed. I was referring to the odds of two days closing at the same level. She seemed to attempt to answer the question “What are the odds that the market closes at 1099.23 on those two days?”, before the first day occurred.

There are a number of different ways to think about calculating the odds of the market closing at the same price on two different days, including removing the assumption that it is random. If you know the closing price on one day, the probable results of the close the next day is not random, it is likely to be more like a normal distribution, with the previous close being the most likely result. There are so many variables one could consider in trying to calculate these odds. For example, the further back in time you go, the less likely a repeat occurrence is.

In any event, it sounds like my blog entry got people thinking, which is good.

BZH: Beazer Homes came out today with positive news. That was not a typo, a homebuilder actually had positive news. Year-over-year home orders were up 33% and closings were up 23% for the quarter ended Sept 30. Its backlog of homes under contract was up 88% YoY.

Jobless Claims: Jobless claims came in slightly better than expected. For most of the year, as shown below, continuing jobless claims have been somewhat stable. The last two ticks have been downward, but the drop is not enough to say the job market is improving.

Continuing Jobless Claims (Four Years)

Market Today: The market ended slightly lower today. Financials were weak on worse than expected results from JP Morgan, tech was strong, and I noticed weakness in industrials.

Have a good day! Brent

Lakefront Daily Blog 10/11/11

2011-10-12T08:50:00.001-04:00

Goldman Sachs: The market has been crushing Goldman Sachs this year, chopping the stock in half from its January high. Interestingly, it is now trading at a lower price to book ratio than it did during 2008-2009. Clearly market participants hate this stock and the price trend is negative, but at this point, I wonder how much more it can fall?

Goldman Sachs (Ten Years)

Cavs and Cleveland: I hadn’t thought about this until I read a story in today’s Plain Dealer, but a basketball lockout would be pretty bad for the city of Cleveland. Cleveland received $4.5 million in admission taxes last year from the Cavs, receives income tax from the team salaries and all the people who work in and around the arena, operates parking lots in the area, and depends on the success of many of the businesses kept afloat from the 42 home basketball games each year. In 2008-09, it was estimated the Cavs pumped $153 million into the local economy. This number is certainly lower post-Lebron, but it is still a significant number.

Today they announced the beginning of the season has already been cancelled. Let’s hope they figure out a solution soon.

On another note, Lebron practiced in full pads last week with his alma mater’s football team. Evidently, they were not allowed to tackle him, though. Afterward, he tweeted, “Just got done practicing with the St.V Varsity football team, full pads and all. Felt great being back on the field. Should I?"

Earnings: Earnings season starts tonight with Alcoa’s release. This is a particularly anticipated earnings season since there is so much uncertainty about the economy. For the S&P 500, analysts are expecting a decline in earnings of six percent from last quarter, which represents year-over-year growth of about seven percent.

Market Today: The market closed roughly flat today after a weak open. Stocks were mixed across the board and no sector stood out as particularly weak or strong. As I type this, Alcoa is trading down five percent on a weak EPS announcement. If the weakness in this stock holds, tomorrow may be a weak day.

Have a good day! Brent

Lakefront Daily Blog 10/5/11

2011-10-06T07:42:00.001-04:00

Coincidence: The S&P 500 closed at exact same level on October 3, 2011 as it did October 3, 2008. The odds of this occurring are very low. I roughly estimated the odds at about 1 in 20,000 in my head. I did not spend the time to look at the data, but I would be surprised if this has ever happened before.

Market Cap Weighted Indices: I have been looking more at this year’s gap between the performance of the broadly used indices, which are market cap weighted, and the performance of stocks in general. Most people believe the returns on the indices they follow represent a broad reflection of the stocks contained within those indices. This is not the case. We equal weighted the 2,500 largest publicly traded companies and created an index. Year-to-date, that index is down about 25 percent, suggesting the typical stock has performed significantly worse than the S&P 500 or other indices would suggest.

To illustrate this point, we have created a random portfolio of nine random stocks (we made it truly random with a random number generator), and Apple, which is the largest (or on some days the second largest to Exxon) market cap stock in the U.S. We looked at the portfolio in two ways. First, we looked at an equal weighted portfolio, which, as you can see performed similarly to stocks as a whole. Conversely, in the market cap weighted portfolio, Apple had a huge influence, completely skewing the performance of the portfolio. In “real life”, investors and investment managers would be more likely to roughly equal weight a portfolio than they would to market cap weight a portfolio. As you can see, there is a dramatic difference in the implied risk and return of the two portfolios.

So, when investors compare their funds to the market indices, it is not always an accurate comparison. It is good to be aware that the indices may not be reflective of typical stock returns. Currently, it is skewed toward the indices looking better than typical stocks. Many times it works in the other direction, making it seem like managers are outperforming the market, when they are really just performing in-line with typical stock performance.

Market Today: The market was strong today, for the second day in a row. Confidence that Europe will act to contain the crisis and positive economic news helped stocks today. Since 3:15 yesterday, the S&P 500 has jumped 6% and the Russell 2000 has increased 8.5%.

S&P 500 (1.5 days)

Russell 2000 (1.5 days)

Have a good day! Brent

Lakefront Daily Blog 10/3/11

2011-10-04T09:15:00.001-04:00

Morgan Stanley: The financials have been very weak lately. I looked at Morgan Stanley today and found that, if looking at a weekly chart, it has only traded below its current level for a full week once since the 1990s. While the low in 2008 was lower than the current price, it was not there for long. Considering just how bad things were in 2008, it is incredible that there was only one week when it traded below today’s price for a whole week.

EK: I made a note Friday to talk about Eastman Kodak and its looming bankruptcy. On Friday, the news was that they were most likely going to have to file for bankruptcy, driving the stock price from $1.75 to almost fifty cents. Since then, the company has come out and said they have “no intention to file for bankruptcy.” Today, the stock price has more than doubled since the low on Friday.

It is always sad when a past “blue chip” gets to the point where they are on the verge of bankruptcy. Eastman Kodak was once in the Dow Jones Industrial Average and has been in existence over one hundred years.

Eastman Kodak (Since 1974)

Q3: Q3 was an ugly quarter, with the S&P 500 dropping 14 percent. It was the sixth worst quarter since 1974. The others, not surprisingly, were 1987, 1990, 2001-2, and 2008.

Market Today: After an extremely rough third quarter, the market began Q4 with added weakness. Stocks across the board were down. Financials and economically sensitive stocks were particularly weak. Some of today’s weakness may have been a result of quarter-end funds flowing out of stocks and into things like treasury bonds and gold which were both up today. Since July, equal weighted indices are down over thirty percent.

The chart below shows an equal-weighted Russell 3000 index of companies with no net debt. One might think these companies would have been slightly insulated from the recent carnage, but that has not been the case. This index is down 31% since July.

Russell 3000 Equal-Weighted No Debt (One Year)

Have a good day! Brent

Lakefront Daily Blog 09/29/2011

2011-09-30T11:04:00.001-04:00

Happy Birthday Google: Google is officially 13 years old this week. It is hard to believe a company worth $175 billion with $33 billion in revenues is only 13 years old.

Debt: I thought it would be interesting to see how the market performed broken down by debt ratios. In order to do so, we created three indices from the Russell 3000. The first index was comprised of companies with no net debt. The remaining companies were split in half by those with higher debt and those with less debt. My guess was that companies with higher debt levels performed a lot worse during the recent debacle. This did not turn out to be true. The chart below shows that all three groups, which together comprise an equal weighted version of the Russell 3000, all have moved similarly since the July 7 high.

Equal Weighted Indices: The above chart begs another question. If the broken down components of the Russell 3000 are down 25+%, why is the Russell 3000 itself only down 15% during the same period? It is because the Russell 3000 is weighted by market cap. This means that a company like Apple has 300 times the weighting of a typical $1.2 billion company. So, the performance of the “market” as defined by the Russell 3000 (which contains 98% of all market capitalization) can be and has been dramatically different than the performance of someone who would have bought equal amounts of every individual stock.

Lake Erie: The fall weather pattern has begun. Tomorrow, waves are forecasted to be 15 feet on the lake.

Jobless Claims: Initial jobless claims came in better than expected. Continuing claims were in-line with expectations. Both series have shown improvement, but has taken a long time, and jobless figures are still elevated.

Continuing Jobless Claims (four years)

Market Today: Today was another volatile market day. From peak to trough, the market moved about three percent. Most indices finished the day higher. Most stocks were higher, but there was clear weakness in stocks related to China. I noticed a number of luxury brands and tech stocks having Chinese exposure down strongly today.

Have a good day! Brent

Lakefront Daily Blog 9/26/11

2011-09-27T08:13:00.001-04:00

Gold: At its low earlier today, Gold was down over $400 from its high earlier this month. Just in the past few days, the metal has dropped dramatically.

Gold (One Year)

European Debt Crisis: Europe survived the weekend without any major calamities. Additionally, around 2:00 pm, European officials discussed plans to ease the crisis. This was interpreted as marginally good news, helping to propel the market higher. This remains a major driver of the market from day to day.

Market Today: The market opened the day flat, and weakened after the open. Later in the day, as incrementally positive news came out of Europe, the market rallied strongly. In the end, the market closed about two percent higher. Most sectors rose today, although I did notice a few weak technology stocks.

Have a good day! Brent

Lakefront Daily Blog 9/21/11

2011-09-22T09:36:00.001-04:00

Mixed Signals: A major coal company announced today that results would be worse than expected partially due to curtailed orders from Asia. This hurt the coal sector, but did not seem to have much of an effect on the overall market. On the other hand, existing home sales were up 7.7% MoM, beating the 1.7% expectation.

Existing Home Sales (Since 2000)

Record Low: The 10-Year Treasury note yield hit an all time low today of 1.8765%. How low can it go and how long can it stay so low?

Ten Year Treasury Yield (Since 1962)

Fed: The market reacted very negatively to the Fed announcement this afternoon. After the announcement, the markets dropped roughly three percent. The actions of the Fed, which you can read in detail from any news source, did not excite the markets. Additionally, they said there are “significant downside risks” to the economic outlook. This statement was probably a large contributor to the downside move in the market.

Market Today: The market was extremely weak today on the Fed announcement. Virtually every sector was down, particularly financials and those that are economically sensitive. As weak as the market was and generally feels, so far, the S&P 500 remains within the fragile short-term uptrend which began on August 9:

S&P 500 (One Year)

Have a good day!

Brent

Lakefront Daily Blog 9/19/2011

2011-09-20T09:35:00.001-04:00

Outflows: In the past four months, investors have withdrawn about $75 billion from U.S. equity mutual funds. This exceeds the $72.8 billion withdrawn after the Lehman bankruptcy from October 2008 to February of 2009. Clearly, investors have been quite fearful.

Oil: Oil was weak today on the same worries that affected stocks. If there is a problem in Europe that causes economic weakness, investors expect that to be a headwind for oil, just like stocks. As one might expect, the market and oil have been highly correlated recently:

Correlation of Crude Oil to the Dollar (50-day, one year)

Euro Debt: Options are pricing a huge amount of volatility into European debt instruments. The chart below shows that volatility versus that of the US. As you can see, the differential is similar to what it was during the U.S. financial crisis, except in the opposite direction:

Euro Debt Implied Volatility Vs. US

[The chart above was made by Bloomberg and formatting of the text didn’t translate properly.]

Market Today: Renewed fears about the potential Greek default helped drive the market lower today. Lack of progress coming out of the weekend euro-zone meetings cast a shadow on the market from the open. Late in the day, however, Greek officials said they were close to a temporary deal. This news immediately lifted the market, once again proving that the Greek news really is a major driver in the short-term gyrations the market has been experiencing.

Have a good day! Brent

Lakefront Daily Blog 9/14/2011

2011-09-15T08:04:00.001-04:00

Greece: German and French leaders expressed support for Greece to remain in the Euro Monetary Union. Additionally, there was continued speculation that China might step in and help Europe’s most debt ridden countries. Not surprisingly, this had a positive effect on the markets.

No Lehman: Tim Geithner said today that “there is no chance that the major countries of Europe will let one of their major institutions fail.” Additionally, the Chancellor of Germany has also said there will be no Lehman Brothers situation in Europe.

Bearishness: Investor’s Intelligence analyzes investment newsletters in an effort to ascertain sentiment among investment professionals. The latest analysis shows there are now more bearish newsletters than there are bullish newsletters. This is a rare condition and was last seen at the bottom in March 2009. Additionally, another study showed that hedge fund bearishness has recently jumped.

Market: The market was very strong today on the marginally better news out of Europe. Today’s intraday range on the S&P 500 was 3.4%, illustrative of yet another volatile day. It has still held the lows set on August eighth, although it has hardly been a smooth ride. As bad as some of the recent news has been, it is interesting the market is holding its newly found (albeit short-term and fragile) uptrend.

S&P 500 (One Year)

Have a good day! Brent

Lakefront Daily Blog 09/12/2011

2011-09-13T07:55:00.001-04:00

Greece: Fear of a default in Greece once again was the biggest news for US stocks today. The consensus is now that a default is imminent and it is a matter of when, not if it happens.

Volatility: Recent market volatility has been very high. Although the market has not yet breached the August low (it is close), the volatility started in late August has continued. In the past six days, the median trading range on the S&P has been 2.8 percent.

Buffett: Berkshire Hathaway said today that Ted Weschler will help oversee investments upon Mr. Buffett’s retirement. Ted manages Peninsula Capital and told investors he will be closing the fund. As of June 30, Peninsula held roughly $2 billion in assets according to filings. It is hard to say exactly how the fund has done through the recent downturn, but its three largest holdings, which appear to be more than half the fund, are down over 20% on average. The S&P is down about 13% during that time. That said, this is a concentrated, buy and hold portfolio where large drawdowns are to be expected. The most interesting thing about this story is that Ted Weschler was twice the winner of the annual power lunch with Warren Buffett. CNBC implied this is where the two first met. The two lunches are said to have cost more than $5 million combined. It sounds like Weschler made another good investment with these lunches.

Market Today: The market was quite weak for most of today on the aforementioned Greek and European debt fears. In the late afternoon, news services announced that China is buying Italian debt. From that point forward, the market rallied roughly 2.3% and closed up on the day. It may be better for the markets for Greece to just default and to get past that fear and move forward.

Have a good day! Brent

Lakefront Daily Blog 9/6/2011

2011-09-07T09:56:00.001-04:00

September: On CNBC, they mentioned this is the worst start to September ever. As of 11:50 am, the S&P 500 has dropped almost six percent and the Russell 2000 has dropped almost eight. The volatility that began in August has continued. As of now, however, the August 9 low has held. The following chart shows the trailing volatility of the S&P 500 on a trailing 20-day basis. The recent episode, as expected, has shown the highest volatility since 2008-09. I was hoping to see the 1999-2003 data, but cannot readily retrieve it.

S&P 500 Trailing 20-day Volatility (Since 2002)

Gold: Gold quickly recovered from the $200 drop in late August and is now trading close to new highs. Obviously, Gold has been a safety trade as other asset classes have gyrated.

Gold (One Year)

Treasury Yields: The ten-year bond yield is now at the lowest level since the 1940s. As of 3:22 pm, it was yielding 1.96%, lower than it was during the crisis of 2008-09. The chart below shows the 10-year yield since 1980:

U.S. 10-Year Treasury Bond (Since 1980)

Swiss Franc: The Swiss Franc has experienced a very strong move up over the past year or so. The perceived safety of the currency has drawn investors out of riskier currencies like the Euro. In an aggressive move to stem the rise in Francs, the Swiss National bank declared it will peg the currency to the Euro at 1.20. "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," said the SNB in a statement. The SNB statement spurred an immediate move in the currency to about 1.2 Euros. One hope is that this will reduce some of the speculative interest in the currency. Today’s move in the Swiss Franc is the largest I could find. I wonder how this move affected currency traders who are often highly levered.

Euro vs. Swiss Franc (One Year)

Market Today: The market opened strongly lower mostly on European and banking fears. Throughout the day, the market slowly strengthened, closing down less than one percent. Volatility continues, with the indices showing roughly a three percent intraday range today. Within a weak tape, I did notice a few up stocks today, particularly in technology.

Have a good day! Brent

Lakefront Daily Blog 9/1/2011

2011-09-02T08:21:00.001-04:00

Ecolab: Bill Gates has been buying large quantities of Ecolabs (ECL). Mr. Gates, or his foundation, bought five million shares over the course of five days from 8/23-8/29. Given that the stock was down today, I am guessing he was not buying today. The shares he bought represent around $250 million. This is not exactly an insider buy by an executive, but is interesting nonetheless. While he was buying it, the stock recovered almost its whole loss since it gapped down in July. A significant driver in the price recovery was probably his buying, but there were probably others who bought just knowing he was buying.

Ecolab (ECL)

Economic News: Jobless claims were roughly as expected today. However, the market moving number was the ISM manufacturing survey from August. ISM came in at 50.6, better than the expected 48.5. Any number greater than fifty is considered positive, so the market reacted well to the news.

August: August was a brutal month for the stock market. The S&P 500, which was one of the stronger indices, was down 5.4%. The Russell 2000 was down 8.7%. A drop as severe and quick as we experienced early in the month is very rare. In fact since the Great Depression, it had only occurred twice before, in 2008-09 and in 1987.

Russell 2000 (One Year)

Market Today: The market began the day weak. At ten o’clock, the ISM data came out, providing an instantaneous one percent move up in the market. Once that was over, the selling continued. In the end, the market was down, with only a few positive outliers. There were probably some beginning of the month reallocations away from stocks, helping to move the market lower today.

Have a good day!

Brent

Lakefront Daily Blog 8/30/11

2011-08-31T09:52:00.001-04:00

Housing: The Case-Shiller home price index came out today for June. June marked the third tick up in home prices in a row. These ticks, however, have been very small. As the chart below shows, the trend is not necessarily upward, but perhaps the downtrend is over?

Case-Shiller Housing Index (Six years)

In other homebuilding related news, some of the homebuilders were upgraded today and their stocks were generally strong. The homebuilding stock index I follow is up 20% since the Aug 9 low. This seems like a lot, but the index would need to be up 40% from that low just to get back to July levels.

Homebuilding Stocks (One Year)

Consumer Confidence: Consumer Confidence came in somewhat lower than expected. Some analysts said the low number may have been partially attributable to the fears earlier in the month regarding the debt ceiling.

Market: The market ended the day slightly up. When consumer confidence was released, the market fell sharply. Soon thereafter, stocks rebounded and closed near the highs of the day. Today’s close was the highest since midway through the eleven day debacle earlier this month.

Have a good day!

Brent

Lakefront Daily Blog - August 26, 2011

2011-08-29T13:46:00.001-04:00

“Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently alerted by the shocks of the last four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.” -Ben Bernanke, August 26, 2011

“The Great Bernanke”: This is the name my partner Rob McCreary has been using for our Federal Reserve Chairman. Visions of a man behind a curtain pulling levers and blowing smoke come to mind. The “Great One” did not offer any specific policy items, but indicated that the Fed has numerous tools to provide stimulus if needed to maintain growth. The September Fed meeting was extended a day, to discuss these actions. It seems that his lack of any urgent comments calmed some nerves as equities rallied shortly after the speech was released. Interestingly, gold was also up, which is counter to the recent trend of stocks up, gold down and vice versa.

TED Spread: A measure that some investors use to gauge risk in the financial system (however you define that) is the spread between the 3 month London interbank offered rate (LIBOR) and the 3 month T-bill. Someone pointed out the recent spike in the spread as can be seen below in the chart on top which is one year. The four year chart is on the bottom and shows what a spike really looks like! Notice on the bottom chart that during last summer’s correction the spread moved up to nearly 49.

Irene: I have very fond thoughts when I hear the name Irene, as it is the name of my late mother-in-law. It reminds me of the times when she would be upset and seemed like a small hurricane. A much bigger version is heading for the Northeast U.S. seaboard and NYC is in its sights. I don’t recall the last time NYC was being partially evacuated for a storm.

Market Today: The market started out weak, seemingly waiting for Bernanke’s speech. After the non-event of his speech, stocks rallied strongly for most of the day until a late pull back. The strongest sectors where tech, industrials and materials. Laggards included utilities and financials.

High school football starts in our area this weekend and my home town team, Brecksville, has a decent team this year, so it should be fun to watch the team’s progress. They are led at QB by the son of a former NFL and Ohio State University QB/punter, who led our high school to its only state championship in 1983. Can you name him? Former graduates are not eligible.

Have a nice weekend and enjoy the nice weather, if you have some.

Edward R. Matuszak

Lakefront Daily Blog 8/24/11

2011-08-29T13:42:00.001-04:00

Quake: A 5.8 magnitude earthquake hit the Northeast yesterday. I am guessing that most of the readers felt it. Although its epicenter was in Virginia, I heard reports that people felt it as far west as Illinois and as far north as Martha’s Vineyard and parts of Canada. The first tweet about the earthquake appeared 24 seconds after the event, and within a minute, 40,000 tweets about the quake were registered.

Problem Banks: The government’s list of problem banks decreased in the second quarter. This is the first decrease since before the financial crisis. Further, the number of bank failures in the first half declined 44% from 2010.

Durable Goods: The market has recently been disappointed with some of the economic news. Today, durable goods surprised on the upside, turning futures from being somewhat negative to flat.

GOLD: As I type this, Gold is down over $100 today. This seems like a lot, but after its incredible move up, the last two days seem like a minor correction.

Gold (One Year)

Recession: An analyst I saw on CNBC believes stocks are pricing in a 70% chance of recession. This makes sense to me, although I would not say it is true across the board. There are many stocks trading all the way back to 2008-2009 levels, but they have better balance sheets and profit margins now than they did then. Other groups of stocks are still measurably higher than they were back then. Among other fears, stocks have clearly reacted to the prospect of a potential recession. The question is whether many of these stocks have overreacted or not.

Market Today: The market was remarkably calm today, at least as of 3:00. Tech caught my attention as being weak, otherwise things were mixed.

The blog is arriving early today since I am getting a needle jammed into my knee at 3:30. Those of you that know me personally know that I have been hobbling around for quite a while. Maybe this series of injections will actually help, we’ll see.

Have a good day! Brent

Lakefront Daily Blog 8/19/2011

2011-08-29T13:37:00.001-04:00

Philly Fed: The Philly Fed index came out yesterday and the number was terrible. The -30.7 reading was the lowest reading since late 2008. Interestingly, a lot of recent occurrences have not happened since the depth of the recession of 2008-09.

Philly Fed (Since 1968)

Dollar/Yen: The Yen is now at its strongest level versus the dollar since World War II. I was only able to chart back to 1971, but hopefully you get the point.

Fear: Normally, barring specific news suggesting a broken deal, a stock that has a cash offer will trade very flat and near the price at which it is being bought out. During extremely fearful periods, I have noticed that these stocks will detach from that price and weaken. This is probably largely due to widespread selling of stocks and ETFs. Most stocks that have outstanding cash offers experienced this phenomenon earlier this month, culminating on August 8. Interestingly, although we are currently near the lows of August 8, these stocks are firmer than they were then. This suggests to me that fear may have waned a bit since Aug 8. A few examples follow; normally these stocks would just “flat-line.”

Market: The market was weak today. Yesterday, it was extremely weak. In the past two days, the major indices have dropped five to seven percent. Most stocks are still above the Aug 8 low, but not by much.

I saw something on television about people who base jump into a cave in Mexico. It reminded me a little of the market over the past month or so. Since early July, some indices are down 25% or more, with lots of individual stocks down much more.

I am going to dinner at Lola with my wife for my birthday. If you come to Cleveland, Lola is a required stop for dinner or lunch.

Lastly, our highly-qualified blog editor, Lea Taft, was unable to edit the blog today. Any and all typos or grammatical errors in today’s blog are completely my fault.

Have a good day! Brent

Lakefront Daily Blog 8/17/11

2011-08-18T07:52:00.001-04:00

Bounce: The market has bounced since August 8. It remains to be seen whether this will mark a bottom or not. If it was a bottom, it was accompanied with things often associated with bottoms, including highly negative sentiment and significant insider buying. Interestingly, August 8 marked the day the market was first able to react to the S&P downgrade of U.S. debt. So, since that seemingly abysmal news, the market has been relatively strong.

Russell 2000 (One Year)

Insider Buying: The insider activity I have referred to has continued. According to Vickers Weekly Insider, insider buys increased eight-fold over the past two weeks and 16-fold over the past three weeks. The number of buys reached almost three times the number of sells. It is very rare for buys to outnumber sells. The last time this occurred was March 2009, which we know marked a major low in the market. It is interesting that insiders turned extremely bullish during this period. They seem to believe the fears that have driven their stocks down are unwarranted, and that their businesses are doing better than the market is pricing in.

Individual Investors Panic: During the week ended August 10, investors’ net outflows from stock mutual funds totaled $30 billion. This is the highest level since October 2008, in the midst of the financial meltdown. This represents a very high level of fear, which often coincides with low points in the market.

Tale of Two Cities: The last two blog entries show two very different behaviors. On one hand, we see executives, who know more about their companies than anyone, taking money out of their pockets to buy stock. Additionally, some very well regarded investors like Warren Buffett have come out buying or saying they are buying stocks. On the other hand, individual investors, who are typically more emotional, are selling in droves. I asked last week whether the most recent activity represented the dumb money selling to the smart money. It appears that some of the recent evidence might suggest that this is indeed the case. Time will tell.

Market Today: The market closed flat to slightly down today. The day was tame, if you consider a two percent intraday range tame. After a strong bounce in most stocks, it appeared today that the buyers might be a bit fatigued.

Lakefront Daily Blog 8/12/2011

2011-08-15T08:31:00.001-04:00

Consumer Confidence: Michigan Consumer Confidence came in with the lowest reading since 1980 for August. Every knows confidence is low right now, but this was surprisingly low. Other low points were 1980, 1990-1992, and 2008-2009. 1980 marked the beginning of one of the longest and strongest bull markets in history. In the 1990-1992 episode the market hesitated, but in the end was just a blip in the broader bull market. 2008 has so far been a bottom, after which the market more than doubled. I know this is different, but I think it is interesting that low levels in confidence have traditionally been times to buy, not times to be “lemming-esque.”

Weak Market Days: The market has recently experienced a LOT of volatility. In fact, Monday qualified as one of the worst days for the S&P 500 in the past 50 years. It turns out that after 13 of 15 of these days, the market has been up a year later.

Market Today: The indices ended the day higher today. Overall, however, I would not consider today that strong of a day. Within the up market, there were plenty of down stocks and sectors. Today, lack of volatility was a welcomed end to two weeks of extreme moves in the markets.

Have a good weekend! Brent

Lakefront Daily Blog 8/11/11

2011-08-12T09:07:00.001-04:00

High Volume: There has been a significant rise in volume over the past five days or so. On the S&P index ETF for example, the past few days’ volume has been the highest since the fiasco of 2008. There is a lot of stock changing hands right now. Is the dumb money selling to the smart money or vice versa?

Insider Buying: Anyone that has talked to me over the past few days knows I have been talking about the unusual insider buying I have been seeing. Suddenly, the media has gotten a hold of the insider buying spree and has covered it widely today. The last few days seem to be unprecedented. I know my observation was that this was the third time in 14 years that I have seen an increase like this. Today, I read that the insider activity is indeed at the highest level since the five days ended March 9, 2009. We all know what happened after march 9, 2009:

S&P 500 (After 3/9/09)

Gold: Gold was down significantly today. This occurred in unison with a higher market, which is what one might expect. Two days ago, when the market was up, Gold was also up, which made bullish investors a bit skeptical of the rally.

Market Today: The market was extraordinarily strong today. I think I heard that for the first time ever, the Dow moved over 400 points for four days straight. There has certainly been a lot of volatility recently. Today’s action was characterized by money moving out of safe haven assets and into the stock market in general. Every sector was strong with BRIC and technology leading the way.

Have a good day!

Brent

Lakefront Daily Blog 08/09/2011

2011-08-10T08:51:00.001-04:00

There is a lot to blog about today. I won’t cover everything, but will highlight a few things.

Insider Buys: In the past few days, I have noticed a lot of insider buying in companies where the stock prices have plummeted. In the past, this has tended to be a positive signal. It is interesting that, as negative as the masses are right now, insiders, who presumably know the most about the fundamentals of their companies, are stepping in to buy stock. Some of these insiders rarely buy stock and have not done so since the debacle of 2008-09

REITs: I have noticed that REITS have been hit very hard in the past couple of weeks. This happened in 2008, during the debt crisis. In fact, a lot of the things that were hit the hardest then have been hit this time. I have noticed that the weakest stocks tend to be those with debt. It would be interesting to create stock indices based on debt ratios; I would bet some interesting correlations would surface. Also, trust preferreds that are normally very stable, have taken a big hit this week.

Dow Jones REIT Index (One Year)

Here is an example of the movement of a trust preferred issue:

BAC 6% (One Year)

Largest company in the world:

Apple is now the largest company by market capitalization, surpassing Exxon Mobil. Interestingly, Apple has enough cash on its balance sheet to buy Bank of America, and still have $7 billion left over.

Recession?: Warren Buffett said yesterday that people should “bet heavily” against a double dip recession. He mentioned there is “growth around the world, but its not mushrooming”. He also believes that unemployment will improve significantly when residential construction resumes.

S&P downgrade, and yields went down? By now, everyone knows that, in an unprecedented move, the S&P downgraded U.S. sovereign debt. This rattled markets worldwide. Interestingly, yields actually went down measurably in US treasuries. I wonder how many people bet the S&P would do that, and then yields would drop? Not many.

VIX: The VIX (Volatility Index) has continued to spike higher. It is now at the highest level since the crisis of 2008-2009. I don’t have to tell anyone this, but fear has jumped very quickly. Everyone seems to be talking about their fears of the market right now. I have been hearing from people I rarely hear from.

Yesterday: As I just typed the word “Yesterday”, I thought of the Beatles song. I have a feeling some market participants might be able to apply the lyrics of that song to their feelings about the market lately. Anyhow, yesterday was quite a day. Here are a few lowlights:

S&P down 6.66% on the day and down 17% over eleven trading days.
Russell 2000 down 8.88%. I believe this was the biggest point loss ever for this index, but I don’t have time to go through the data.
The first six days of August make up the worst August start ever.

Gold: Gold experienced its biggest dollar move ever yesterday. Today, it is moving almost as much. Currently, it sits at $1,765 an ounce. Gold has now surpassed the price of Platinum. Today, Gold was up and the market was up. Those looking for a higher market might take this as a signal to be cautious.

Gold (5 years)

Dividend Yields: The dividend yield on the S&P 500 is higher than the yield on the ten-year treasury. Also, as of yesterday (its probably more now), 75% of the dow had a higher dividend yield than the ten-year.

Treasury Yields: The ten-year treasury yield hit a new all-time low today, hitting 2.03%.

FED: The media will fully cover this topic, so I can’t add much. The most interesting thing seems to be that they said rates will remain low “until at least mid-2013”. This marks the first time they have placed an actual timeframe on this. Previously, they said “extended period”. Their release caused rates to drop, particularly at the short end of the curve, caused a major “heartbeat” in stocks, and it appears there was a huge move in the US Dollar versus the Swiss Franc.

Today: It was just another normal day today. I think the following description will suffice: Up 3% followed by a drop of 4.4% followed by a rally of 6.5%. Today was characterized by huge volatility, except today, for the first time in over two weeks, stocks ended higher. In the end, the indices closed significantly higher, with the S&P 500 closing up 4.7%. The last time the S&P had a day this strong was 3/23/2009. The last two weeks have been incredibly interesting and weak. What’s next?

S&P 500 (intraday)

Have a good day! Brent

Lakefront Daily Blog 8/5/2011

2011-08-08T11:02:00.001-04:00

Market: A lot has happened since Wednesday’s blog. At the time, it felt like the market had already been incredibly weak. Yesterday, stocks tumbled even further on fears coming out of Europe. Most indices were down in the neighborhood of five percent yesterday. Today, the volatility continued with roughly a four percent intraday move. In the past two weeks, the markets have experienced a very strong downturn, unmatched since 2008. While the overall indices have taken a hit, if one looks at individual stocks, an abnormally high number have sustained drops of fifty percent or more. In many cases, the market is pricing in a 2008-like recession. Company fundamentals look different than they did in 2008; balance sheets are stronger, companies are leaner, and valuations are better.

Russell Small Cap Index (One Year)

Many stock indices were down over ten percent this week.

Extreme Moves: If you are interested in looking at some stocks that have moved down a lot, here are some tickers: STEC, FBC, IMAX, VPRT, AGP, LEAP, AKS, SMSI, AMCC, FOE, PEIX, AONE, CLWR, LINC, JNPR. In general, companies that have missed earnings have been hit extremely hard.

Exxon: I have some friends that own Exxon. This is usually a very steady stock. In the most recent pullback, however, even the mighty Exxon has been hit. It is down around 15% in the past two weeks.

XOM (One Year)

Wall Street Projections: Wall Street Strategists still say (on average) that the S&P will close at 1401 this year. This represents a 17 percent increase from here. I have a feeling this might tick down after the recent debacle

Rates: As investors have fled risky assets, short-term interest rates have dropped to zero. I heard that a major bank is actually charging certain customers to carry large short-term cash balances.

Fear: There is clearly a lot of fear influencing the markets. The VIX has spiked to levels seen during the 2010 retracement and the 2008 debacle. Another sentiment indicator that I look at, the AAII Survey, shows that bearishness has spiked. It is very common for the market to strengthen after such high readings.

Volatility Index (VIX – Six Years)

Jobs Data: There was a lot of fear surrounding today’s jobs data. It turned out that the data came in better than expected. The good news helped the market open higher, but as I mentioned above, that strength soon fizzled.

Market in Gold: Some people like to look at things in terms of Gold, with the idea that Gold is money. Bernanke, of course, disagrees with this viewpoint. I thought it would be interesting to look at the market in Gold terms. The following chart shows the S&P versus an ounce of Gold. It is at the lowest level in at least twenty years:

S&P 500 in Gold Terms (Since 1992)

Today’s Market: Today, the market opened higher only to fall four percent by noon. At which point, the European Central Bank said they would be willing to buy Italian bonds. The ending value on the S&P 500 today was flat, but it was hardly a flat day, and most stocks ended lower. The image below well reflects the market over the past ten days:

Have a good day! Brent

Lakefront Daily Blog 8/1/2011

2011-08-04T08:01:00.001-04:00

Gold: Gold hit new highs today and continues the trend in place since 2003:

Gold (since 2003)

Debt Ceiling: The debt ceiling issue was resolved (at least temporarily) yesterday. The rally that most people expected did not occur. A negative reaction to positive news is usually something to pay attention to as a negative sentiment indicator.

Market: The market has recently experienced a fairly violent move. Here are some of my observations regarding the market:

At today’s lows, the S&P had dropped 8% in eight days
Yesterday, the S&P broke its 200 day moving average for the first time in a year; it quickly plummeted after breaching this technical level
Intraday today, the S&P was down for the year

The market opened flat on the day and quickly plummeted almost two percent. At about 10:30, stocks experienced a strong rally and closed up on the day.

The question is whether these recent moves are fear-based reactions to macroeconomic events, or whether this is the beginning of a broad market decline?

Have a good day! Brent

Lakefront Daily Blog 8/1/2011

2011-08-02T08:54:00.001-04:00

Manufacturing Weaker: The ISM Manufacturing number for July came out today. The 50.9 reading was the lowest in two years. When this came out, the news trumped the perceived good news regarding the debt ceiling and the market weakened measurably.

ISM Manufacturing (Since 2005)

Debt Ceiling: Majority House leader Eric Cantor said the House will have enough votes to approve a rise in the debt ceiling. This has been a leading cause of the recent market volatility. Today, this was initially considered good news, but the market quickly traded down on economic concerns.

Summer: I am back from my annual summer pilgrimage to see my family. I happened to experience the hottest day in history in NYC where the temperature reached 104 degrees, with a heat index of 120 degrees. The city also demanded more power on that day than any day in history. On this trip, I was able to visit the New York Stock Exchange. It was a bit sad to see half of it has been closed down and the part still open is operating with a fraction of the people as in the past. I was really intrigued by the history of the building and my tour guide (a floor trader) gave me access to some of the innards of the building. We also toured Bloomberg headquarters. If you know anyone that works there, it is worth seeing. They have created a really impressive work environment.

We also stopped in Hershey, PA. for my ten-year-old twins. The Hershey story is quite interesting. Hershey lived during the same time as the great American industrialists. Instead of coal, shipping or oil, his claim to fame was milk chocolate. He had no children and left his entire fortune to build an orphanage. The school, no longer called an orphanage, is still in existence and his foundation is now worth billions.

Market Today: The market was quite volatile today. In the morning there was a strong bounce due to the potential solution of the debt ceiling problem. Upon the release of the ISM data, the market dropped, hitting a low around noon. Although the final move of the S&P on the day was unexciting, there was almost a three percent intraday move. The market ended July on a very weak note, as fears of the debt ceiling accelerated. It will be interesting to see what occurs when and if it is resolved.

Have a good day!

Brent

CapitalWorks, LLC Has Moved

2011-08-01T11:11:00.001-04:00

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We've moved - effective August 1, 2011

In order to accommodate our growing company,

CapitalWorks and Lakefront Partners have moved. Below is our

new address. All other contact information remains the same.

New Address

CapitalWorks, LLC

Two Chagrin Highlands

3000 Auburn Drive, Suite 430

Beachwood, Ohio 44122-4340

tel: 216-781-3233

fax: 216-781-6670

www.capitalworks.net

Old Address

CapitalWorks, LLC

Eaton Center

1111 Superior Avenue, Suite 970

Cleveland, Ohio 44114

tel: 216-781-3233

fax: 216-781-6670

www.capitalworks.net

Warren P. Coleman
VP, Business Development

216-472-5510

wcoleman@lakefrontlp.com

John P. Corrigan III

Associate

216-472-5540
jcorrigan@capitalworks.net

Richard R. Hollington III
President
216-472-5530
dhollington@capitalworks.net

Brenton K. Luce
Sr. VP, Portfolio Manager
216-472-5555
bluce@lakefrontlp.com

Edward R. Matuszak
Sr. VP, Portfolio Manager

216-781-6659

erm@lakefrontlp.com

Laura J. Moran
Dir. of Hedge Fund Operations
216-472-5559
lmoran@lakefrontlp.com

W. Todd Martin

Vice President

216-472-5545

tmartin@capitalworks.net

Robert G. McCreary III
Chairman
216-781-7727
rgm@capitalworks.net

John M. Mueller
CEO

216-781-6671

jmm@capitalworks.net

Christine L. O'Dell
Executive Assistant
216-781-3233
codell@capitalworks.net

Kathleen D. Speer
CFO & CAO
216-472-5508
kspeer@capitalworks.net

Lea E. Taft

Operations Associate

216-472-5520

ltaft@lakefrontlp.com

About CapitalWorks, LLC

CapitalWorks, LLC is an alternative asset manager focused on two private investment strategies.

· Private Equity - three funds to date

· Long/Short Equity - Lakefront Partners

CapitalWorks private equity is focused on making control investments in lower middle market companies. We leverage the wide variety of industry experience resident in our team and from within our network of limited partners to provide a strategic advantage.

Lakefront Partners is focused on outperforming major market indices over a full market cycle with an emphasis on capital preservation during bear markets and creating uncorrelated alpha-based returns.

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Lakefront Partners Daily Blog 7/28/2011

2011-07-29T08:17:00.001-04:00

“I chose America as my home because I value freedom and democracy, civil liberties and an open society.”

-George Soros (1930- )

Soros retires: Famed investor George Soros and his family have decided to stop managing funds for non-family members, primarily due to the new financial regulations requiring the firm to register with the SEC if it continued to manage money for outsiders. His fund has assets of approximately $25 billion, which includes less than just $1 billion of non-family money.

Eco: Jobless claims and pending home sales provided some positive news to the market this morning as both were better than expected. Washington quickly squelched any good feelings.

Budget show: Much of the coverage on CNBC was focused on the budget impasse in Congress. A perspective from China was expressed by Stephen Roach, who indicated that officials in China, are “appalled” by the politics of the budget risking financial stability.

IPO Boom: Another “hot” IPO hit the street this week, Dunkin’ Brands. Wow, what a start to the the donut king as DNKN soared 47% on its first day of trading. I remember when the Krispy Kreme fad hit the markets during the 2000-2003 period. After going public in 2000, the stock rose strongly in a weak market. By 2005, however, accounting irregularities surfaced and a restructuring followed. Here is a chart of KKD:

Market Today: The market started out positively today but sold off as the lack of progress out of Washington seemed to consume everyone. In the end the market was basically flat, with industrials, energy and materials being the weakest and financials and healthcare being up slightly.

As of Monday, we are relocating to the address in my signature below.

Edward R. Matuszak

Senior Vice President, Portfolio Manager

Lakefront Partners, LP

Two Chagrin Highlands

3000 Auburn Drive, Suite 430

Beachwood, Ohio 44122

216-781-6659 (v) - direct

440-724-4330 (c)

216-781-6670 (f)

Lakefront Daily Blog 7/25/2011

2011-07-25T16:37:00.001-04:00

“Research is what I’m doing when I don’t know what I’m doing.”

-Wernher von Braun (1912-1977)

Deal or No Deal?: All eyes are on Washington D.C. waiting for the budget deal to be negotiated. In what is often compared to watching sausage being made, the budget talks are not a pretty sight. The market has been anticipating some solution and has moved higher on positive news. This morning, futures were down nearly one percent on the negative news of no deal. Maybe we need Howie Mandel to arbitrate?

Earnings: 153 companies in the S&P 500 have reported earnings so far this quarter. Here are some early stats for the second quarter:

128 reported higher earnings versus last year
75% reported a positive surprise almost identical to the surprise % a year ago (are companies that good at controlling earnings and analysts expectations?)

Gold Rolling: Continued doubts about debt levels in the U.S. and Europe have seemingly fueled the rise in gold to new highs. Here is a one year chart of gold showing the trend lines:

Market Today: The market started out weak due to the lack of progress on the budget deal. As the day went progressed, it gradually climbed until...two democratic senators spoke and the market retreated steadily. Interestingly, some compromise was offered, but the tone was quite negative. Earlier, both parties were quite negative, which is not what the market wants to hear right now. Stocks in general were weak, with energy, materials and industrials surprisingly being the best performing.

Best regards,

Edward R. Matuszak

Lakefront Daily Blog - 7/21/11

2011-07-21T16:40:00.001-04:00

“The greatest of faults, I should say, is to be conscious of none.” Thomas Carlyle (1795-1881, Scottish writer; famous for calling economics “the dismal science”)

Apple: On its way to controlling all electronic devices, Apple Inc. has achieved a size that was impossible to imagine as recently as 2003. On April 17, 2003, the stock was trading at just when $6.36. At the end of that month, Apple introduced the iTunes music store, which sold 1 million songs in its first week. The rest, as they say, is history. Today Apple has a market capitalization of over $360 billion. Here is a weekly chart of Apple since April 17, 2003:

Anticipation: It seems that the market is eagerly awaiting a budget deal out of Washington D.C. Today, a rumor surfaced that a “deal” between Obama and Boehner was imminent and the market jumped .50% in a matter of minutes. As the deal was denied, the market retreated briefly and then resumed its upward trend. There may be some pent up interest in buying stocks should the uncertainty in Washington be relieved.

Acquisitions: more acquisitions were announced today as Medco Health sold to Express Scripts for $29 billion in the pharmacy benefits industry. This followed yesterday’s announcement of Ecolab’s buying Nalco in water treatment. There certainly appears to be a pickup in merger activity. With corporate balance sheets holding excess cash and stock prices up over the last two years, it is likely that undervalued or strategic names will continue to be targets should any clarity on taxes and debt be resolved.

Jobs/Housing: Jobless claims were slightly worse than expected, but within a range of error that did not seem to bother anyone. Housing prices improved slightly for the second straight month after ten consecutive months of declines.

Market Today: Positive hope that the Greek debt crisis might have a resolution, continued positive earnings reports, and a possible budget deal spurred the market higher at the beginning of the day. The market remained strong all day with leading sectors being financials, energy and transportation.

Best regards,

Edward R. Matuszak

Lakefront Daily Blog 7/19/2011

2011-07-19T16:47:00.001-04:00

“Silence is one of the hardest arguments to refute.”

-Josh Billings (Pen name of American Author, Henry Wheeler Shaw, 1818-1885)

Housing: Total housing starts and building permits surprised to the upside today, which led the market higher early. While the gross number of housing starts still remains at low levels, the recent trend is “less bad.”

Earnings reports: IBM, Coca-Cola and Novartis provided strong earnings reports; when combined with somewhat reconciliatory commentary from the budget battle in Washington D.C. these provided fuel for a strong market. At the same time, bell weather companies like Goldman and Cisco announced layoffs.

Cash is king?: According to an article on Bloomberg, George Soros’s Quantum Endowment Fund is down 6% for the year and is holding 75% cash, waiting for better opportunities. In anecdotal conversations I have had, a number of institutional wealth managers cited high cash levels due to continued client nervousness, along with taking money off the equity trade after the long run up in equities overall. I wonder how common excess cash is in portfolios around the country. Will the market rally to confound the “experts”?

Market Today: The market started out strong with the positive surprise from housing, solid earnings reports and was boosted by the positive talk out of Washington. Year to date, the market has favored the more defensive sectors like healthcare and utilities. Today, those were the lagging areas while more economically sensitive sectors like technology, consumer discretionary and energy led the market higher.

Have a good night!

Edward R. Matuszak

Lakefront Daily Blog 7/15/2011

2011-07-18T08:21:00.001-04:00

Consumer Confidence: The University of Michigan Consumer Confidence survey dropped in July. This is the lowest level since the recovery began in 2009. This, however, had very little effect on today’s market action.

Consumer Confidence (since 2005)

Interestingly, this chart looks a little like the market. When sentiment was very high back in 2007, the market was on the edge of one of the biggest debacles ever. Conversely, in 2008 and 2009, the low consumer sentiment marked the market’s bottom. If you look further back in time at the previous market cycle, Michigan consumer sentiment hit a high at the end of 1999, right before the tech bubble burst. The survey bottomed in March of 2003, right at a major market low.

US Debt Downgrade: Moody’s has threatened to downgrade U.S. debt. It basically said that if the government does not reach a solution soon, it will be forced to downgrade the U.S. to below the Aaa rating it has held since 1917. This is the first time U.S. debt has been under Moody’s review since 1996.

GOOG: Google released results last night and is currently up $64 (12%). This is a big move for such a large company and today’s move reflects an increase of over $20 billion in market cap. Google beat estimates and now commands 41% of the U.S. online advertising market. Also, it has a new social networking service, which I had never heard of until just a few days ago called Google+. In the first two weeks since its launch, Google+ reached 10 million users.

Market Today: The market ended fairly strong today. Google and a couple of M&A deals were positive influences today. Most sectors were strong, although I noticed Homebuilders were down.

Have a good day! Brent

Lakefront Daily Blog 07/12/2011

2011-07-13T08:04:00.001-04:00

Semiconductors: Microchip Technology and Novellus both lowered projections going forward. Microchip cited challenges in its automotive segment related to the Japan earthquake. Meanwhile, Novellus lowered its view because foundry customers are becoming cautious. Both stocks were down over ten percent, and this news was a major contributor to the fact that technology was among the weakest sectors today. As you can see below, Semiconductor stocks have been weak since their February peak.

Philadelphia Semiconductor Index (Two years)

Gold: Gold has been in a very predictable uptrend for over two years. This reminds me a bit of the trend the S&P 500 was in for a while that I frequently highlighted. Once the uptrend was broken, the market went in to a phase of higher volatility and uncertainty.

Gold (Since 2009)

SPX (One Year)

Market Today: Futures were very weak overnight and this morning on European debt fears. However, they erased much of those losses when reports came out that the ECB is or will soon buy Spanish and Italian debt. For most of the day, the market traded roughly flat. At the end of the day, stocks weakened to end down around 0.5%.

Have a good day!

Brent

Lakefront Daily Blog 7/8/11

2011-07-11T08:31:00.001-04:00

Jobs: Yesterday, the jobless claims numbers and the ADP report were seen as being relatively positive indicators for the jobs market. Today, the mixed signals continue; today’s jobs report was negative on all fronts. So, the roller coaster continues.

Continuing Jobless Claims (Since 1990)

Unemployment Rate (Since 1990)

As one can see from the charts above, the unemployment rate is still quite elevated. While the recent trend is downward, the last two ticks have been upward. The jobs market has been a big issue for those looking for proof that the economy is truly improving.

Retail Sales: Yesterday, retail sales came out better than expected. Perhaps not coincidentally, I noticed several consumer based stocks trading at all time highs. Just in the S&P 500, the following consumer stocks hit 52-week highs yesterday:

Amazon	McDonalds
AutoNation	Netflix
Bed Bath and Beyond	Nike
Chipotle	Nordstrom
Coach	Polo Ralph Lauren
Darden Restaurants	Tiffany
Harley Davidson	TJ Maxx
Macy’s	Wyndham

If I had counted things like credit card companies, food companies and shipping companies, this list would have been much longer. This suggests that market participants have generally embraced a comeback in retail and have been driving up the stocks as a result. The retail index I follow is up 240% from the 2008 low:

Morgan Stanley Retail Index (Since 2008)

California Upgraded: Yesterday, S&P upgraded California’s debt rating. I think it was only to “neutral”, but it was a positive step, none the less.

Lake Erie Islands: I am going to the Lake Erie Islands this weekend. People not from Ohio are probably not aware that there are inhabited islands on Lake Erie. In fact, there are 28 named islands, most of which are in the western basin of Lake Erie. The personality of the islands ranges from spring break like to extremely rustic.

Market Today: The market was weak today, mostly on the jobs reports. This follows a strong streak, including yesterday, when the market was up around one percent. Considering the weakness inherent in the jobs report, it is a victory for the bulls that the market is still higher than where it was on Wednesday .

Have a good day! Brent

Lakefront Daily Blog 7/6/2011

2011-07-07T08:36:00.001-04:00

Fed Lending: The Fed released data from its $80 billion single-tranche open-market operations which was designed to make 28-day loans to banks during the financial crisis in 2008. From the looks of the spreadsheet I have, the biggest borrowers under this program were foreign banks and Goldman Sachs. Interestingly, Goldman took the single biggest loan and used up the entire allotment of the program on December 9, 2008. If you would like a copy of the spreadsheet, please reply to this email.

Sector Detail: On Friday, we compiled some sector data as of month-end:

As one can see above, 6 of 10 sectors lost money last quarter. Interestingly, performance deviated measurably from sector to sector. Generally, defensive portfolios that were heavy in things like healthcare, staples and utilities did well. Conversely, BRIC, energy, tech and financial heavy portfolios did poorly during the quarter.

Note from the chart above that sector returns for June were less bifurcated.

In the year to date table above, there is quite a difference between the best and worst sector. It would be interesting to see the dispersion of sector returns over time. I would guess that this year’s sector returns are more dispersed than normal.

NYC Elevators: I will be on vacation and coming through NYC in two weeks. My ten year old is completely fascinated by elevators and even has a youtube channel of elevator videos he has taken. In fact, the main reason we are staying in the hotel we chose is because of the elevators. If any readers have access to some cool or old elevators in the city, we would love to come take a ride.

Market Today: The market opened weakly, moved down further until about 1:30, and then strengthened to close around flat. Looking across the board, things were very mixed. I did, however, notice some strength in healthcare and some weakness in tech.

Have a good day! Brent

Lakefront Daily Blog 7/1/2011

2011-07-05T08:44:00.001-04:00

ISM Manufacturing: The ISM (formerly PMI) manufacturing data for June was released today. The index rose slightly to 55.3. Economists had predicted a decline to 52. The market liked this data and moved up after the release.

ISM Manufacturing Index (Six Years)

Tesla: I saw my first Tesla in Chagrin Falls the other day.

The vanity plate was too hard for me to figure out, but my ten-year old son immediately recognized that it stood for “Electric S”. This reminded me to look at the stock, which has been trending up ever since the early days following the IPO:

TSLA (Since 2010 IPO)

Market: The market was strong today, mostly propelled by the aforementioned ISM data. For the week, the S&P increased 5.7%. Most of the recent days could be characterized as having some sectors up and some down. Today, everything seemed to be up and there appeared to be an allocation into stocks in general.

I had a couple more items I wanted to put in today’s blog, but I decided to wait until next week, because I have a feeling today’s blog will experience low readership given the long weekend.

Have a good day! Brent

Lakefront Daily Blog 6/29/2011

2011-06-29T15:54:00.001-04:00

Housing: Yesterday, the Case-Shiller home price index came out slightly better than expected. Today, a large homebuilder came out with disappointing results. This particular homebuilder has a heavy exposure to first-time home-buyers in some of the most hard hit markets, like Las Vegas and Phoenix. At ten o’clock this morning, pending home sales for May came out much better than expected. So, the data coming out of the housing industry is still mixed.

Pending Home Sales (YoY % Change)

Case-Shiller Housing Index (Since 2000)

The following tables show past and projected earnings and revenues for the publicly traded homebuilders. Based on these numbers, the street believes the worst is over. On an EPS basis, these stocks will make money in 2011 after four straight years of losses. On a revenue front, year over year revenue growth is anticipated to flip into positive territory in the September quarter.

Greece: The Greek austerity vote passed this morning. There was a lot uneasiness surrounding this vote. The market was up on the initial news, but faded later in the day. It appears the market has mostly priced in this news.

Market Today: I have a meeting for which leave at 3:30. So, I cannot provide a final market result like I normally do. As of now, the market is up modestly. Commodity and energy stocks are among the strongest stocks. Homebuilders are very weak as the news on KBH trumped the positive macro housing data. Indices that are not heavy in BRIC stocks are weaker than some of the more widely followed indices.

Have a good day! Brent

Lakefront Daily Blog 6/27/11

2011-06-28T08:28:00.001-04:00

Economy: Most economic indicators have been showing weakness lately. Consensus estimates for economic growth for the second quarter have dropped. The question remains “how weak?”, and whether the market is pricing in the weakness or not. So far, the recent pullback had been about eight percent on the S&P 500.

Oil: Oil prices have weakened considerably since the beginning of May, falling from $115/bbl to $90/bbl. Oil prices do not always correlate directly to gasoline prices, but I have definitely noticed a measurable drop in prices at the pump.

Oil (Two Years)

Dollar: Interestingly, and expectedly, the dollar experienced a bottom at the same time oil prices hit a high:

Dollar Index (Two Years)

Dodgers: The Dodgers filed for bankruptcy today after they announced they could not make payroll this week. The filing and announcement occurred after Major League Baseball rejected a television deal with Fox. According to Forbes magazine, the Dodgers are the third most valuable team in baseball. Also of note, according to the filing, the largest unsecured creditor to the team is Manny Ramirez. I was looking for a good image of an old time Dodgers player, and came across the following photo. When I was young I collected baseball cards, and the 1975 Topps series was one of my favorites. There is an excellent chance that I actually have this card somewhere.

Market Today: The overall market was strong today. However, there were some pockets of weakness in BRIC and education stocks.

Have a good day! Brent

Lakefront Daily Blog 6/22/2011

2011-06-23T08:09:00.001-04:00

Vegas: In May, airport traffic at Las Vegas’ McCarran airport was up 5.5% year over year. This is an indicator that economic conditions may be a bit better than last year at this time.

Greece: There was a favorable vote in Greece overnight. Evidently, the market priced this in, since futures were mostly unaffected.

Fed: The Fed held their scheduled news conference today. Sure enough, as Bernanke spoke, the market dropped and finished at the lows of the day. The Fed acknowledged that the economy is still not robust and that they are unlikely to act on interest rates in the next few meetings.

Retail: Retail sales have rebounded an exceeded pre-recession levels. Interestingly, however, as the chart below illuminates, there is little new shopping space. The lack of building probably can be attributed to an overbuilding pre-recession, difficult credit and not enough demand.

Market Today: The market was slightly up most of the day. Then, starting at about 2:30 when Bernanke began to speak, the market fell almost one percent.

Have a good day! Brent

Lakefront Daily Blog 06/20/2011

2011-06-21T09:21:00.001-04:00

Greece: The market is still nervous about the situation in Greece. I saw a piece on Friday that showed that the stock markets of most defaulted countries were actually quite strong following the incident.

Stocks Cheap: One of the most read stories on Bloomberg is headlined “Stocks Cheapest in 26 Years as S&P 500 Falls.” I am not exactly sure how they calculated this, but the chart below is an extended version of the chart they attached to the story. Based on P/E, the S&P was lower in 2008-2009. However, outside of that period, this is the lowest since about 1990.

S&P 500 PE Ratio (Since 1980)

RIMM: Research in Motion is down another seven percent today after being crushed on Friday. Another senior executive left the company today, and not many people are excited to own this stock. Just since February, the stock has dropped a whopping 63%, representing roughly $20 billion in market capitalization.

RIMM (One Year)

Market Today: The market was slightly up today. As I mentioned earlier, Greece is a definite overhang at the moment. There is a vote tomorrow in Greece, which may have an effect on the market. Today, I noticed that materials stocks were on the weak side and the homebuilders were strong.

Have a good day! Brent

Lakefront Daily Blog 6/16/2011

2011-06-16T16:17:00.001-04:00

Philly Fed: The Philly Fed came in very weak today. Two months ago it was at its highest point since 1983. Both of the last two readings showed measurable drops in this indicator, which is meant to be a proxy for business conditions. A reading below zero represents contraction.

Philly Fed (Since 1980)

Greece: The prevalent fear in the market right now seems to circle around Greece. Until that situation is better known, there will be a headwind in the market.

Pandora: The latest IPO, Pandora, dropped significantly in its second day of trading. As of 2:12 this afternoon, the stock was down 18% on the day and down almost 50% from yesterday’s high. Usually the underwriters will try to protect the stock price at or above its offering price. In this case, maybe the selling is so intense that they can’t even absorb it.

Pandora (Two Days since IPO)

Housing: Housing starts and building permits ticked up in May. New defaults are at a 53 month low and foreclosures are at a 42 month low. This news helped the market and homebuilding stocks specifically.

Building Permits (7 years)

VIX: The VIX, which is another sentiment indicator has spiked over the past two days, suggesting increased levels of fear. It was interesting the VIX was up so much today, considering the slightly positive market close.

Market Today: Early in the day, the market reacted well to strong housing data and shrugged off a really ugly Philly Fed reading. In the afternoon, fears related to Greece accelerated and the market sharply reversed. Then, at 3:00 stocks strengthened measurably. The market has definitely been jagged lately.

Have a good day! Brent

Lakefront Blog 06/13/2011

2011-06-13T17:13:00.001-04:00

· Bearishness: Bearishness has been increasing all year, and is at the highest point since last summer, at least as measured by the AAII. I have mentioned before that high bearishness is often a contra indicator. Note that the high in bearishness last July almost perfectly coincided with the July market low, after which, the S&P increased over 35% through April.

AAII Bearishness (Since 1/1/10)

S&P 500 (Since 1/1/10)

I looked back to see if I said anything last July when bearishness was high. Sure enough, I did:

07/09/10 - Bearishness: As I have highlighted in one way or another over the last couple of weeks, bearishness is very high. The AAII Bearishness index below, is at the highest level since THE low in March 2009. As you know if you have read many of these over time, I view this as a contra indicator. Investor sentiment is like a pendulum, it goes too far in both directions. When investors are overly bearish, they tend to have already reacted by selling stocks. The potential for change is in the other direction. I bet this index will show a lower reading next week, for what it is worth.

· Big Win: Cleveland was the second most elated city in the country last night following the huge win by the Mavs. Lebron looked just like he did when the Cavs needed him to step up in the playoffs…lost. Lebron Tweeted the following today: “The Greater Man upstairs know when it’s my time. Right now isn’t the time.”

I saw Lebron today and I asked for one dollar. He gave me 75 cents. I said “where is the rest?” He replied, “I don’t have a fourth quarter.”

Why does Lebron only get served boneless buffalo wings? Because he has a tendency to choke.

Tomorrow is Lebron James day. Everyone gets to leave work 12 minutes early.

· M&A: M&A activity remains robust. Today, Timberland was up 40% on an offer from VF Corp. Also, there have been lots of IPOs lately, even if their post-IPO performance has been in weak.

· Market Today: The market was a little bit volatile today. A strong open quickly faded and the market dropped until 1:00. At that point, the weakness was erased with a 1% rally. That rally ended up fading, and in the end, the market ended roughly flat.

Have a good day! Brent

Lakefront Daily Blog 06/09/11

2011-06-10T10:24:00.001-04:00

· Recent IPOs: I noticed today that some recent IPOs, while strong on their first day, have been very weak since then. Two that catch my attention are LinkedIn and ZipCar. LinkedIn has dropped 40% from its high on the offering day, while ZipCar has lost almost 38%.

LNKD (Since May IPO)

ZIP (Since April IPO)

ZipCar is approaching its $18.00 IPO price. If it does reach $18, I bet it will “flat line” there for a while.

· Google: If you have not checked out the Google homepage yet today, check it out. You will need volume. It seems like the Google Doodlers are becoming more and more creative all the time.

· Continuing Jobless Claims: Continuing jobless claims ticked down this week, slightly alleviating the recent fears regarding the job market.

Continuing Jobless Claims

· Market Today: The market rebounded today, breaking a streak of six down days. Most sectors were up, although there were plenty of stocks that were not up. Looking at my screen, it looks like maybe 1 in 6 stocks were down.

Have a good day! Brent

Lakefront Daily Blog 06/07/11

2011-06-07T17:00:00.002-04:00

· 52-Week Highs and Lows: As of 10:40, not a single S&P 500 is hitting a new 52-week high today. Only four (Radio Shack, Tellabs, Cisco, Lexmark) are at 52-week lows. Interestingly, these are all tech companies, and some might argue they are not exactly on the cutting edge of technology.

Looking at the chart below, one can see that occasionally there are periods where there are few new highs and lows. The table shows 30-day and 90-day performance of the S&P 500 after these conditions have occurred in the past year. So far, they have all coincided with low points in the market.

52 week Highs and Lows (Daily, One year)

· Timber: Temple Inland received a hostile bid from International Paper, sending the shares of TIN up 40% today. The buyout would represent the highest price ever for the stock and a double-digit premium to its 1997 all-time high. In 2008, Temple Inland was trading at $2.09, today’s offer is for around $30, which is roughly 15 times the price just two years ago.

Temple Inland (20 Years)

Giant Wind Turbine: The other day, I took a ride by the port of Cleveland and saw a massive wind turbine blade. I have since discovered that Lincoln Electric is erecting one of the largest wind turbines in North American at its Euclid Plant. Evidently, Lincoln ordered the turbine last fall in a show of support for the Great Lakes Energy Development Task Force's campaign to persuade a turbine maker to build turbines here. The two images below from the Plain Dealer show the size of the behemoth wind turbine. At its peak, the new turbine will be a whopping 443 feet high and will spin once every five seconds.

· Market Today: The market was reasonably strong today until Bernanke spoke. Once he began to speak, the market dropped to end the day roughly flat.

S&P 500 Today

Have a good day! Brent

Lakefront Daily Blog 6/3/2011

2011-06-03T18:04:00.002-04:00

· Non-Farm Payrolls: Non-farm payrolls were worse than expected for May and grew slower in May than expected. This is a fairly volatile data set, but nonetheless, the market digested this as a sign that the economy might be slowing. A number of economic indicators have suggested weakness recently, causing investors to question whether we are in the midst of a short-lived patch of economic weakness, or something more significant.

Non-Farm Payrolls (Since 2000)

· Trucks Everywhere: I found myself driving through the industrial flats yesterday on my way back from Nate’s Deli. I have driven through there many times, but this time there were trucks everywhere. It may be mostly a product of the steel mill, but things definitely appeared robust down there. Admittedly, I am not there a lot, so I don’t know what “normal” is.

· Five Weeks of Decline: The Dow was down five weeks in a row. This is the first time this has happened since 2004. I find it interesting that it did not occur during the market decline of 2007-2009.

· Unemployment: The unemployment rate ticked up in May. Investors did not particularly like this development. While it is not abnormal for unemployment to tick up during a recovery, the unemployment rate remains elevated and increases make investors nervous.

Unemployment (Since 1980)
After looking at the above chart, it does appear that the post-recession recovery in unemployment has been less smooth than after previous recessions.

· Gold: I read today that Dennis Gartman cut his position in Gold in half. The trend since 2002 has been pretty amazing:

Gold (Since 2002)

· Market Today: The market was somewhat weak today. The main culprit behind today’s weakness was the morning jobs report. Stocks attempted to rally mid day, but failed at the end to close near the lows.

Have a good weekend! Brent

Lakefront Daily Blog 5/31/2011

2011-05-31T17:43:00.001-04:00

· Housing: The Case-Shiller Home Price Index came out today for March. Today’s reading represented a new low. This was not digested by the market or homebuilders, which both finished higher on the day.

The two charts below show that Homebuilding stocks and the Case-Shiller Index have tracked fairly closely. Since the market bottom of 2009, however, the stocks have been trending up, while the actual data has been flat (ish). This suggests that investors believe there will likely be an improvement in homebuilding at some point.

Case-Shiller Home Price Index (Since 1999)

Homebuilding Stocks (Since 1999)

Interestingly, looking at Homebuilding earnings, below, the industry is expected to begin making money again in 2011 from an EPS standpoint:

· Chicago Purchasing Managers Index: The Chicago PMI came out worse than expected today. Like the home price news, this did not have much of a negative impact on stocks. Looking at the data, the newest reading came off of extremely high levels, and the overall dataset is usually somewhat volatile anyway. The index remains at a relatively normal level for an expanding economy.

Chicago PMI (Since 1980)

· Two Years Ago: I sometimes go back and look at past blogs from the current date. Two years ago I wrote the following the entry. What is interesting about this is that I got a response asking me to provide the next “bagger” instead of past baggers. It turns out that THC doubled since the posting, is now an “eight-bagger” from its low, and has an offer to be purchased by another company.

05/27/2009: Bagger Du Jour: Today’s bagger is Tenet Healthcare. THC is a whopping five bagger now since its low in March.

Tenet Healthcare (YTD as of 5/27/2009)

· Market Today: The market was higher today. Overnight, futures were higher, partially on better news out of Greece. All of the major sectors I track were up, and the only pockets of weakness I noticed occurred in education stocks and uranium stocks.

Have a good day! Brent

Lakefront Daily Blog 5/26/2011

2011-05-26T16:16:00.001-04:00

“Happiness is not a station you arrive at, but a manner of traveling.” -Margaret Lee Runbeck (American Author, 1905-1956)

GDP Growing Slowly: GDP for Q1 2011 came in at 1.8% versus a 2.2% expected growth rate. Overall, economists cite weak household spending as the primary contributor to the slower than expected growth. Lower spending on gasoline, utilities and autos were cited as the primary reasons behind the slight miss.

Retail Stars: Last week I highlighted some clothing retailers who were not performing well. This week we are seeing high-end retailers like Tiffany, Coach and even lesser known Vera Bradley showing strength. These high-end retailers generally remain strong as they are less sensitive to commodity prices, have little or no competition in their segment and maintain less price conscious customers.

Wage Trends: According to the Bureau of National Affairs, wage trends continue to improve, which echoes news from the temporary employee industry. A number of temporary employee staffing companies have indicated wage billing rates are robust, especially in tech and healthcare industries. This is often a precursor to higher wages and job growth overall.

Market Today: The market shrugged off a lower GDP number, slightly disappointing jobless claims, and the daily Greek concerns and rose. Highlights included better than expected earnings from Tiffany and NetApp and Microsoft’s boost from a well know hedge fund manager (not me). Overall, the strongest sectors were basic materials, energy and technology; utilities and healthcare lagged.

Have a great holiday!

Edward R. Matuszak

Lakefront Daily Blog 05/23/2011

2011-05-24T16:39:00.001-04:00

· New Home Sales: New home sales were slightly better than expected. This indicator continues to “scrape the bottom” and has been stable for about a year. It is interesting that new home sales, even without adjusting for population changes, are at their lowest levels since they started tracking this in 1963.

New Home Sales (Since 1963)

· Oil: Oil was up today. I have not shown a chart on oil since the big decline earlier this month. Interestingly, it has stabilized somewhat, and still remains within the uptrend of the past year.

Oil (One Year)

Energy stocks, which are generally down 10-15% from their highs, have also stabilized over the past week or so.

Coincidentally, Goldman Sachs raised its price forecast on oil today and is calling a bottom in the recent commodities correction.

· Market Today: The market ended the day slightly down. Early morning strength on the housing news and Goldman prediction gave way to a weak Richmond Fed number. Energy and education stocks caught my attention as being up. Other sectors were mixed or slightly down.

· Tribe: I have been to five Tribe games already, which is WAY more than usual. Against all odds, the Indians are currently the best team in baseball and keep winning in ways that remind me of 1995. Last night, it was pouring rain, but the crowd all stayed to watch the tribe come back late in the game and win 3-2. I wonder how many readers will immediately recognize the image below?:

Have a good day! Brent

Lakefront Daily Blog 5/20/11

2011-05-20T16:10:00.001-04:00

“If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” -John Maynard Keynes

Tech Mania?: Some market strategists are suggesting that the IPO of LinkedIn marks a peak in tech stocks and indicates we are seeing a “bubble” in that sector. Here is a chart of the LNKD IPO yesterday, which was priced around $45 per share hit a high of over $120 intraday.

LNK

LinkedIn now has a larger market cap than 177 companies in the S&P 500. Today it surpassed notable companies such as Tiffany, JM Smuckers, Chipotle, Harley Davidson, JC Penney and KeyCorp.

NASDAQ 100: The tech heavy Nasdaq 100 has certainly been strong since last summer’s correction climbing nearly 40% since July 1, 2010.

Retail Stumble: Gap Stores, Aeropostale and American Eagle reported weak results and outlooks on future revenue growth. Citing higher input costs in the form of fuel and cotton, they indicated that price increases were not a solution at this point as consumers are too price sensitive. Abercrombie & Fitch does not seem to be seeing the same issues at this point. Are they better managers of raw material purchases?

Market Today: The market was weak most of the day on worries related to the European debt crisis in the form of a Greek downgrade (again) and weak retail sales. Only the utility sector was up on the day, while industrial, financial and consumer sectors were the weakest.

Have a great weekend!

Edward R. Matuszak

Lakefront Daily Blog 5/18/2011

2011-05-18T17:31:00.001-04:00

· Big Mac Attack: I heard that someone ate their 25,000^th Big Mac recently. Allegedly, the 59 year old guy who has eaten all of these is healthy. Reading this made me wonder how much “special sauce” this guy has eaten in the 39 years he has been eating these. If we assume that each Big Mac receives one fluid ounce of sauce, then the Big Mac eater has eaten 25,000 fluid ounces of sauce. There are 128 fluid ounces in a gallon, so this guy has eaten 200 gallons of special sauce! The visual below shows roughly how much “special sauce” this guy has eaten:

· Sector Performance: There is quite a variance in sector performance so far in May. BRIC/Energy stocks have been very weak. More defensive stocks like utilities, staples and healthcare have been stronger:

· Yuan: A lot of people are talking about the delinking of the Chinese and US currency. Here is what the relationship looks like since they began the process back in 2005. I have noted this before, but it is interesting how they halted the depegging process during the recession.

Dollar/Yuan (Six Years)

· Blog Glitch: We appear to have had a network glitch last night which resulted in some readers receiving copies of old blogs. We are attempting to alleviate the possibility of this occurring again. We apologize for any inconvenience this may have caused. Interestingly, I received a few comments about the content of those blogs even though they were old.

· Market Today: The market was strong today. Every sector I pay attention to was up. The only pockets of weakness I noticed were a few small retailers and education stocks.

Have a good day!

Brent

Lakefront Daily Blog 5/16/2011

2011-05-16T16:39:00.001-04:00

· Spillway: As we have all seen in the news, officials have opened the Morganza Spillway in Louisiana in order to minimize the destruction of the flooding Mississippi River. This would be an interesting topic in an Economics class. How is the value of property below a spillway affected by the fact that the government can choose to flood it when the time comes? I assume that the government insures the damage caused by opening the spillway, so does that actually increase the value of the land below the spillway? Is there speculation around this possibility, and if so, was there a flurry of activity in recent days?

· RVs Going to China: CNBC covered an interesting story today. There is an RV company that expects over $300 million in revenue this year. Last year (or maybe it was 2009), they had no revenues. It turns out that a Chinese investor invested in the company and it is exporting all of its RVs into the nascent Chinese RV market. Here is a version of the story as told by the LA Times, if you are interested: http://articles.latimes.com/2011/jan/21/business/la-fi-china-rv-20110121

· Market Today: The market was quite weak today. Interestingly, if you look at the movement of the dollar today, it was almost perfectly negatively correlated:

DXY (Today)

S&P 500 (Today)

From a sector standpoint, most were weak. I noticed specific weakness in tech stocks and energy stocks.

Have a good day! Brent

Lakefront Daily Blog 5/13/2011

2011-05-13T16:42:00.001-04:00

· RMBS: Rambus was halted twice today. Once for hitting the circuit-breaker on the upside, and once for hitting the circuit-breaker on the downside. I am not sure I have ever seen this before. There was legal news on the stock which was initially digested positively, sending the stock from $18.50 to $21.75. Shortly there thereafter, it became evident that the news was bad, causing the stock to plummet to $14.60.

Rambus (One Year)

· BRIC and Energy: As I look at stocks within these groups, I am finding more and more that have broken their uptrends, and that have begun at least short-term (last month or two) downtrends. The following chart of the oil service index is a good example of what I am observing.

OIH (One year)

· Market Today: The market was weak today, continuing the choppiness it has been experiencing over the past couple of weeks. The indices are still not far off their 52-week highs, but there are lots of individual stocks which have dropped more measurably. Today’s weakness spanned most sectors, although I did notice strength in a few smaller cap retail stocks.

Have a good day! Brent

Lakefront Daily Blog 5/11/11

2011-05-11T16:40:00.000-04:00

· Inflation: Inflation fears infiltrated the market once again today. Part of the catalyst was the Bank of England Governor saying that inflation remains “uncomfortably high”. Officials in England also signaled that they will raise rates later this year. Lately, the inflation theme is at the forefront of market worries. One of the inflationary forces many are worried about is the price of oil/gasoline. Interestingly, however, when these are down, so is the market. I have not shown a chart like that below for a while; it shows the correlation of crude prices to the market since 1991. As you can see, oil prices and stocks have shown historically high correlation over the past three years:

Crude Oil Correlation vs. S&P 500 (Twenty Years)

· Commodities: Commodities took another nosedive today. As of 2:25, oil was down $6.50/bbl and silver was down almost ten percent. Both are higher than they were at their lows last week, but the subsequent rally they experienced was largely extinguished today.

· 401(k): Fidelity said today that the average balance of 401(k) retirement plans reached the highest level since they began tracking it in 1998. The average 401(k) balance currently stands at $74,900. One positive sign Fidelity highlighted is the fact that more participants increased deferrals versus decreasing them.

· Market Today: The market was quite weak today. BRIC and Energy related names were amongst the worst performers. Price movements in commodity related stocks continue to attract attention.

Have a good day! Brent

Lakefront Daily Blog 5/09/2011

2011-05-09T17:14:00.001-04:00

· Commodities: Last week’s big move in commodities continues to be a major topic. I showed Silver and oil in charts in last week’s blog, but today came across the following index which tracks 24 raw materials:

S&P GSCI Index (One Year)

This index does not show intra-day movements, but today, commodities were up. As of 3:46, Gold was up $16/oz, oil was up $6/bbl and silver was up 6% to $37.92. All of these moves are minor retracements of last week’s decline.

· Goldman Sees Commodity Recovery: Goldman Sachs said that last week’s debacle in commodities is creating a buying opportunity. A month ago, the same analyst was cautious.

· Market Today: The market was strong today. Most sectors were strong, although I noticed Homebuilders were down.

Have a good day! Brent

Lakefront Daily Blog 5/5/2011

2011-05-05T17:19:00.001-04:00

· Russell 2000: The market acted differently today than it has over the past several days. From the open today, the Russell 2000, which is a general proxy for small-cap stocks, was measurably stronger than the overall market. This is quite a contrast to the first three days of the month, when the Russell 2000 lost almost four percent. To me this suggests that the market dynamics in place during the first three days of the month have slightly changed.

· Commodities: The selloff in commodities accelerated today. Oil was down over $11 a barrel (3:15), which is a fairly major move. Looking back, today’s move was the worst in over two years for oil.

Crude Oil (20 Days)

Silver has received more attention than any other time I can ever remember. This commodity has dropped in the last four days, moving an incredible 30%. We looked back to see how common this is. Amazingly, this has not happened since 1980 in the aftermath Hunt Brothers’ attempt to corner the market.

Interestingly, if you Google “hunt” right now, the first search trend is “Hunt Brothers.”

Silver (One Year)

This move has certainly bankrupted a few commodity traders. It is hard to know how much of the move is due to margin calls, how much is due sheer speculation or whether there might be one big player involved, or how much is normal market forces. I am guessing there will be plenty of media coverage on this in the coming days.

· Strength: The market has appeared to be strong this year. I thought it would be interesting to see how strong this year’s strongest stocks were in the period before this year. I looked at the top ten percent of stocks this year based upon YTD performance. This group of stocks had a median gain of 37% this year. This same group was up 2.6x (160%) from the lows of 2009. So, in order to have participated in the strongest part of the market this year, one would have had to look for stocks that have experienced massive moves. “Buy high, sell higher” has been working better than the old mantra of “Buy low, sell high” recently.

· Market Today: The market was weak today after a mid-day attempt to rally. The strange moves in commodities seemed to have helped squash the rally. Nonetheless, as noted above, today’s weakness was a bit different than seen in the past few days. Small-cap stocks were relatively strong, and oil stocks were not as weak as one might expect given the move in oil.

Have a good day! Brent

Lakefront Daily Blog 5/3/2011

2011-05-04T10:16:00.001-04:00

· BLOG: Today’s blog, which is really yesterday’s blog, is coming out in the morning. For some reason it did not get sent last night. I wonder if the change in timing will increase or decrease readership?

· Russell 2000: The Russell 2000 has been very weak since the beginning of the month, and has been weaker than the S&P since early April. There has been some talk about how small cap stocks are expensive; it appears that investors are reacting to that and selling off smaller capitalization stocks right now. Here is a relative chart of the Russell 2000 versus the S&P 500:

Russell 2000/S&P 500 (YTD

· Materials: Materials stocks, including silver, gold and oil related names were very weak today. There appears to have been a sudden shift in the appetite for these stocks. The following is a Silver bullion ETF. Note the last two days.

Sprott Physical Silver Trust (from Oct inception)

· Market Today: The market ended lower today, except for the Dow Industrials. The Russell 2000 was down 1.3%. Stocks were much weaker until a late day rally which started at 3:00. There seemed to be more up stocks today than is typical on a weak day like today. I noticed a few bank and education stocks that were up.

Have a good day! Brent

Lakefront Daily Blog 05/02/2011

2011-05-02T16:18:00.001-04:00

· OBL: Osama Bin Laden was killed by US forces last night, which is likely not a surprise to anyone reading this. If one had asked me Friday how much of a discount was priced in to the market because OBL is still at large, I would not have thought there was much of one. It turns out that as exciting as the news is, it is not market moving news.

· Cleveland Sports: If you have not noticed, the Indians are in first place and are the best team in all of baseball. They have had a number of really exciting late game comebacks. I keep waiting for them to revert to the mean, but so far that has not happened. If they were to just go .500 from here, they would have a decent chance at making the playoffs.

· 52-Week Highs: The S&P 500 hit a new high this morning before selling off. I thought it would be interesting to see how many stocks within the S&P are hitting 52-week highs. Roughly 100 new 52-week highs have been occurring each day that the market moves to new highs. In the past year or so it has been uncommon for there to be many more than 100 stocks within the S&P 500 hitting new highs. Also of interest is that since September, there have been very few new lows hit for stocks within the S&P 500. It would be interesting to get data going back several years. If any readers have access to that, I would love to see if there are any correlations to this and market peaks and troughs. My guess would be that large numbers of new lows are more correlated to bottoms than large numbers of new highs are to tops.

52-Week Highs and Lows with the S&P (One Year

· Market Today: The market was somewhat weak today. While the major indices only showed a minimal decline, the internals of the market were quite weak.

Have a good day! Brent

Lakefront Daily Blog 4/27/2011

2011-04-27T17:35:00.001-04:00

· New Highs: In case you had not noticed, the S&P 500 broke through the previous highs and is now at the highest level since 2008. With the market having broken through previous resistance levels, the bearish camp is a little quieter than it has been in recent weeks.

· Correlation: The other day, one of our investors asked me about our Fund’s correlation. I looked through the correlations of a number of large mutual funds as is shown in the table below. Not surprisingly, while their returns are variable, all of them have been highly correlated to the market. Additionally, all of them had very large drawdowns back in 2008-2009. If investors are trying to construct a portfolio, it is important to assemble a number of assets that are not correlated to each other, thereby diversifying their risks. So, while some mutual funds may beat the market and have a place in a portfolio, investors should recognize that they will act very much like the market, particularly during a downturn.

· Fed: Today was “Fed Day”. After its release, the market rallied a bit. Following the release was the first ever post meeting press release with the Fed Chairman. There are plenty of quotes and commentary in the media which is easily accessible via Google search.

· Market Today: The market started the day down and strengthened after the Fed news. Today’s close marked a new high for the year for stocks. Most sectors were strong except for energy, which was notably weak.

Have a good day! Brent

Lakefront Daily Blog 4/25/2011

2011-04-25T17:25:00.002-04:00

· Homebuilding: New home sales were slightly better than expected for March, coming in at 300k versus an upwardly revised 270k in February. The expectation for today’s number was 280k. While today’s number was strong, it is not strong enough to suggest that the housing market is doing anything other than “scraping the bottom.” The chart below shows new home sales since they began tracking it back in 1963:

New Home Sales (Monthly Since 1963)

I thought it would be interesting to adjust the numbers based on today’s population. The formatting is slightly different in the following chart, but it shows that when smoothed out for population increases, the “bubble” was not quite as extreme, and the current lows are somewhat lower than any of the other weak periods in history. The big question is still “has the homebuilding industry finally bottomed, and if so, how drawn out will the rebound be?” Consensus seems to be that homebuilding has roughly reached a bottom, but there is no reason to think that this means a rebound is around the corner.

· Factoid: At its highest measured point, the tsunami in Japan measured 124 feet above sea level.

· ETFs: I am constantly running into people who are using ETFs and levered ETFs to try to make bets on commodities. For people who are trying to make a bet on the direction of a commodity over any extended period of time, the levered ETFs are usually very inefficient. Over the years, I have blogged about the concept and why these don’t usually perform the way people expect. If you would like to look back, I talked about levered and inverse ETFs on 5/11/10, 1/27/10, and 7/30/09. I copied the following table from an old blog. It shows what would happen to a 3x leveraged long and short ETF during a random period in which the underlying security ended up being flat. Most investors would have expected their ETF investment to be somewhat flat if the underlying security itself was flat:

Just looking at one real world example this year, I looked at a random 2x levered inverse crude oil ETF. The index it is supposed to track is up 11.1% this year. Many investors would expect their investment to be down 22.2%. Instead, the ETF is down 35.5%.

· Market Today: The market was somewhat uneventful today. Most stock indices ended the day slightly down. Homebuilders were on the strong side, as were the “Nuke” stocks.

Have a good day! Brent

Lakefront Daily Blog 4/20/2011

2011-04-20T16:11:00.002-04:00

· Volatility: I mentioned in Monday’s blog that volatility was recently higher. One of the readers correctly noted that the VIX is actually at a low as the chart below illustrates:

VIX (since 9/30/2010)

The following chart shows the volatility in the S&P over the past sixty days. The white line is the volatility, the yellow line is the market.

S&P 500 and Trailing 60d Volatility (since 9/30/2010)

So what is the difference between these two measures of volatility? The VIX is not actually a measure of recent market volatility. Rather, it is measure of the implied volatility built into the price of S&P 500 options. It is a measure of the expected market volatility over the next thirty days. Many people look at it as a fear gauge for the market, and would currently look at it and say fear is pretty low. The lower chart, showing actual volatility of the market, calculates the trailing 60 day annualized volatility of the market.

· Dow at New Highs: It certainly does not feel like the market is at new highs, and it isn’t based on the broad market indices. Those who watch the news or follow the Dow Jones Industrials, however, will probably talk about how the market hit new highs today. Today’s close marks a new post-bubble high for the Dow:

DJIA (Four Years)

· Market Today: Earnings were good from bellwethers of several industries. Yahoo, United Technologies and Intel were all up sharply on better than expected results and guidance. Recent fears took a back seat to confidence in the economy, at least for today. Technology stocks led today’s rally, while consumer and financial stocks lagged.

Have a good day! Brent

Lakefront Daily Blog 4/18/2011

2011-04-18T16:28:00.001-04:00

· S&P Cuts Outlook on US Debt: The Standard and Poor’s rating service cut the U.S. long-term credit outlook to negative and assigned a 1-in-3 chance of a ratings cut in the next two years. They said “We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013. If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

· The Channel: Ever since the market broke the uptrend it was in, it has had a very difficult time moving higher. With the increased volatility and the recent weakness in the market, the AAII sentiment indices are not showing abnormally high bearishness.

· Root Candles: Once a month, the Lakefront team takes a “field trip” to a local manufacturing facility. We have seen some really amazing examples of entrepreneurship and innovation. On Friday, we went to Root Candle in Medina, Ohio. Root has been in business since 1869 and lays claim to making the best candles in the world. Above and beyond the retail piece of their business, they are a major supplier to churches, which require the highest quality candles made of 51% or more pure beeswax. The history of this company is pretty remarkable. Check it out at: www.rootcandles.com

· Market Today: The market was weak today, mostly on the S&P news mentioned at the beginning of the blog. The low occurred around 10:00, after which time the indices rallied modestly. In the end, the markets ended down 1-1.5%

Have a good day! Brent

Lakefront Daily Blog 04/14/2011

2011-04-14T17:07:00.001-04:00

· “Is There Any Reason to Buy?”: There was a Power Lunch debate on CNBC today with this title. There is definitely a bearish tone out there.

· Cleveland Sports: Guess what? The Tribe and the Cavs did it again earlier this week when they both won on the same night. This is pretty interesting. It reminds me of what happened to the financial markets in 2008-2009. People built all of their risk models based on a backward looking set of data during “normal” times, and thought of things in terms of standard deviation. Using the data on the Cavs and Indians that I presented last week, having the two teams both win on the same night three times within a week would be expected to be an extremely rare event. Standard deviation and bell curves work well in classrooms and in formulas, but in “real life”, distributions are not usually in the form of a bell curve. They often have fat-tails, which means that the theoretically rare events are not as rare as a normal distribution would suggest. Billions, if not trillions of dollars were lost in 2008-2009 because people underestimated the odds of these rare events.

One way I like to think about this is that if one protects themselves against things that happen 99.999% of the time, but are wrong and they only protect themselves 99.99% of the time. They are actually ten times more exposed to the risk they are trying to protect against.

· Zipcar: Zipcar shares were up as much as 75% in their first day of trading. This is an interesting company that rents cars by the hour and the cars are located in strategic spots throughout a given city. If you are not familiar with it, check out www.zipcar.com , it is a pretty interesting concept. My question, however, is whether it is an interesting concept like Webvan was an interesting concept. Webvan worked in a few cities, but was not a scalable idea that would work in cities across America.

· Market Today: Before the market opened today, futures were down. After about 10:00, the market began to rally and closed roughly flat on the day. I did not notice any dominant sectors, but I did see that the nuclear related stocks were strong.

Have a good day! Brent

Lakefront Daily Blog 4/12/2011

2011-04-12T17:03:00.001-04:00

· Gas Prices: I paid $4.08 a gallon the other night for gas which caught my eye. The $4 milestone seems to be making people a bit nervous.

· Japan: Some of today’s weakness was due to new news out of Japan related to the nuclear plants. They raised the severity level, a seven, which is the same as Chernobyl.

· Market Top?: The market has been weak the past few days and has not been able to break the previous highs. I have shown the broken uptrend line a number of times. The bears are clearly beating the drum right now and seemingly have plenty of ammunition.

· AA: Alcoa announced earnings today. Their top-line was a bit light which helped cause BRIC related stocks to fall today.

· Real Estate as a Hedge: There has been a lot of talk about inflation, and one of the concepts that many are talking about is whether or not real estate is a good hedge against inflation. I came across the following chart today, which seemed interesting given the times. The chart suggests that commercial real estate returns usually do outpace inflation. I am not exactly sure what the index they are using is comprised of.

· “We’ve Been Hit by Air France”: If you do not know what I am referring to, go to this link, it is pretty unbelievable: http://youtu.be/ayCWSm1f9qk The smaller plane appears to be an ERJ, which is still a sizable plane.

· Market Today: The market was weak today, the reasons for which were mostly covered above.

Have a good day!

Brent

Lakefront Daily Blog 4/08/2011

2011-04-08T17:00:00.001-04:00

· Cleveland Sports: In the last blog, I noted the low odds of the Cavs and Indians both winning on the same day. Guess what? It happened twice in a row. Using the same assumptions from Wednesday, that should happen once every sixteen years.

· Sentiment/Inflation: The big theme lately is inflation. Everyone I talk to is worried about inflation, and all of them believe it will be bad for the market. I have not recently run into many people who tell me they think the market is going to continue to move higher. The following Bloomberg Chart of The Day might interest some readers:

· Market Today: The market was weak most of the day, with the lows occurring around 3:00. There was some coverage of the potential government shutdown which seemed to make traders a bit weary of being too long going into the weekend.

Have a good day! Brent

Lakefront Daily Blog 4/6/2011

2011-04-06T16:58:00.003-04:00

· Sentiment: I keep hearing people tell me how cautious they are and how sure they are that the market will drop. Over the past two years, there have been plenty of seemingly reasonable bearish arguments investors have been making. So far, none of those have panned out and the market has more than doubled. I have said this several other times, but when so many people question the strength of the market, it is rarely the top of the market. Interestingly, one well known market commentator tweeted today that this could be the top for the market. Time will tell.

The chart below is the S&P 500 over the past year. I have talked about the channel the market was in, and a few people have asked if the recent strength has moved the market back into that channel. Interestingly, it has not.

S&P 500 (One Year

· Cleveland Wins: In a rare but glorious day yesterday, the Cavs and the Indians both won. Let’s try and figure out just how likely this is:

They are scheduled together eight times this year.

The Cavs winning percentage is .208

The Indians last year won 42.6% of the time.

Given these assumptions, they would only be expected to win together twice every three years.

· Chagrin River: I mentioned the big flood that took out the dam on the Chagrin River a few weeks back. Since then there has been a lot of talk about the Steelhead Trout that run the river and that their range would now expand measurably. My friend sent me video of him already catching Steelhead several miles north of the old dam. If they haven’t yet, they will soon reach the next waterfall, the location of which is only known by the locals.

· Market Today: The market closed modestly higher today. The major indices are near the previous highs but have not broken through as of now. The bullish camp obviously believes the market will power higher. The bearish camp believes that the breaking of the aforementioned trend and the brief hesitation near the highs are negative signals. Energy and BRIC stocks were weak while most other stocks were up to varying degrees.

Have a good day! Brent

Lakefront Daily Blog 4/5/2011

2011-04-05T16:09:00.001-04:00

· Google: If you have never noticed, Google frequently changes the face of its homepage. The other day, they showed the image below to recognize the 119^th anniversary of the ice cream sundae.

· NSM: M&A activity has continued, even in the face of higher stock prices. Today’s highlight is Texas Instruments’ offer for National Semiconductor. This $6b deal announcement represents a huge premium, causing NSM to trade up a whopping 71% today. I circled today’s price in the chart below since it is such an anomaly and would be easy to miss:

NSM (Two Years)

· NDX: The Nasdaq 100 is re-weighting Apple from over 20% to around 12% of the index. I have not yet figured out how many shares this will mean will have to be sold from the index and all the related indices and funds that base their weightings off that of the NDX, but it has to be a big number.

· Market Today: The market ended the day flat. Within the market, however, more stocks were up than down. The major indices were affected by a few large stocks like Google and Apple, which were down. Semiconductors were strong on the buyout news and homebuilders were weak. It is worth noting that the homebuilders bounced strongly off morning lows.

Have a good day! Brent

Lakefront Daily Blog - March 31, 2011

2011-03-31T16:09:00.004-04:00

'The serenity of mind, gentleness, silence, self-restraint, and the purity of mind are called the austerity of thought.” -The Bhagavad Gita (Hindu scripture)

Consumer Confidence: While consumer confidence fell slightly this month versus last month, the trend of improvement remains intact. Given the devastation we witnessed in Japan, Libya and the Middle East, it is wonder it did not fall further. Especially in Cleveland, as it just should not be snowing the day before the baseball season opens.Purchasing Managers: At the same, Chicago purchasing managers index continued to remain at very strong levels. This measure of business activity in the heartland certainly points to continued recovery in manufacturing.

Oil: Meanwhile, oil continues to go up in price, which will remain as a potential headwind on the consumer. This is adding to the inflation talk out there.

Market Today: The market spent most of the day at the pool (like Brent) treading water. A mixture of economic news this week has the wall of worry in full force with a plethora of economic releases coming tomorrow. Weakness was concentrated in financials and consumer discretionary stocks while industrial, material, energy and transports were the strongest.

Edward R. Matuszak

Lakefront Daily Blog - March 29, 2011

2011-03-29T17:06:00.005-04:00

"Nobody can really guarantee the future. The best we can do is size up the chances, calculate the risks involved, estimate our ability to deal with them and make our plans with confidence.” -Henry Ford II

Personal Income: Personal income continues to grow steadily and has not had a negative month over month change since September 2009. Outside of that one month, it has been positive since May 2009, nearly two years ago, which coincides with the peak in continuing claims below.

Housing: Broadly, housing prices continue to decline, but in some areas the rate of decline is slowing. There is no surprise here as everyone knows housing will take a long time to recover, but new homes are being built in some areas, and if you are a buyer, you have numerous choices. Of course, many buyers need to sell as well. Like a rock thrown into a pond, the waves of news on housing are dissipating and having less and less of an effect on the market overall.

Jobs: Continuing claims have now returned to levels which represented the peak during the 2001-2003 period. They have been steadily trending down for nearly two years now.

Cricket Madness: The Cricket World Cup is taking place in Asia (hosted by India, Bangladesh and Sri Lanka) and the “mother of all” cricket matches will basically shut down Indian and Pakistani businesses as the two rivals face each other for a trip to the finals. It is estimated that this match will have hundreds of millions watching in both countries. Most Americans have never seen cricket played, let alone understand the rules, while a billion people (est.) call it their favorite sport. The winner plays Sri Lanka.

Market Today: The market started out weak today, but once again, climbed a “wall of worry” to close up nicely on the day. Continued declines in home prices, as mentioned above, drifted into the back ground as most all sectors where stronger, with the exception of the education and housing stocks. The energy and materials sectors were strongest, while financials were weak. We will see later in the week if this was “window dressing” to get some attractive trades in portfolios before the end of the quarter for funds which have been lagging.

Best regards,

Edward R. Matuszak

Lakefront Daily Blog - March 25, 2011

2011-03-25T16:35:00.001-04:00

“Markets that will not go down on bearish news are not bear markets.” -Dennis Gartman

Eco: GDP numbers came in as expected for Q1. Consumer confidence was in line with expectations and is still in the range of the recent uptrend. Though some of this may have been tabulated before the Japan issue.
Goldman: While the market has been quite resilient during the last couple of weeks as we have been digesting the news from Japan, GS has not been as strong. Here is a one year chart of GS
Market Today: The market was strong in the morning and gradually gave up some gains as the day progressed, but ended up on the day. The strongest sectors were energy and transportation while financials were weak. The Russell and Dow Jones are up on the month, while the S&P 500 remains in the red. It will be interesting to see if we have some volatility next week as managers who are lagging the indices attempt some “window dressing” before the end of the quarter.

Edward R. Matuszak

Lakefront Daily Blog 3/23/11

2011-03-23T16:14:00.001-04:00

· Egypt: The Egyptian market re-opened today after being closed for weeks. I brought up EGPT, the ETF for Egypt, a while back and noted that it was trading without the underlying securities trading. I was waiting to see how efficiently the ETF was pricing things in and how closely it would resemble the opening price of the market. It turns out that it was not priced efficiently:

EGPT (One Year)

· Cleveland: I received a number of questions and comments about the blog I wrote recently about Cleveland’s population decline. One recurring inquiry has been related to how the metropolitan area as a whole has changed versus just the City of Cleveland. Below, we have incorporated the Cleveland MSA to the chart we introduced in the original blog. Please remember these numbers are normalized as of 1950 in order to illustrate the growth trajectories of each dataset.

Notice that when the city’s population started dropping in 1950 that the MSA’s population kept pace with the national growth rate. I would guess that this partially due to the interstates being built and the “doughnut effect”, which caused significant suburban growth. After 1970, the population of both the city and the MSA began to decline. I would think that this was due to economic factors, and marked the beginning of the decline of Cleveland’s manufacturing base which coincided with a general demographic shift to the south and southwest.

· New Home Sales: New home sales were worse than expected. The market, however, did not care. Investors have been more concerned with other matters most recently.

· Market Today: The closing prices of the market indices were slightly higher. However, the market after 10:00 was quite strong, with the S&P rising over one percent from that point forward.

Have a good day! Brent

Lakefront Daily Blog 03/21/2011

2011-03-21T16:51:00.001-04:00

· Japan: The situation in Japan slightly improved over the weekend. Not surprisingly, the Nikkei was strong today. Here is the Japan ETF I highlighted last week:

EWJ (One Year)

It is very uncommon to see a major market index like this move down 20% and then rebound 15% within such a short period.

· Nukes: Based on the information above, logically, the nuke stocks are up today too. The Lakefront Nuke Index is currently up about 6% on the day (11:06).

· Banks: The Fed said on Friday that it sees “significant improvement” in banks’ capital. From the low in 2009, the BKX, which is the most widely followed bank index, has almost tripled:

BKX (3 Years)

· C: Citigroup has announced that they will execute a 1:10 share split. This is mostly cosmetic, but there is something interesting about this. I decided to calculate how much money will stay in investors’ pockets and out of the pockets of trading firms as a result of the split. I assumed that the average commission on this is one cent per share, and assumed an average volume of 500m shares a day. So, in a year, the stock trades 125,000,000,000 shares. If a penny a share is anywhere near accurate, this means that $1.25 billion in trading commissions are currently generated annually via Citigroup stock trading. If there is a 1:10 reverse split, 90% of these commissions remain in the hands of the investor. I am sure there are a few people out there who will not be in favor of the reverse split.

· Cleveland: The last five days have been quite exciting for Cleveland. Last Thursday, more than 100,000 people ascended upon the city for Saint Patrick’s day. Friday and Sunday, Cleveland hosted the NCAA tournament with OSU showcasing the event.

· Market Today: The market closed higher today, mostly on the relief that things appeared to improve in Japan. The stocks that were weakest last week tended to be the strongest today.

Have a good day! Brent

Lakefront Daily Blog 3/16/2011

2011-03-16T16:21:00.001-04:00

· Japan: The tragedy in Japan has had serious affects on the financial markets. The Nikkei has been incredibly volatile. From high to low, the ETF for Japan dropped over twenty percent, most of which occurred within just a few days:

EWJ (Japan ETF)

The current fears are all circulating around the nuclear (not nucular) power plant crisis in Japan. As fears have ebbed and flowed regarding the potential meltdown, the market has been moving strongly in both directions.

· The Channel: I have been referring to the channel the market was trading in and mentioned it when it broke that channel. As you can see below, since the market broke that trend it has fallen precipitously:

S&P 500 (Six Months)

· Rent or Buy: We came across the following chart today. It shows that the rent-own ratio is the worst it has been in at least a decade. It would be interesting to look at this going back further in time.

· Market: The market was quite volatile once again and ended the day measurably lower. The crisis in Japan has trumped all other issues. Some are considering this a buying opportunity, others are running for the hills.

Have a good day! Brent

Lakefront Daily Blog 3/14/2011

2011-03-14T17:03:00.002-04:00

· LZ: Lubrizol agreed today to be purchased by Berkshire Hathaway for $9b in cash or $135 a share. This purchase is taking place after the stock has risen from $23 back in 2009. The purchase represents the all time high on the stock and an all-time high price to book ratio. Earnings have exploded in the past two years, so the P/E ratio is not at all-time highs. This is good for Cleveland in that there will be a bunch of shareholders and executives who just cashed in on a lot of wealth. However, if Buffett is correct and LZ continues to accelerate into the future, it will mean that a lot of the money from future success of the company will leave NE Ohio.

LZ Stock Price (20 years)

LZ Price to Book Ratio (20 Years)

There are some grumblings from shareholders who say this price was too low. However, looking at the above charts, one might argue that shareholders should be happy with the price LZ is being sold for.

On a related note, Berkshire Hathaway stock is down 14% since 9/9/2008, while the S&P is up 9%. Also interesting is the fact that since 2006, the correlation of Berkshire stock to the market has increased:

BRK/A Correlation to SPX (100 Weekly for 20 years)

· Nukes: The tragedy in Japan has created shockwaves in stocks related to Uranium and nuclear energy. It is too soon to tell, but the market often tends to overreact to things like this…time will tell. We created an index of three of the major stocks. As one can see, they opened significantly lower and then recovered throughout the day. Early sellers were big losers, while those who bought early today were rewarded, at least so far.

Lakefront Nukes Index (5 Day Intraday

· Market Today: The market opened down, following a significantly lower Nikkei. Stocks continued lower through about 1:00 pm when buyers stepped in. The ensuing rally brought stocks back to opening levels, leaving the indices down only about 0.5%.

Have a good day! Brent

Lakefront Daily Blog 3/10/2011

2011-03-10T16:49:00.001-05:00

· Steel Coils: One of our readers mentioned to me that the steel coils are piling up at the mill we drive by every day. He is right, there appear to be more coils sitting around than there have been at any time since the mill was reactivated back in 2009.

· Cleveland: I noticed yesterday that the population of Cleveland has dropped below 400,000, dropping 17% from 2000, and 57% from the peak in 1950. I thought it would be interesting to see how Cleveland’s trajectory compares to that of Youngstown, and to look at that versus the trajectory of the US as a whole. In the chart below, we normalized the population of the three entities as of 1950 to best illustrate the growth rates over time.

While some might have expected Youngstown to have experienced a more severe population decline than Cleveland, it turns out that both cities have declined similarly. Also, there is a staggering difference between the population trends of these two Ohio cities and the U.S. as a whole.

· Factoid: US household net worth rose $2.1 trillion in the fourth quarter.

· The Channel: On several occasions, I have mentioned the trend channel that the S&P 500 has been trading in. Today, it clearly broke through that channel. This reflects a recent higher level of volatility and newly found investor pessimism. For the past six months, buying stocks in general has been rewarded with very few exceptions. In the past two weeks, that has not been the case. Time will tell if this is a “blip” similar to November or something more. In any event, it is good to acknowledge that the current conditions are a bit weaker and more volatile than they have generally been since August.

S&P 500 (Six Months)

· Market Today: The market was quite weak today. There were numerous negative news items concerning investors, including worse than expected jobless claims, slower export growth in China, Spain’s credit rating cut and reports that Saudi Arabian police fired into a group of protestors.

Have a good day! Brent

Lakefront Daily Blog 3/7/2011

2011-03-07T15:51:00.001-05:00

· Jobs Report: Friday’s job report showed a decrease in the unemployment rate to 8.9% in February. The change in non-farm payrolls was positive as well. The market appeared to have expected this improvement and traded down on Friday.

Unemployment (Six years)

· QOD: I thought today’s Bloomberg quote of the day today was interesting: “The things we know best are the things we haven’t been taught.” - Marquis de Vauvenargues

· Oil: Oil moved higher once again today to close over $105 per barrel. The market is definitely uncomfortable with this move right now and the related unrest in the Middle East. Looking at the six-year chart below, the most recent move is interesting, but even more interesting is the move in 2008. It is amazing to look back and see how quickly and how precipitously things changed back then.

Oil (Six Years)

Market Today: The market was fairly weak today. Stocks opened slightly higher and traded down through about 1:00. After one, the indices strengthened but still closed down on the day. A Wells Fargo semiconductor downgrade and the continued rise in oil were blamed for today’s weakness.

Have a good day! Brent

Lakefront Daily Blog 3/3/2011

2011-03-03T17:31:00.001-05:00

· Wall Street Analysts: The way that sell-side analysts come up with their recommendations never ceases to amaze me. I have brought this up in the blog many times over the years. The phenomenon has remained consistent during both bull and bear markets. Very often, when the street is bullish on a stock, it is a red flag, and when they are highly negative, it is often a buy signal. Today, I noticed two stocks that were upgraded yesterday. One was TXN, the other was XLNX. Since the low, which was two and a half years ago, TXN has almost tripled. During that entire period of time, the highly regarded analyst had a “hold” on the stock, which is essentially a “sell”, and had a price target consistently below the prevailing price of the stock. NOW, after all that has happened, he has decided to recommend that clients, who were previously led to sell this at lower prices, should buy this stock. The same is true for XLNX.

The charts below show the stock price, the analyst’s recommendation (diamonds and arrows), and his price target (white line). It remains to be seen whether this will prove to be a good time to sell, but so far he has been almost perfectly wrong. Examples of this are almost endless.

TXN

XLNX

· Labor Market: Continuing Jobless Claims dropped again this week. I will spare readers from the chart, since I show it so frequently. In the Fed’s Beige Book released yesterday, all twelve Fed districts reported improved labor conditions.

· Small Cap Stocks: Yesterday, I was looking over our portfolio and how the breakdown of small, mid and large cap exposure has evolved over time. Interestingly, while our net exposure has remained relatively stable, our mix of small cap to large cap stocks has changed measurably. Our Large cap exposure has decreased somewhat and our small cap exposure has increased. This suggests that we are finding fewer opportunities to buy the large, well-followed companies, but are still finding opportunities in smaller less followed companies. This may be an indication that the bull market of the past two years has evolved and matured somewhat.

· Oil and Stocks: Oil and stocks have been positively correlated since the bottom of the market back in 2009. This correlation seems to flip from positive to negative over time. Recently, this has occurred once again, and oil is now negatively correlated to the market. The first assumption might be that this is a result of the most recent spike in oil, but it actually happened before that. My theory is that for a while, higher oil has been reflective of a stronger economy. Now, most market participants have accepted that the economy is stronger and are now worried that higher oil and inflation will be a headwind for the market.

Oil Correlation to S&P 500 (2 years)

Market Today: The market was quite strong today. Gold and oil were down, everything else was up.

Have a good day! Brent

Lakefront Daily Blog 3/1/2011

2011-03-01T16:51:00.001-05:00

· First Day: The first day of the month has been quite strong recently, possibly suggesting systemic inflows into stocks. Since the current bull market began, 19 of 23 months have begun on a strong note. During the 10 previous months, which represented the worst part of the bear market, the first day of the month was down eight times. I don’t have all the information available for the last bull and bear cycle at the beginning of the millennium, but it appears that it might show a similar trend.

· GOLD: Gold hit a new all time high today. The metal has been in a pretty consistent uptrend since 2002. I know a lot of people who really like Gold and oil right now.

Gold (Twenty Years)

· Floods: The Cleveland area was subject to significant flooding yesterday. My mom has lived in Chagrin Falls since 1973 and said that she has never seen the river higher than it was yesterday. In Gates Mills, the dam, built in 1906, was completely obliterated. Here is a photo of the Chagrin Falls yesterday versus a normal summer day.

· Market Today: As I suggested above, the market was very weak today. Stocks across the board were weak, with one exception; Gold stocks were up.

Have a good day! Brent

Lakefront Daily Blog 02/25/11

2011-02-25T16:33:00.001-05:00

· Market Trend: The market has managed to stay within the trend channel. During each of the last two days, the market fought off mid-day weakness and managed to close right on the bottom of the trend, which has been place for about six months.

S&P 500 (Six Months)

· Continuing Claims: Continuing Jobless Claims continue to drop. I have noticed lately that the theme of “bad jobs market” has been waning, while “inflation” and most recently “Middle East” have become the new fears.

Continuing Claims (Three Years)

We received another foot or so of snow last night. Is winter almost over? I am hoping the ride home is better than the ride in was today. I expect that it will be.

Have a good day! Brent

Lakefront Daily Blog 02/23/2011

2011-02-23T18:31:00.002-05:00

· Oil: Oil in NY is at $100 per barrel for first time since Oct 2, 2008. The unrest in the Middle East is certainly causing some volatility. Here is a chart of oil over the past year:

Oil (One Year)

Here is a chart of oil over the last five years:

Oil (Five Years)

The oil chart above reminds a little of another chart:

S&P 500 (Five Years

· Housing: I know there has been a lot of housing data out. Some of which is being diagnosed as positive, some of which is being diagnosed as negative. From an anecdotal standpoint, I had heard that a friend of mine sold a house in a neighborhood in a subdivision named “Thornberry” in Solon. Back in 2008 or 2009, this neighborhood was the poster child of the housing crisis. If I remember correctly, it was even highlighted in the Wall Street Journal. This was a new neighborhood of 4,000-5,000 square foot homes. Back then, it looked like the great depression had hit. A huge percentage of the homes were empty, with weeds and lockbox boxes seemingly everywhere. I remember hearing about a previously $700k+ home not even getting a single bid at auction for $400k. Today, the scene is much better. There are still a few lock boxes and empty houses here and there, but the neighborhood is unquestionably healthier than it was before.

· Light Bulb: My son, who is fascinated with lights, switches and every other electrified gadget showed me a story in The Plain Dealer the other day about the world’s longest running light bulb. Allegedly, this light bulb, which hangs in a firehouse in California, has been in operation since 1901. The story is pretty interesting. Here is a link: http://www.centennialbulb.org/

Someone once told me that GE has long had the technology to create an extremely long-lasting light bulb, but has purposely not been doing so. Maybe that is true?

· VIX: The VIX, which is a measure of options volatility premium and an indicator of market sentiment, has jumped 45% in recent days. Clearly, there has been a spike of fear in the market.

VIX (One Year)

· Catastrophic Crash: Surveys show that investors’ fears of a “catastrophic crash” are rising. According to a story I read, this is the first time in history that this has occurred during such a bullish market period.

· Market Today: The market was weak today on fears in the Middle East. This marks two days of measurable weakness. Virtually all sectors were down except for (big surprise) oil and Gold stocks. This weakness reminds me of a blog from two weeks ago, where I highlighted how tight the market trend channel has been. Today’s close rests almost precisely on the bottom of the same channel:

S&P 500 (Six Months)

At the time, I mentioned that I thought this channel would be broken soon. Most interestingly, some readers took that as a bullish statement, and some thought it was bearish.

Have a good day!

Brent

Lakefront Daily Blog - February 18, 2011

2011-02-18T16:32:00.001-05:00

“The single most important decision in evaluating a business is pricing power. The extraordinary business does not require good management.”

-Warren Buffett

Stock picking: We subscribe to the belief that in order to beat the market over a market cycle, one has to pick stocks and actively manage risk as opposed to broad index or ETF investing. As one example, a comparison of Expedia(EXPE) to Priceline(PCLN) is interesting as both are in a similar business of providing travel related services. Over the last year, as can be seen in the following graph, Priceline is up about 93% while Expedia is down about 7%.

A brief comparison of their fundamentals shows a similar annual operating margin at this point of approximately 20%. EXPE’s margin has improved from 14% to 22% in the last five years while PCLN has improved from 2% to 19%. The biggest difference over the last five years is that PCLN’s revenues have tripled and are expected to continue to grow at a high rate as compared to EXPE which has increased revenues by “only” 50%. Having risk management tools in your investment process which will help you exit positions prior to catastrophic, multi-month or multi-quarter declines such as PCLN has experienced will enhance returns dramatically.

Five year return: PCLN +1973%, EXPE -11%. Both stocks experienced a nearly 60% decline during the 2008 market and a 20-30% correction in mid 2010. Avoiding the majority of the down periods would enhance these returns considerably.

China: The central bank in China increased reserve requirements for banks in order to slow down increases in inflation and especially home prices. If the Chinese are taking funding away and the U.S. continues to stimulate who wins?

Market Today: The market was strong early and late, with a sell off mid day. The small roller coaster ride resulted in modest gains for the overall market. Most sectors were up slightly, except basic materials which were down, led by fertilizer and metal stocks.

Have a great weekend!

Edward R. Matuszak