What I'm Thinking and
Personal News and
The market ended the year with an
amazingly strong run through the fourth quarter, enabling all of the
major averages to finish with double digit gains. That means two
straight years with gains of 12% or better for the Dow. Could we
have a third? Check out my Fearless Forecasts below for my thoughts.
I do think we'll make some more money this year.
As I write this on a cold and wet
Tuesday afternoon, the Dow Jones Industrial Average is trading
at a new two-year high of 11,850, 3.3% higher than it was
five weeks ago. Last month I wrote that there was excessive
optimism in the market, which suggested that a correction might
be forthcoming, but not before the end of the year. All of that
remains true today, so be vigilant.
So let's look at some charts and
see if they tell us anything. The daily chart of the Industrial
Average right now is very bullish. After breaking above the May high
in early November, and returning to the level set before the
collapse of Lehman Brothers in October '08, the market experienced a
quick 3% correction. Then the market surged to greater
highs. Next stop? 12,000 here we come. But mark my words, a
correction of between 5-10% is coming.
Like the Industrial average, the
Transportation average has broken to new highs, confirming an
interim bull signal according to Dow Theory. The index is also
trading above both moving averages and the 50-day is higher than the
200-day average. All of this is bullish. The next resistance level
come in just below 5,300.
In the past two years, the yield
on the 10-year treasury went from 2% to 4%, then almost back to
2% before rising to finish the year around 3.3%. That is a harrowing
ride; and not one for the faint of heart. Investors who are long
bonds right now are in a very perilous position and poised to lose
some money. Over the past few months I suggested that yields would
"continue to rise back towards 3%." I think over the next
few months, yields will likely test resistance at
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, not including dividends. As
you can see by the results below, the broad market averages
finished the year with a bang, lifting the averages to double digits
gains for the year. Small-cap growth was by far the big winner and I
must admit, I missed the boat on that one. Not surprisingly,
bonds were the only loser in the month (and quarter). I kept saying
that stocks would outperform bonds in the second half of the
year and that prediction was dead on. For 2011, stocks will trump
bonds by a wide margin. Write that down.
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended
January 14 was 404,000, an decrease of 37,000 from the prior
week's revised figure. The four-week average was down to 411,750,
the lowest figure since August 2008. Notwithstanding the gain
from the prior week, the general trend in claims had been showing
some real, if modest, improvement. Let's see if this trend can
continue through the next few months.
- Non-farm payroll employment increased by a modest 103,000 in
December, while another 70,000 were reported as added through
upward revisions to October and November. The majority of the
private sector jobs came in the leisure and hospitality and health
care sectors. Construction lost the most jobs. Average hourly
wages for blue collar workers were up to $19.21, and the average
work week inched up to 33.6 hours.
- The total number of workers counted as unemployed fell to 14.5
million (as people simple gave up looking). The unemployment rate
dropped to 9.4% (which shows just how useless this number really
is). The more comprehensive U-6 rate increased from 16.4% to
16.6%. 6.4 million people continued to be unemployed longer than
27 weeks. The seasonally adjusted number of people who could only
find part-time work dropped to 8.9 million and the number of
marginally attached workers ticked up to 2.6 million. The
number of people holding multiple jobs held at 6.9 million.
Overall, the employment picture remains poor and somewhat
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $80 billion in December, leaving us with a deficit of
$370 billion for the first three months of fiscal 2011, which is
$18 billion less than the same period a year ago.
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $38.3 billion in November, down from
$38.4 billion in October. This is the smallest trade gap
- The Census Bureau reported that privately owned housing
starts were dropped 4.3% in December, after rising 3.8% in
November, and were down 8.2% from a year ago, to a seasonally
adjusted annual rate of 529,000 units. New building permits
were up 16.7% from the prior month and down 6.% from last
year. Housing remains very weak.
- The National Association of Homebuilders/Wells Fargo
Confidence Index in January remained at 16 for the third
consecutive month. At least it isn't going down.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in November rose 5.5%
from the prior month, but remained 21.2% lower than a year
ago, to 290,000 units. The estimate of homes for sale was 197,000,
which represents 8.2 months at the current rate of sales. The
median sales price was a higher $213,000, which is slightly
below the 12-month moving average price of $218,442.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes rose 5.6% in November, but remained 27.9% lower
than a year ago, to 4.68 million units. The estimate of homes
for sale, at 3.71 million represents a declining 9.5 months of
supply at the current rate of sales. The median sales price held
steady at $170,600, which is slightly lower than the 12-month
average of $172,658. The housing market is unlikely to get
appreciably better any time soon.
- The S&P/Case-Shiller Home Price Index (10-city index),
which uses a three-month moving average to track the value of home
prices across the US, fell again in October, giving further
evidence of the trend of falling home prices across the county.
While this is a trailing indicator, it does pain a bleak picture.
- According to RealtyTrac, the number of foreclosures in
December decreased 1.8% from the prior month, after plunging 21%
in November. There were over 3.8M foreclosure filings on
2.8M properties in the U.S. The number of foreclosure filings is
expected to increase again in 2011 once some of the litigation for
"robo-signings" and other problems are addressed. This will
continue to be a big problem.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 57.0 in December, up fractionally
from the prior month. This marked the seventeenth consecutive
month of expansion in the manufacturing sector. The ISM
index of non-manufacturing activity was 57.1, also up slightly
from the prior month. This marked growth in the service sector for
twelve consecutive months.
- The Federal Reserve reported that in October, capacity
utilization in the industrial sector increased to 76.0% from the
prior month, which leaves it only 4.6% below the average level of
the period from 1972 through 2008. Capacity utilization has slowly
but steadily improved over the course of the year.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 1.1% in November, following
increases of 0.4% in October and 0.6% in September. Says
Ataman Ozyildirim, economist at The Conference Board: "November�s
sharp increase in the LEI, the fifth consecutive gain, is an early
sign that the expansion is gaining momentum and spreading. Nearly
all components rose in November. Continuing strength in financial
indicators is now joined by gains in manufacturing and consumer
expectations, but housing remains weak.�
- According to the Bureau of Economic Analysis, the "third"
estimate of GDP growth in the third quarter was a slightly better
2.6%, versus the "second" estimate of 2.5% and the "advance"
estimate of 2.0%, and higher than the disappointing 1.7% rate of
growth in Q2. GDP growth in Q1 was an artificially inflated 3.7%.
The slight increase this quarter was due in part to increased
government spending and personal consumption, as well as a build
in corporate inventories.
- The Federal Reserve reported that in November the amount of
outstanding consumer credit was largely unchanged from the prior
month, holding at about $2.4 trillion. The amount of revolving
debt fell steadily throughout the year, while non-revolving
portion remained fairly constant. The overall amount of
consumer credit is at its lowest point since the end of 2006.
- According to the Census Bureau, retail trade and food service
sales were 0.6% higher in December, and were 7.9% higher than
a year ago. While the past few months have shown some modest
improvements in retail sales, I continue to believe that until the
employment numbers show some sustained growth, retail sales will
continue to lag.
- The Federal Reserve reported in that in December the supply of
M-2 increased slightly from the prior month and was up 5.4% during
the prior six months. The supply of M-1, on the other hand, rose a
slightly faster 5.9% over the same six months. As I said last
month, we need to see if this money will begin to circulate
through the economy more quickly in order to stimulate business.
- The Conference Board Consumer Confidence Index
decreased in December from 54.3 to 52.5. This was very
disappointing after the nice gains in the prior months and
demonstrates the concern felt by consumers in this country. As
I've said before, I don't believe that any real progress will be
made here until a significant number of new jobs are created.
- According to the BEA, the personal savings rate in November
dipped to 5.3% from 5.4% in October. I would expect the
savings rate to continue to trend lower thanks to a rising stock
market and historically low interest rates on savings.
- According to the FDIC, 160 banks failed in
2010, surpassing the prior record of 140 banks that were either
closed or merged into healthier banks in 2009. By comparison, 26
failed in 2008 and only 3 failed in 2007. Three more banks have
already failed this year, through January 14.
If you don't like roller coasters,
you should stay away from the dollar index as it is not for the
faint of heart. Over the past two years, the dollar has plunged and
soared twice. Right now, the dollar index is sitting midway between
the high around 88 and the low of 74. And as the dollar goes, so
(oftentimes) goes the market, in an inverse relationship. I had
expected the dollar to fall to new lows, but that was before the
return of problems in the Euro-zone, and the post-election results
and subsequent deal extending the "Bush tax credits". Each of these
items have helped to bolster the Greenback. In the short term, I'd
expect further strength in the dollar before turning back down again
sometime later in 2011.
As an investor, I have been
riding the golden bull market for eight years now. I have championed
the long term benefits from owning gold in virtually every issue of
this newsletter. And I see no reason to change my tune now. I would
look for some consolidation between $1,300 - $1,400/oz before the
yellow metal resumes its inevitable path to even higher prices. Over
the past two years, there was a period of about six to seven months
where the price traded in a narrow range before bursting higher.
We're now three months into the latest consolidation. Don't say I
didn't tell you when this thing bursts through $1,500.
While gold gets most of the
headlines, silver continues to do equally well, if not better.
Indeed, after consolidating around $18/oz for the first two
thirds of 2010, the price of silver has exploded to a new high
over $30/oz. I was a bit early when I started taking a position in
some silver mining stocks a few years ago. I started adding to those
positions late in 2008 and that decision is bearing fruit
as the price of silver has surged higher. And like gold,
I'd expect a few months of consolidation before it resumes
its upward march.
After trading in a narrow range
for the first half of 2010, the price of copper soared in the
second half of the year. The price has broken above a five year
resistance level around $400 to a new all time high. Like all
commodities, copper is benefiting from a generally weak dollar and
strong international demand (read: China). Remember, copper is often
thought of as a proxy for economic growth. So this chart is telling
us that the prospects for future growth look good. That being said,
a pullback is inevitable, so be careful.
The price of West Texas Crude
spent a year (Oct '09 - Oct '10) trading basically between $70 - $85
per barrel after recovering from the crash of '08. Then in November
it made a solid move to break above that resistance and move to
around $90, where it has been trading for the past month or so. In
early December I wrote that I expected "the price of crude to go
higher between now and the end of the year", and that came to pass.
At around $92/barrel, the price of oil is trading at its highest
price ever, not including the late 2007 to early 2008 bubble period
in which oil got as high at $147/barrel. So where does it go from
here? I think we'll see $100 before we see $80 again.
For the second time in nine
months, the financial sector has broken above a powerful
resistance line. The question is will it fall to hold, as it did
last April, or will the sector finally move up? I have been highly
bearish on financials since 2008 (a little too late unfortunately)
and in not ready to turn bullish yet due to some of the
fundamentals. Technically, the 50-day average has moved above the
200-day average and the index is above both. RSI is mildly oversold,
suggesting a correction, or at least a consolidation, is
Like the financials, the
housing sector has traded in a narrow band for the past year
and a half and had one failed breakout. Now it looks like it's
going to try again. But to me, the fundamentals in the housing
sector are even worse than in the financial sector, so I'm even
more bearish. But again, technically, things look good. So we'll
just have to wait and see which way this one will go. For me; I'm
avoiding the sector.
The European stock market is
defying all the headlines about credit problems among many of its
member countries. It is now poised to break out of the classic
"rising triangle" pattern seen below. This is technically
a very bullish picture suggesting strong gains ahead.
The health of the Chinese economy,
and by proxy, it's stock market, is very important to the world's
economy as they buy much of the world's output of raw materials and
produce most of the goods sold to the world. Given the robust
results from the US and Europe, you might think the Shanghai
Composite would also be hitting new highs, but that's clearly not
the case. The index is now trading around the middle of the range,
and between their narrowing 50- and 200-day moving averages.
This is not a pretty picture. If the index falls below support
around 2,700, it could fall like a brick to test the next support
around 2,320. That would not be good.
This chart is the most frightening
one I'm showing you this month. The NYSE Bullish Percent Index
represents the percentage of stocks listed on the NYSE that signal a
buy. Contrarians would argue that extreme levels of exuberance is a
bearish indicator, and vice-versa. There is an over-abundance of
optimism in the market right now. That suggests a move to the
downside is coming. It doesn't have to be severe, and it doesn't
have to last long. But it has to be bad enough to shake out the weak
and fearful. Watch out for a correction, or at the very least,
a period of consolidation to allow some of the excess exuberance to
wear off. This would not be a bad thing as it would allow patient
investors to put some money to work at better prices.
Finally we have the VIX, or the
"Fear Index". As you can see, there is virtually no fear in the
market right now. Like the Bullish index above, too little fear is a
bad thing, which suggests sometime soon fear will return in
the form of a stock market correction, which is overdue
anyway. But who knows when that correction will come, for as John
Maynard Keynes once wrote: "markets can remain irrational far longer
than you or I can remain solvent."
|Fearless Forecasts -
Looking Back and Looking Ahead
Each year in the January newsletter I make
a number of predictions about the stock market, the domestic
economy and maybe a few trends. I also use this opportunity to
review the accuracy, or lack thereof, of my Fearless Forecasts
from the prior year. Let's see how I did. The forecasts
are in black and what really happened is in red.
- I'm going to forecast a full year decline on the Dow
Jones Industrial Average. I think we'll likely have a solid
first half, maybe even be in the red through the third
quarter. But I believe we're headed towards trouble in 2011
and I expect the market to begin to discount those future
problems. I never get the percentage gains or loss correct,
but put me down for a loss of 7%, bringing the Dow to about
9,700. The bad news is that I was dead
wrong here. The market was flat to down through the end of
August then surged higher for the rest of the year,
finishing up about 12%. The good news is that I was holding
about 94% equities, so my clients did very well
- I don't think the Fed will have the courage, or the
political will, to increase rates this year in any
meaningful way. So I'm going to call for Fed Funds to remain
at 0.25% for most of the year, and be capped at 0.50%. I nailed this one as rates did remain
- It's much tougher to predict the yield on the 10-year
Treasury because market forces would suggest higher rates,
but the Fed will fight that tooth and nail. I think the
yield will trade in a range of 3.50% to 4.50% for the
majority of the year. If there is to be a variance, I expect
it to be on the upside during the first half of the year.
I was pretty good on this one.
Rates held around 4% for the first quarter
before plunging to 2.2% by the third quarter, then
rallied to finish the year around 3.5%
- Ah the dollar; everyone's favorite whipping boy. I think
we will see a bit of a rally in the dollar in the first half
of the year, perhaps taking the dollar index to as high as
85 or so. Then I think the dollar will continue its
inevitable slide. That drop will take it back down to around
70 or so. I nailed the trend here as the
dollar rallied from 74 to almost 89 by June before plunging
to 75 in early November. Fiscal problems in the Euro
zone helped push the dollar index a little higher
- I feel a little more confident predicting that oil will
resume its upward trajectory. This will, of course, not
happen in a straight line. I think the price of West Texas
Crude will go no lower than $70, and maybe no lower than $75
per barrel. I'll call $95 as the high, but I wouldn't be
surprised if it broke above $100 during the summer. Again, I nailed the trend and was very
close on the range. After starting around $83, it briefly
touched a low of $67 and finished the year at the high of
- I think the price of gold will exceed $1,500 per ounce
sometime in 2010, probably toward the end of the year. I
don't think the price will fall below $1,000 this year. I
also think the price of silver will exceed $20 per ounce.
This was probably my boldest call, and I
wasn't far off, as gold hit a high of around $1,440 per
ounce after hitting a low of $1,075 early in the year. We
won't see that price again any time soon. My silver
call was correct, if conservative, as the price of silver
briefly crested $30 per ounce before finishing around
- I expect the housing market make incremental gains in
the first half of the year. The number of units sold will
have a modest increase, maybe 5% or so, while prices stay
relatively flat as foreclosures and delinquent homes
continue to flood the market but the number of homes for
sale falls to a sustainable level. Any future gains are
dependent on low interest rates. If rates go up, there will
be no joy in real estate. Towards the end of the year,
unfortunately, I think the entire housing sector will roll
over when the next wave of adjustable mortgages come due for
refinancing. This too was pretty
spot on. Housing remains stuck in the doldrums and dominated
- I expect high yield debt and emerging markets to trail
the broad market averages as these sectors, which led the
market in 2009, revert back to the mean. Technology will
also struggle this year as large cap value will take the
lead this year. I got this one totally
wrong. High yield debt, emerging markets and growth all led
the broad market averages.
- I think GDP growth for the 4th quarter of 2009
through the 3rd quarter of 2010 will be in the neighborhood
of 2.0% to 3.0%, which isn't too bad, but which continues to
be artificially inflated by government intervention. GDP for the last two quarters was 2.5% and
1.7%, after an artificially high 3.7% in Q1. Not bad for a
- The trade gap will likely remain somewhat flat for the
year, or increase slightly as economic conditions appear to
improve. Unemployment will hang around 10% for the first
part of the year before falling no lower than 9%. The U-6
measure for unemployment, a more accurate gauge of the
true unemployment situation, will range from 15% to 17%.
The trade deficit started the year at
$39B and finished at $38.3B. Sounds flat to me. The
unemployment rate began the year at 10%, fell to 9.5% before
finishing at 9.4%. The U-6 stayed between 16.5% and 17% for
most of the year.
- Finally, the big stories of the year will be the
Republicans taking back Congress as the electorate revolts
against the incumbents, the end of the health care bill in
its current form, and a huge public outcry over tax
increases in 2011 for the entire country, not just the
"rich". I couldn't have been much more
on target here.
Like the prior year, I think my
forecasts were amazingly accurate last year. Not bad for
someone with no training in economics; just someone who pays
attention to what is happening in the real world.. Or maybe
that's the point. Anyway, I can't rest on my laurels. It's a
new year, which means a new set of Fearless Forecasts. So
without further ado, here we go:
- As much as it worries me to say it, I think 2011 will be
a good year for the market. It wouldn't surprise me to see
double digit gains by the end of the year. What worries me
is that bullishness is the consensus view right now. Still,
I think the Dow Jones Industrial Average will finish
the year around 13,500. It won't be a straight line
to get there; indeed, I expect at least two
corrections of 5% or better, and maybe one of more than 10%
sometime during the year.
- I expect the Fed to leave short term rates
unchanged for the entire year. And I also believe they will
resist the temptation to enact further "quantitative easing"
policies as the economy shows tepid signs of life.
- I believe the Fed will continue its efforts to
restrain the yield on the 10-year Treasury but it will
be to no avail. I think the yield will slowly creep higher
until it finally surpasses 4.00%. It may even go as
high as 4.50%. The only way I see rates moving lower is
if there is a new crisis, probably in Europe, that sets off
a "flight to quality", which is still US sovereign debt.
- Forecasting the direction of the dollar is tough. Left
on its own, the greenback would clearly sink lower.
But given that the Euro is in either worse shape, and
the yen isn't very appealing, this will be a year of
relative performance for currencies. Therefore, I
expect the dollar index to trade in range between
75-85 depending on the sentiment of the moment.
- Again, I believe that the price of West Texas Crude will
creep inexorably higher. I think we'll again see prices
north of $100 per barrel as summer approaches. I'll set a
high of $105 and a low of $80 per barrel.
- The price of gold has moved higher in each of the last
10 years. Can any of your investments say that? I think it
will again close higher this year, but I don't expect a big
move. My upside target is about $1,600 per ounce while the
downside is about $1,250. I think the price of
silver could reach $35 per ounce while it's downside is
limited to about $25. I think silver will probably
outperform gold this year.
- I expect the housing market to remain relatively flat
this year, as the story remains dominated by low prices and
foreclosures. If rates go up in any meaningful way, a
flat market would be the best possible result. Watch for
more stories on "robo signings", lawsuits, and adjustable
rate mortgages coming due for refinancing.
I think the average rate of GDP growth over the next four
quarters will be 2.0% to 3.0%, which isn't horrible,
but isn't enough to generate meaningful job growth. I
expect better growth in the second half of the year.
- Employment, or the lack of it, will be the biggest
domestic story of the year. The unemployment will likely top
out around 10% to 10.2% before falling, at best, to around
9% by the end of the year. 9.5% might be the best we
get. The U-6 measure for unemployment, a
more accurate gauge of the true unemployment
situation, will likely remain in the 16%-17%
- Finally, the big domestic stories of the year will be:
the fight over the health care bill, the inevitable
move by President Obama towards the center, the
attempts by the Republicans to govern from the majority and
to find a credible presidential opponent, the upcoming
debate over our tax system and the national and statewide
budget deficits. And we can't forget the problems in Europe
over their budget problems.
What I'm Thinking and
If you eliminated the "noise" from
the market last year, simply step back and see where we ended
versus where we began, 2010 was a pretty good year for the
market. The broad averages were all solidly profitable, with
some indices up double digits. The economy is clearly better
than it was a year ago, even if the recovery remains somewhat
tenuous. And importantly, some of the uncertainty has been removed
from the political landscape; and we all know how the stock market
hates uncertainty. As I mentioned in my predictions above, I'm
cautiously bullish for 2011, even as I acknowledge the strong
likelihood of one or two painful corrections sometime during the
year. But it's my job to look past the noise to the bigger picture,
and invest accordingly.
Last year turned out to be another
excellent year for WAM and its clients. While compliance rules
prohibit me from putting my actual performance numbers in
print, I'd be happy to discuss them with you on the phone. I will
say that I'm very proud of my track record over the past 10 years. I
have been saying for some time now that I believed that things were
looking better and that I thought the market would move higher. That
belief has been rewarded as my clients and I have profited
handsomely from this two-year rally. We have especially
benefited by the tremendous move in precious metals and commodities
(including crude oil, base metals and agricultural products). We
have avoided the problems in the financial and housing sectors,
among others. And most importantly, we did not panic and sell during
the spring sell off or the two summer swoons. Indeed, we had the
courage to buy during those pullbacks. We reduced our cash position
from $4.3M at the end of February to about $1.6M by year-end and
under $1.4M today.
Most recently, I bought a solid
position in a junior gold mining company and have started to nibble
at a new sector that I'm not prepared to disclose just yet. But I
believe this sector has explosive potential over the next decade and
This is the perfect time of year
to review your investment portfolio and your current
advisor. With that in mind, I would like
to offer anyone a free one hour phone consultation during the
month of January. During this consultation I will review the
status of any of your investments (taxable, IRA's, 401k, 529, etc.)
and discuss with you whether I think changes need to be
made. So give me a call.
Personal News and
The big news is that after eight
years, effective immediately I've moved out of my office in Valhalla
and into my home office full time. So please make note of my
new office address and phone number, listed above. Absolutely
nothing in my business will change except that my commute is shorter
and my dress code even more casual.
Sometime within the next month I
hope to formally launch WAM's fan page on Facebook. I will let all
of you know as soon as it's up and running. I hope you will all join
me on the page and contribute to the content. In addition, I'm
planning a blog which will be integrated between my website and
Facebook. I would also urge all Twitter users to follow me there as
I tweet content daily about the economy and the stock
I'm making a commitment to getting
out and about more in 2011. So I'll be attending more industry
events, networking functions and meeting with other industry
professionals in order to expand my ability to more effectively
serve the growing needs of my clients. So if you are in the New York
area, and would like to meet, drop me a line and let's get
Don't forget that you can friend
me on Facebook, connect with me on
or follow me on Twitter.
I try to "tweet" the latest market and economic news every day.
Following me is a very easy way for you to receive stock market
updates in between my newsletters. I've been using these three sites
because I'm actively seeking to make new business connections as
well as maintain contact with friends old and new. So please look
for me out in Cyberspace, and ask your colleagues, friends and
family members to do the same.
As always, I thank you, my
readers, and remind you that this newsletter is for you. I have been
writing to you now for over seven years. I hope some of you have
learned something about our economy and our stock market, and that
you will continue to follow along with me into the future. 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.
"News and Views", Copyright, Werlinich Asset Management,
LLC and www.waminvest.com. All