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

January 30, 2009
Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
Fearless Forecasts
What I'm Thinking and Doing
Personal News and Notes

Current Market Analysis

Before I begin this month's newsletter, a bit of housekeeping. Obviously, I'm a bit late getting the newsletter out this month. Going forward, it will be my intention to publish earlier in the month. Therefore, I will not write one in February, allowing me to send the next newsletter out in early March. Now, let's begin.

The promise of a new year and a new administration has already begun to tarnish in the face of increasingly dour economic news and a stock market that is struggling to remain above the lows established last November. That being said, it is very constructive that the market, as represented by the Dow Jones Industrial Average, has indeed remained above the closing low of 7,552.29 set on November 20. Every day that the market remains above that level increases the possibility that the worse may be behind us. That doesn't mean that the worst is over, but that the possibility exists that it may be. I am amazed at how well the market is actually holding up as the economy worsens. We know all the bad news; we read it every day in the papers and watch is every day on CNBC. Yet the market is hanging in there. That suggests some optimism.

Notwithstanding that optimism I referred to, the current market picture is still a bit bleak. The Dow Jones Industrial Average is down about 4.5% since I wrote to you last month. Importantly, it has stubbornly remained above the November low, the 50% mark of 7,470 and the October 2002 low of 7,286. These are all important technical levels. As long as the market can rise, or even just remain steady, in the face of the deteriorating economy, that is very positive. In addition, new lows on the NYSE have fallen dramatically since hitting 92% of all stocks traded on October 10. That also is positive as we look forward. So now let's look and and see what the charts tell us.

The daily chart of the Industrials shows the recovery from the November 20 low and the creation of a trading range between 8,000 and 9,500, or even 9,000 if you shorten the time frame. I don't mind staying within this trading range for a few months while the worst economic news is reported. If we don't violate that bottom, it increases the likelihood of a solid rally down the road.

The weekly chart again shows a base being formed above that important support level. Let's hope I don't have to show where the next support level would form.

On January 20, the Transports closed at 2,959.40, which was below the November 20 closing price of 2,988.99. That's not good news. But since the Industrials did not also break to a new low, this is actually bullish for the market, according to Dow Theory. As long as the Industrials don't confirm this low with it's own new low, it sets the stage for a upward move. We'll keep a close watch on this non-confirmation.

The "bond bubble" that I talked about last month may have already been pricked. As you can see, the yield on the 10-year Treasury has surged from 2% to above 2.7% in just a month. If yields simply rise back to the "normal" levels pre-Lehman levels of between 3.25% - 4.25% then bond holders will have suffered significant losses. That being said, it wouldn't surprise me to see yields fall one more time before ultimately rising much higher over the next few years.

One bit of good news is that the panicked "flight to safety" of t-bills is starting to abate. A yield of 0.125% is still absurdly low, but it's better than 0.0%. As investors demonstrate more willingness to buy risky assets, t-bills yields will continue to rise back above 1%.

Last Month's Results

As always, I provide the following chart to show the raw results for the preceding month, the quarter-to-date and the year-to-date. It was a horrific year; there's simply no other way to put it. Fortunately, there was a little bit of a "Santa Claus Rally" that gave most of the major averages a small boost to finish out the year. The hope here is that the market will manage to remain above the November lows and find a strong base from which to move higher in 2009.

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

Statistics To Watch

  • According to the Department of Labor, the most recent figure for seasonally-adjusted initial jobless claims for the week ended January 24 was 588,000. The four-week average is now 542,500. A year ago that figure was about 325,000. The unadjusted figure is a much higher 617,289.
  • Non-farm payroll employment fell by a whopping 524,000 in December. The November job losses were revised from 533,000 to 584,000. This brings the number of jobs lost in the year, as reported, to a stunning 2.33 million. Average hourly wages grew a bit to $18.35, but the average workweek dropped to 33.3 hours, so real wages are actually falling.
  • The number of workers reported in December as unemployed rose to 11.1 million, bringing the unemployment rate to 7.2%. We started the year with 7.7 million people out of work and an unemployment rate of 5.0%. The seasonally adjusted number of people who could only find part-time work jumped to 8.0 million and the number of marginally attached workers held at 1.9 million. The number of people holding multiple jobs fell to 7.43 million. My Comprehensive Labor Index™ rose to 15.54%, the highest level since the end of 2005. My CLI™ is much closer to the true unemployment number. I wouldn't be surprised to see the CLI™ at around 20% later this year.
  • Calculating the federal deficit, already a quagmire, has gotten worse due to the Troubled Assets Relief Program (TARP). Now the CBO is reporting the deficit on a cash and adjusted basis. The CBO estimates that the Treasury will report a federal budget deficit of $491 billion for the first three months of fiscal year 2009. That's higher than the entire fiscal 2008 deficit. The CBO believes that the equity investments for that program should be recorded on a net present value basis adjusted for market risk, as specified in the Emergency Economic Stabilization Act of 2008, rather than on a cash basis as recorded by the Treasury. Evaluating TARP on a net present value basis, CBO estimates the federal deficit totaled $303 billion through December. If you understand that, please let me know and explain it to me. And now, get ready for TARP 2.
  • According to the Census Bureau, the U.S. trade deficit in November was $40.4 billion, down significantly from $56.7 billion in October as imports plunged.
  • The Census Bureau reported that privately owned housing starts dropped 15.5% in December, following a 15.1% decline in November, and was down 45.0% from a year ago, to a seasonally adjusted annual rate of 550,000 units. New building permits were also down 10.7% from last month and 50.6% from last year. The market must continue to clear out excess inventory.
  • In January, the National Association of Homebuilders/Wells Fargo Confidence Index, which was created in 1985, fell to a new all-time low of 8, down from 9 the prior few months.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in December fell 14.7% from the prior month and 44.8% from the same period last year, to a meager 331,000 units. That is by far the lowest figure in the five years I've been tracking new home sales and follows downward revisions of the prior three months. The estimate of homes for sale is now only 357,000, which represents a staggering 12.9 months, or more than a year of supply at the current rate of sales. The median sales price fell to $206,500 and remained below the steadily falling 12-month moving average price of $228,350.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in December actually increased 6.5% from the prior month, but were down 3.5% from the same period last year, to a projected 4.74 million units. The estimate of homes for sale, at a much reduced 3.68 million, represents 9.3 months of supply at the current rate of sales. The median sales price fell further to $175,400, which remains below the steadily falling 12-month average of $197,275. As prices continue to fall, inventory is beginning to clear out.
  • The S&P/Case-Shiller Home Price Index, which uses a three-month moving average to track the value of home prices across the US, fell to 166.05 in November, the lowest level since March 2004.
  • According to RealtyTrac, foreclosures increased by 17% in December to 303,410, and remained 41% higher than a year ago. Foreclosures were up 81% in 2008. Nevada, Florida and Arizona, respectively, reported the highest foreclosure rates in the country while California had the highest actual number of foreclosures.
  • The Institute for Supply Management (ISM) index of manufacturing activity fell to 32.4 in December. This is the worst level since 1982. Any number below 40 suggests a serious recession. The ISM index of non-manufacturing activity was a slightly better 40.6.
  • The Conference Board reported that in December it's index of Leading Economic Indicators rose 0.3%, thanks in large part to the massive monetary stimulus. The six-month rate of decline is now -2.5% as the economy continues to weaken, and the outlook is no better.
  • According to the Bureau of Economic Analysis, the "preliminary" estimate of GDP growth in the fourth quarter of 2007 was -3.8%, which while pretty bad, was actually better than the estimates of between -5% and -7%. GDP growth in the third quarter was -0.5%, down from 2.8% in the second quarter and 0.9% in the first quarter. The second quarter "growth" was an illusion thanks to a federal stimulus program.
  • The Federal Reserve reported that in November the amount of outstanding consumer credit fell 0.3% from the prior month, to $2,571 billion. That means that consumer credit has declined in three of the last four months. That's good for consumers, bad for the economy.
  • According to the Census Bureau, retail trade and food service sales fell 2.7% in December, and was 9.8% worse than a year ago. This marks the sixth consecutive month in which retail trade and food service sales fell on a month-over-month basis.
  • The Fed increased the supply of M-2 by an astonishing 18.4% in the last three months. But the headline here is that they've increased the supply of M-1 (the narrowest definition of money) by a staggering 39.6%. The Fed is desperately trying to resuscitate this economy and avoid the horrors of deflation. So far, it isn't working as that money is not being put to work.
  • The Conference Board Consumer Confidence Index fell in December to 37.7, which marks a new all-time low. This should come as no surprise.

Trends To Watch

The downward trend in the financial sector remains in force as no amount of federal assistance seems to help the bank stocks. The index continues to fall to increasingly lower lows while rallying to increasingly lower highs. This is very bad action. I would avoid this sector like the plague until the trend is broken.

At least temporarily, the housing sector is performing a bit better than the financials. That being said, I believe it's another premature rally and I expect this sector to test the November lows before rallying above the recent high of around 94. The housing numbers are so bad, it's hard to make a bullish case for the sector just yet.

The price of West Texas Crude has continued to fall thanks to worldwide demand destruction. Even massive supply cuts by OPEC can't stem the price erosion. The price of oil has fallen to four-year lows. There is talk that prices could fall to around $30 in the short-term. The current price has effectively killed the alternative energy movement. Nobody is talking about solar, wind or ethanol any longer. Future projects are being mothballed. But mark my words, we are setting up for a massive price increase when demand returns as there won't be enough supply to meet that demand.

The price of gold has been quietly trending higher for about three months. Last month I said that the price of gold could again, with some fits and starts, head north of $900 per ounce on its way to test that $1,000 level. As you can see below, we're slightly north of $900 right now. But remember, I don't recommend that you trade gold. It's better to establish a position and simply sit with it. Part of why we own gold is for "portfolio insurance". And part is to protect us against future inflation and the debasement of our currency. If I'm wrong about the general upward trend of gold, it will likely mean the stock market is headed much higher, and we would be more than compensated for our "losses" in our gold positions by higher equity prices. So if you own gold, just sit tight. If you don't, consider buying during times of weakness.

The price of copper, which is often thought of as a proxy for the economy, has temporarily halted its downward spiral. After falling almost 70%, Dr. Copper has shown a bit of resiliency over the past month. We'll see if this is a short-term correction or a glimpse of better news in the future. 

Another example of worldwide economic activity is the Baltic Dry Index. The BDI measures the demand for shipping capacity versus the supply of dry bulk carriers and indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as cement, coal, iron ore and grain. Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, the index is also seen as a good indicator of future economic growth and production. As such, it appears that the prospects for future economic growth look dim indeed as the index has fallen more than 90%. Two months ago I wrote that I expected at least a short-term bump because this index was massively oversold. That seems to have happened. I expect this index to continue to suffer for a while, but longer-term, I would expect a tremendous recovery here as the price of hard assets inevitably go back up. This is not the end of global commerce.

The price swings in the dollar index is beginning to look more like the VIX (see below). Going forward, will the world continue to view the dollar as a safe harbor or will the world grow wary of our nation's growing deficits and what that will mean to our currency? The answer to that question must be viewed in a global context as other nations struggle with similar problems. So where is the dollar headed? Short-term, it could strengthen; long-term, I think it's headed lower.

Foreign markets, as represented by the MSCI EAFE index, continue to be very weak, but seem to have formed a trading range. The U.S. markets continue to outperform their foreign counterparts.

I haven't shown the Chinese market in a little while. It still isn't a pretty picture, but at least for now, it has stopped going down. Rest assured, if we break to new lows, we'll drag the Chinese market with us.

Volatility in the market, as measured by the VIX, sometimes known as the "investor fear gauge", continues to abate. The VIX has fallen by more than 50% from the high, and is almost back to "normal" levels. This means a much calmer market, which is exactly what we need right now.

Fearless Forecasts - Looking Back and Looking Ahead

In my January 2008 newsletter, I made 9 forecasts for the market and the domestic economy. Let's see how I did:

  1. I expect the Dow Jones Industrial Average to be down for the year. It is already off 9% in only twelve days of trading and will likely fall further, although probably not in a straight line. I believe the worst of it will be done in the first half of the year before a rally ensues in the second half. Let's put the year-end price around 12,500. I was right the the Dow would be down for the year, but wrong that the second half would be better, and not even close on the depth of the downturn.

  2. The Federal Reserve target rate will likely drop 1.00% in the first quarter, and possibly another 0.25% to 0.50% to a low of between 2.75% and 3.00% before the Fed finishes cutting rates. The recession will last two to three quarters and be done by the end of the first half of the year. Similar to above, I was right that the Fed would cut rates, but I certainly didn't see how bad things would get, resulting in the Fed basically cutting rates to zero.

  3. I think 10-year treasuries will fall to as low as 3.25% before rallying back up to between 4% and 4.25% by the end of the year. I got this one right, until Lehman went out of business. Treasuries spent most of the year trading between 3.25% and 4.25% until plunging to a panic low of 2%.

  4. I think that the dollar will continue to fall as the Fed cuts rates. It could get to 1.60 vs. the Euro. Then I expect the dollar also to rally in the second half of the year as the economy strengthens. The dollar fell to almost exactly 1.60 vs. the Euro before strengthening dramatically in the flight to safety during the credit crisis.

  5. The price of oil could sink as low as $80 per barrel early this year during the worst of the economic news. Then I expect it to strengthen and again trade over $100 per barrel, possibly getting as high as $110 as demand soars and supplies remain tight. I got this one very wrong. I didn't predict either the meteoric rise to almost $150/barrel or the subsequent plunge to $35.

  6. The price of gold will be the biggest story of 2008 as prices will surge above $1,000 per ounce. Prices will average better than $900 per ounce for the year. There will be the inevitable profit-taking and consolidations, but the general trend will remain upward. The price of gold did briefly surpass $1,000/ounce. There was a ton of volatility with a mild downward trend. The average price was between $825 - $850.

  7. I still don't think we've reached the bottom of the housing mess, but we're likely getting closer. I believe the worst of it will be over in the first half of the year. Then defaults will start to fall, sales will improve and the inventory of homes for sale will decrease. We still haven't found the bottom of the housing debacle.

  8. The two biggest investment stories of 2008 will the the declaration of the recession and the subsequent recovery from it and the financial and political impact of the Sovereign Wealth Funds. The government didn't finally declare the recession until November. Thanks to their massive losses, the Sovereign Wealth funds were a non-story in the second half of the year. I'll give you one guess as to the biggest investment story of last year.

  9. Finally, GDP growth for Q4 2007 through Q3 2008 will likely average no better than 2.0%, with the last half being better than the first half. The trade gap, on balance, should improve over the course of the year thanks to a weaker dollar helping exports and a sick economy hurting imports. The federal deficit will likely grow again as tax revenues shrink. The unemployment rate will likely rise to 5.5% and the democrats will take the White House with the economy being the most important issue. GDP growth averaged around 2% for the four quarters. The trade gap did improve a bit. The federal deficit began to grow out of control. Unemployment ballooned to 6.7%. The democrats did indeed take the White House as the economy swooned.

All things considered, my predictions weren't too bad last year. Unfortunately, that didn't help our investments very much as we felt the effects of the credit crisis like most all other investors. So what does my crystal ball reveal for 2009? It's a little daunting to make predictions in the face of this economic crisis, but I'll do my best anyway.

  1. I'm going to go out on a limb and predict the Dow will be marginally higher by the end of the year, but not until we get through a very difficult first half. I'm going to call for a 5% rise, bringing the Dow to around 9,200.

  2. The Federal Reserve target rate will remain between 0% and 0.25% for most of the year, possibly rising no higher than 0.5% by the end of the year. The recession will last the entire year, but will the economy will be "better" in the second half.

  3. I think 10-year Treasury yields will remain between 2.0% and 3.0% for most of the year as the Fed works to keep rates low. It is possible that they could fall briefly below 2% in the first quarter during the worst of the economic news before rallying higher.

  4. The dollar is a bit of a mystery because, left to its own devices, it should drop like a stone. It is being held aloft by being "relatively" better than other currencies. And that relative strength could prop it even higher, moving the dollar index above 90 and bringing it closer to parity with the Euro. Sooner or later though, but maybe not in 2009, the dollar will fall, and fall hard.

  5. The price of oil will go no lower than $30 per barrel early this year during the worst of the economic news. Then I expect it to strengthen and again trade over $75, perhaps even getting close to $100 per barrel as demand soars and supplies remain tight.

  6. The price of gold will likely rise above $1,000 per ounce. As the federal deficit soars to $2 trillion or more, it's possible to see the price spike as high as $1,500. Prices will average better than $950 per ounce for the year. There will be the inevitable profit-taking and consolidations, but the general trend will remain upward.

  7. I still don't think we've reached the bottom of the housing mess. Prices will have to fall at least another 10%, the inventory of homes for sale must decline and mortgage rates will have to remain around 5% to bring buyers back into the marketplace. We are simply not there yet. The market isn't likely to improve before 2010.

  8. Finally, GDP will likely be negative for all of 2009, although it will improve in the second half. The trade gap will shrink even further as imports evaporate. The federal deficit (cash basis) will exceed $2 trillion for fiscal 2009 (ended September 30). The unemployment rate will rise to 9%, with my Comprehensive Labor Index™ rising above 20%. The story of the year will be the hundreds of billions squandered by ill-conceived bailouts and failed stimulus plans.

So there you have it. My Fearless Forecasts for 2009. Like you, I'll be watching closely to see how these forecasts pan out, and to see what happens in the market this year.

What I'm Thinking and Doing

I believe that anyone whose investment horizon is less than two years should basically be in cash right now. For those with a longer view, you should continue to selectively invest in your taxable accounts and fund your 401k's and IRA's. Sometime this year, and we may already be there, we will have one of those once in a lifetime buying opportunities that creates massive wealth. But in order to earn those riches you have to be willing to be invested during difficult economic times like these, even if it means being more selective than normal. That being said, I would avoid investing in much of the broad market right now, especially financials, housing, retail, consumer discretionary and anything heavily dependent on global economic growth. It is imperative to have a well-thought out investment strategy, a lot of patience, and the fortitude to stick with your plan. If not, find an advisor to help you. In addition, you should also minimize or eliminate your debt, cut back on discretionary spending and save as much as you can.

We have begun to stick our toes back in the market. We've added sizable positions to two great companies and we're about ready to buy a third. These are major, blue-chip companies that are very profitable, pay sizable dividends and are leaders in their industries. We've also made a couple of profitable trades, although that will never be an important part of our business. So, while I remain content to sit with a large cash position, I'm happy to begin using some of those cash reserves to buy into great companies, at great prices. I expect that over the next few months I will have spent about half of my available cash.

Personal News and Notes

The first month of 2009 is just about done. President Obama has finally moved into the White House. He and his administration are working feverishly to stem the tide of this economic crisis. I do not envy him this job. Bruce Springsteen is playing a short concert in Tampa this weekend during a little football game. Tickets for his next tour go on sale Monday morning. Guess what I'll be doing at 9:00am? Pitchers and catchers begin to report to spring training in about two weeks. I'm hoping the Mets manage to sign one more pitcher and one big bat before then. In baseball, hope always springs eternal.

Two weeks ago my daughter Nola did a magnificent job leading the congregation as she become a bat-mitzvah. I was very proud, but not surprised, at how well she did and how beautiful she looked. It was a great weekend all around. Today is my mother's birthday. I won't mention how young she's become. Then next week Lily turns 11. Time just seems to be accelerating and there is nothing we can do to slow it down. All we can do is try to enjoy it as much as possible and find the joy whenever possible.

That's it for this month. I thank you, my readers, and remind you that this newsletter is for you. If you have any thoughts or suggestions on how to make it better, please let me know. And if you'd like to speak with me about your investment needs, I'd be pleased to be of service. Simply give me a call or drop me an email.

Best regards,

Greg Werlinich

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