Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595

January 19, 2006 Comments   |   Refer A Friend   |   Sign Me Up   

The Black Book on Personal Finance, which I co-authored with a chapter entitled "Sector Rotation Investing", is now available for sale at or Barnes & The book is also available at selected bookstores around the country. Please consider buying a copy. I'm sure you will learn something. Thank you.

I will be leading a discussion on Sector Rotation Investing, and signing books, at the Barnes & Noble in the City Center mall in White Plains, NY beginning at 6:30 on February 7. I hope to see many of you there for an informative and entertaining evening.

Market Analysis...Out Like A Lamb, In Like A Lion
Last Month's Results - Quiet End
What I'm Doing Now...Continuing What Worked
Statistics...Generally Bullish
Trends To Watch
Forecasts...Looking Back and Looking Ahead
Monthly Tip...Credit Cards
Personal News and Notes

Market Analysis...Out Like A Lamb, In Like A Lion

After an explosive rally in December, the upward momentum faded in December. In fact, the Dow finished up the year in slightly negative territory at 10,717.50, down 0.6% for the year. The S&P 500 and NASDAQ, on the other hand, managed to eke out small gains. The interesting thing to note is that after many attempts in 2005, the Dow finally managed to close above 11,000 earlier this month. In fact, it traded over 11,000 for three days. The unsettling news is that the Dow failed to hold that level, and has fallen back to the mid-10,800s. At the same time, the Dow Jones Transportation index, which I haven't really talked about, has also shown some weakness, after a very strong year last year. In fact, this index has been moving steadily higher since hitting bottom in early 2003 (see the weekly chart below). The transports are a very good proxy for business in the country as much of what gets made here must be transported by planes, trucks and railroads. If the transportation index heads south, it would be a very bad harbinger of things to come. Ideally, the Transports and Industrials would move in lockstep, to clearly identify a direction for the overall market.

Flash: High Oil Prices Are Back!! But then again, they never really left. In reality, the ascent in oil prices just took a breather. As I've been saying for years, high oil prices are here to stay; get used to it. After bottoming out at about $56 in November, the price for West Texas Crude is again closing in on $70 per barrel. This time, people are talking about potential trouble in Nigeria. Mark my words, there will be more talk of disruptions from Venezuela, Iran, and other countries who realize that the best way to cause problems in the US is to disrupt delivery of our precious oil.

Treasury yields continue to fall, and are now around the midpoint of the high and low marks of 2005. The bond market is clearly telling us something. Bond investors do not fear inflation right now. The Bond King, Bill Gross of PIMCO, has said that the bear market in bonds is over. I don't want to argue with a guy who manages around $1 trillion. Concurrent with the strength of bonds is the weakness in the dollar (see the chart in the Trend section). Since September, these two items have moved in lockstep with each other. The spread between the 10-year Treasury and the TIPS remains around 2.40%.

After all the sturm and drang in 2005, the markets ended basically flat for the year. In fact, the 0.6% drop in the Dow Jones Industrial average was the smallest annual change in 79 years! When the Dow closed at 11,043 on January 11, it was the highest closing price since June 2001. Yet with everything that happened in the market and the world last year, as I sit here typing this morning, most investors have nothing to show for the last year, and little if anything to show for the past five years. And I don't like their chances in 2006; but more on that later.

Last Month's Results...Quiet End

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. December provided an anti-climactic ending after the huge rally in November. Most of the major indices finished flat or slightly down for the month, although they all managed to finish up for the year, except the Dow, which was down fractionally. For the year, large-cap stocks out-performed small-cap and value trumped growth by a little. In general, international stocks did much better than domestic ones. Not shown on the chart, but of great importance to WAM's clients, energy was the best performing sector in the market in 2005.

Name of Index





S&P 500




Large-cap stocks

Dow Jones Industrial Average




Large-cap stocks

NASDAQ Composite




Large-cap tech stocks

Russell 1000 Growth




Large-cap growth stocks

Russell 1000 Value




Large-cap value stocks

Russell 2000 Growth




Small-cap growth stocks

Russell 2000 Value




Small-cap value stocks





Europe, Australia, Far East

Lehman Aggregate




US government bonds

Lehman High Yield




High-yield corporate bonds

What I'm Doing Now...Continuing What Works

2005 was a tremendous year for WAM as it produced its third straight year of double digit returns and beat the S&P 500 by the widest margin in its 8 1/2 years in business. This was done by successfully implementing the sector investment strategy that I have been talking about for the past few years. Our core sectors of energy, natural resources, precious metals and defense all had banner years. Other sectors like large cap finance and specialty retail also did pretty well. A few of our special situations recovered a bit towards the end of the year, leaving us with strong gains in almost every position.

Of course there will always be losing investments, and we had a few of those this year. A couple of those stocks were sold for tax-loss purposes, and others were sold because the investment thesis was no longer in our favor. As we head into 2006, we hold only one or two key positions that are down, and I expect that to change this year.

Really the only thing that changed for WAM in 2005 was that we began to make greater use of Exchange Traded Funds (ETFs) to implement our sector investment strategy. I expect that as more targeted ETFs are created, we will continue to increase our exposure to this interesting product.

Statistics To Watch...Generally Bullish

  • There was a disappointing increase of only 108,000 non-farm jobs in December after strong growth in November. Average hourly wages rose to $16.34 from $16.32. They started the year at $15.86, an increase of 3%, which is similar to the rate of inflation. The average workweek remained flat 33.7 hours.
  • The number of unemployed workers in December fell to 7.38 million from 7.58 million in November. The greatest increase in employment were in leisure and hospitality, food services and drinking places. The number of seasonally adjusted people who for economic reasons could only find part-time work fell to 4.1 million. There were another 3.8 million people for whom business conditions or lack of opportunity forced them to take part-time work. The number of marginally attached workers (those individuals who had looked for work sometime in the past year, but not in the past four weeks, and are therefore not counted as unemployed) rose to 1.6 million. My adjusted Comprehensive Labor Index™ was flat at 9.2%, it's lowest rate of the year. The official unemployment rate reported by the government dropped slightly to 4.9%.
  • The number of people holding more than one job in December rose to 7.83 million, it's highest level of the year.
  • The most recent four-week average for initial jobless claims held steady at around 323,550 for the last month. The low for the year was 306,000 and the high was 394,000 (post-Katrina).
  • The University of Michigan Consumer Confidence Index in December rose again (not surprisingly) to 91.5 from 81.6 in November. The highest mark of the year was 97.1 twelve months ago.
  • According to CBO estimates, the government ran a surplus of about $12 billion in December, which was smaller than expected, but reduced the deficit for the first three months of the fiscal year to $113 billion.
  • According to the Census Bureau, the U.S. trade deficit fell slightly to $64.2 billion in November from an adjusted high of $68.1 billion in October. Trade with China was $18.5 billion of that deficit.
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for all urban consumers fell 0.1% in December, after falling 0.6% in November. The drop in oil prices accounted for the most of the downward move both months. The "core" CPI, which excludes food and energy, remained steady at 0.2%.
  • The Federal Reserve reported that total outstanding consumer credit was unchanged in November, at $2.15 billion. Consumer indebtedness remains at record levels.
  • The American Association of Individual Investors' (AAII) bullish sentiment was surprisingly weak recently, falling to 41% for the week ended December 26. This mild pessimism doesn't match up with the consumer confidence numbers. Recent numbers will likely be higher thanks to a strong stock market.
  • According to the Census Bureau, retail trade and food service sales edged up 0.7% in December and were up 6.4% from the same period last year.
  • The Census Bureau reported that privately owned housing starts in November rose 5.3% from October to a seasonally adjusted annual rate of 2.123 million. This was 17.5% above the same period last year.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in November fell 11.3% to a projected 1.245 million units (after rising 11.4% in October). The estimate of 503,000 new homes for sale, representing about 4.9 months of supply at the current rate of sales, is the largest supply of the year.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were were down 1.7% in November to a projected 6.97 million units. The estimate of 2.903 million existing homes for sale, representing about 5.0 months of supply at the current rate of sales, is the largest available supply in years. Average sale prices remain high.
  • The Institute for Supply Management (ISM) index of manufacturing activity measured 54.2 in December, down from 58.1 in November. This marks the 31st month in which economic activity in the manufacturing sector is reported to have grown. Anything above 50.0 is considered to be an indication of growth.
  • According to the Bureau of Economic Analysis, the "final" estimate of real gross domestic product, the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 4.1% in the third quarter of 2005. This is down from the "preliminary" estimate of 4.3% but up from the "advance" estimate of 3.8%. It shows how imprecise the measurement of GDP really is.
  • The Fed ramped up its policy of flooding the market with dollars. The Fed increased M-3 by $92 trillion in December. The Fed has increased the supply of M-3 by 7.8% this year and by 8.6% in the last three months alone. This injection of money is very inflationary and continues to erode the value of the dollar. This is one of the scariest numbers that I report on.
  • Foreigners now hold over $1.5 trillion in US debt. Have you written your thank you notes yet to the Chinese and Japanese governments for financing our country?
  • The NYSE reported that in late December, the final price for a seat on the Exchange sold for $3.55 million. As the NYSE is now a public company, "seats" will no longer be sold.

I suppose that all in all, the numbers look pretty good when looked at individually. Nothing except the M-3 increases and maybe the housing sales numbers jump out at me and scream trouble. Yet I continue to be mildly troubled. My biggest immediate worries are interest rates, the yield curve and the housing market. I'm also worried the consumer may be tapped out, which would hurt the retail sector. I also don't think enough attention is paid to the massive increase of the money supply, which would appear to be a desperate attempt by the Fed to inflate away the debt of the government. The problem is that it doesn't seem to be working. In addition, we're still in Iraq with no clear exit strategy in sight and more deaths being reported every day. So I remain vigilant, and so should you.

Trends To Watch

The broad, year-long range of 11,000 to 10,000 for the Dow managed to hold all of last year, only to be broken to the upside after some strong early-year trading in 2006. The Dow managed to remain above 11,000 for a few days, but has retreated a bit to back below 11,000. It's hard to say which direction it is headed. For all intents and purposes, the trading range holds.

The price of gold exploded in November and early December to a peak price of $541 per ounce, its highest price in 18 years. In mid-December prices dropped considerably, to a low of $490. Since then, prices have spiked up and the February futures contract is currently trading for almost $555 per ounce, which is roughly equal to the high price of $554 per ounce last reached in March 1981. The trend continues to be onward and upward.

As I mentioned earlier, the value of the dollar seems to have topped out in November, along with the yield on the 10-year Treasury, and has been falling ever since. The index is now hovering just above its 200-day moving average and appears to be very oversold, so it wouldn't surprise me to see a little rally.

The price of oil broke out of its consolidation pattern and is in a strong uptrend. Obviously, the next key price level is $70.

The real estate market continues to show signs of weakness. It will be interesting to see if rates continue to fall, and if that sparks a new surge in home sales.

Finally, let's look at interest rates and the yield curve. Right now, the Fed Funds lending rate is 4.25%. 2-year Treasuries yield 4.36%, as do the 10-year Treasuries. The 30-year Treasury yields 4.53%. This is a very flat yield curve, and is one that was nominally inverted (where short-term yields are higher than long-term yields) a few weeks ago. If the Fed increases the lending rate at their next meeting on the 30th, that will very likely create an inversion. If that happens a recession is very likely to follow within the next 9- to 12-months.

Forecasts...Looking Back and Looking Ahead

In my January 2005 newsletter, I made 7 forecasts for the market and the domestic economy. Let's see how I did:

  1. I said that 11,000 would be the ceiling on the Dow last year but that the 10,000 would not hold as the floor. As was right about the top, but not quite right about the bottom as 10,000 was the low for the year. I was right for 10 months when I forecast that the Dow would be down 5-7%, but the November rally ultimately proved me wrong. I was though spot on when I said that the Dow would trade in a range of 5% up or down for the year.

  2. I underestimated the Fed's resolve to put the brakes on the economy when I said that they would only raise rates to between 3% and 3.5% when in fact the Fed raised their lending rate to 4.25%, and they might not be done yet.

  3. I was right on when I stated that the yield on the 10-year Treasury would range between 4% and 5% for the year.

  4. I was off a bit when I said that the dollar would continue it's decline all the way to about 1.50 to the Euro. In fact, the dollar rallied nicely.

  5. I was dead on correct when I said that not only would oil prices stay over $40 per barrel, but that they would likely exceed $50 per barrel.

  6. Similarly, I was also correct when I forecast that gold would rise above $450 per ounce and attempt to set new highs - which it did in spades.

  7. Finally, I underestimated the growth in the economy when I suggested that GDP growth would be about 3.5% in the first half of the year before slowing in the second half. I was though correct when I said that the trade and budget deficits would widen.

All in all, I think these forecasts proved quite accurate, and they helped me to make very profitable investment decisions in 2005. So, enough about last year, what do I think will happen in 2006? I'm glad you asked.

  1. With regards to the Dow Jones Industrial Average, my prediction for 2006 will be much like 2005. I think the high for the year will be set in the first half of the year, and will be no higher than 11,500 (a 5% increase). I expect that the Dow will be down for the year and that it will end the year between 10,500 and 10,000 (a 5-9% drop). If the Dow falls below 10,000, watch for support around 9,750. I expect the S&P 500 to experience a similar weakness this year.

  2. At the risk of again underestimating the Fed, and their new incoming Chairman, I think that the Fed will stop tightening at 4.50%. Not only that, but I think before the year is over, we will be talking about lowering rates again.

  3. I think the yield on the 10-year Treasury will fall between 3.75% and 4.50% for most of the year. I also think we will have a clearly inverted yield curve at some point in the first half of the year.

  4. I think that in response to a staggering growth in liquidity the Fed floods the world with dollars, the value of the dollar will have nowhere to go but down. Therefore, I'll reiterate last year's prediction that the dollar will fall to as low as 1.50 vs. the Euro.

  5. I believe that the price of oil will not only remain above $50 per barrel, but that it will likely exceed $60 per barrel for a most of the year, and that it will move above $70 sometime this year.

  6. I expect gold prices to remain north of $500 per ounce and crest $600 before the year is over.

  7. Unfortunately, I expect the US troops to remain in Iraq and Afghanistan, and for the cost of these war efforts to come in much higher than the current government estimates. I think we'll see more Latin American countries, like Venezuela, moving further to the Left. Look for more announcements from Argentina. Unrest will likely increase in some of the African countries. Political and economic unrest around the world will continue to roil the world stock markets.

  8. Finally, GDP growth for the year will come in around 3%, the trade gap will grow, the federal deficit will remain steady or grow slightly, my Comprehensive Labor Index™ will average around 11.5% while the government's unemployment index will stay between 4.8%-5.0%.

So there you have it. My Fearless Forecasts for 2006. Like you, I'll be watching closely to see how these forecasts pan out, and to see what happens in the market this year.

Monthly Tip - Credit Cards

This month I've asked my friend Jeffrey Newman, of GE Capital, to to explain the fine print of your credit card agreements. I think many of you will be very surprised at what he has to say.

What’s in the Fine Print of Your Credit Card Agreement and Should You Worry?

“Not me – I always pay off my entire credit card balance.” That’s what more than 80% of credit card holders say. In reality, 40% - 60% carry a balance at least one month a year.

How Does This Happen?

  • People don't always do what they know is good for them.

  • People intend to pay on time but misplace bills (traveling, other responsibilities) and miss the payment deadline.

  • Some people, for one reason or another, can't pay the full balance in a given month, for any number of reasons.

So what happens if you make a late payment?

  • Late Fees - You will be charged a late fee of up to $39 if you are even one day late. Credit card companies make a huge percentage of their income from late fees, so they have changed the rules over the years(it's in the “Terms & Conditions” section of the credit card contract that most people never read). Grace periods (the time between when you receive your bill and when payment is due) have been shortened. Additionally, credit card companies often have an early date and time deadline of 9 AM (even though mail delivery for any given day usually is much later than that).

  • Interest Charges – You expect to pay interest on your outstanding balance but credit card companies have instituted an interest charge calculation called two cycle billing that doubles the interest charges for people who occasionally miss a payment deadline. Here's how it works:

    • You pay your entire $2,000 balance on January 1st for December charges.

    • You charge another $2,000 through January 20th.

    • You miss the payment due date of February 1st, and instead pay it on the 5th.

    • You think you pay interest on $2,000 for five days, or $5 (assuming an 18% APR).

    • With 2 cycle billing, you instead pay interest on the outstanding balance for 35 days (January 1st - February 5th), or $20 - $35 (depending on the timing of your charges during the month).

    • How can credit card companies do this? They've disclosed it in the aforementioned Terms and Conditions.

  • Reward Points - Some credit card companies will void any points (frequent flier miles, etc.) you have earned if you miss a payment. Many will offer to let you buy those points back by paying an additional fee. Credit card companies can advertise generous reward programs all the while expecting (and implicitly encouraging) some rewards not to be redeemed.

  • Penalty Pricing - Once you are late on a payment, the credit card company can increase your APR to a very onerous rate; sometimes in excess of 25% (again, see the Terms and Conditions)!

  • Universal Default – Other financial institutions can increase your APR on unrelated loans if you are late on credit card payments. They can look at your entire “credit universe” and raise your rate because they now consider you "high risk" (their definition). Some financial institutions also may simultaneously reduce your grace period because you are higher risk, thereby making you even more likely to be late with a payment.

What Can You Do?

While it's very tempting to submit your payments as close as possible to the due date to maximize your “float”, the payoff isn’t worth the risk. On that $2000 credit card balance, if you gain an extra 2 days of interest (assume 3% on your savings account) you gain 33 cents each month or about $4 a year. Miss one payment in 10 years and you break even only taking the late fee into account. Instead, mail in your check almost as soon as you receive it or utilize on-line bill payment.

Call and ask to get fees and interest charges waived. Most credit card companies will waive fees once within 12 months if you are a good customer (one who consistently carries a balance or has a high spending volume), but only if you call. Less than 20% of people call. Don’t get nasty on the phone; the customer service representatives have some leeway to waive fees. If they say no, ask to escalate it to their manager or supervisor. If the manager says no, call back. You might get a different customer service representative and get a different answer. If you get a waiver request approved, get the name of the person who approved it.

If you realize your payment is going to be late, call the credit card company and let them know. Usually, they will treat you more favorably. It goes back to that old lesson your parents taught you: if you admit your mistake, your punishment will be less harsh.

Credit cards are a great convenience, but credit card companies are in the business to make money – just let them do it off someone else.

Jeffrey Newman is an executive with GE Capital in Stamford, CT and has 18 years of experience in the Consumer Finance industry. Jeff can be reached via email at if you have any further questions.

Personal News and Notes

As I've mentioned before, The Black Book on Personal Finance is now available for sale on, Barnes and and a number of retailers around the country. I urge you to go out an buy a copy. Let's see if we can make it a bestseller (or at least a pretty-good seller). In addition, I have the first of what I hope will be a series of book signings coming up at the Barnes & Noble in White Plains beginning at 6:30 on February 7. I hope you will be able to attend.

Normally I wouldn't use my newsletter to espouse any of my political views, but this month I'm going to make an exception. Many of you may be aware of the highly anti-American leanings of the Venezuelan President, Hugo Chavez. What you may not know is that Citgo, one of the largest oil refiners in this country, is a subsidiary of Venezuela's state-owned oil company, Petroleos de Venezuela S.A. (PDVSA). In other words, Citgo is controlled by Chavez. I will no longer buy my gas at Citgo stations and I suggest that you consider the doing the same.

As always, I thank you for your interest and consideration, and invite you to contact me if you have any questions or if I can be of service to you in any way.

Best regards,

Greg Werlinich

Copyright© 2006, Werlinich Asset Management, LLC and All Rights Reserved.