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

February 21, 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.

Market Analysis...Making Highs
Last Month's Results - Good Start
What I'm Doing Now...Buying on Weakness
Statistics...Generally Bullish
Trends To Watch
Monthly Tip...Credit Scores
Personal News and Notes

Market Analysis...Making Highs

After an erratic but up-trending January, the Dow has risen above 11,000 and is now at its highest level since May 2001. Helping to confirm this rally, the Dow Transports and the S&P 500 are also at or near multi-year highs. If the Dow manages to stay above 11,000 for a little while, this rally could have legs. It is interesting to me that the market continues to power upward in the face of rising interest rates, widening deficits and increased political turmoil around the globe. The market is increasingly priced to perfection and I don't think it will last. But for now, like the rest of you, I'm enjoying the ride.

Volatile oil prices, at least in part, continue to be a major catalyst for movements in the broader market. I don't think that it's a coincidence that the recent surge on the Dow is happening against a backdrop of falling oil prices. After peaking recently at around $70 per barrel, the price of West Texas Crude has fallen to around $60. Don't get too comfortable with these prices. $70 oil is likely to be back before you know it.

Treasury yields have moved up a bit this year to coincide with the increase in the Fed Funds rate. The spread between the 10-year Treasury and the TIPS has inched up to around 2.50%. While there seems to be a small whiff of inflation in the air, I believe it is strictly monetary inflation as the Fed continues to print money at an alarming rate. The government needs a certain amount of inflation in order to be able to repay its mammoth debts, so don't expect the Fed to turn of the spigots just yet.

So what do all of these charts and analysis mean to you? It means that we've had a nice start to the year, and it means that the rally could last a little while. So for now, enjoy it, but don't change investment strategies that have worked for the past three or four years trying to catch the tail of this comet. Continue to be prudent and patient.

Last Month's Results...Good Start

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. The news was generally good, across the board, for the stock market in January. All of the major indices finished up for the month, with the biggest gains coming in the small-cap sector. It's also nice to note that through the middle of February, the rally has continued.

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...Buying on Weakness

It has been a very interesting year after the first seven weeks. Following three straight years of double-digit returns, January was the single best month in terms of performance in the history of WAM. Once again, this was done by successfully implementing the sector investment strategy that I have been talking about for the past few years, and written about in my book.

The problem is that as is often the case, what goes up, sooner or later goes down. Thanks to the recent drop in the price of oil, February hasn't been quite so kind as many energy stocks have dropped a bit. This has enabled me to add to some existing positions at bargain prices.

As I mentioned in last months letter, I began last year to make greater use of Exchange Traded Funds (ETFs) to implement my sector investment strategy. I have continued to add to my portfolio of ETFs so far this year, and anticipate adding still more as the year progresses.

Statistics To Watch...Generally Bullish

  • The most recent four-week average for initial jobless claims fell to 297,000.
  • There was an increase of 193,000 non-farm jobs in January after a weak (but revised upward) December. Average hourly wages rose to $16.41 from $16.34. The average workweek increased slightly to 33.8 hours. The number of people holding more than one job fell to 7.43 million in January from 7.84 million in December.
  • The number of unemployed workers dropped to 7.0 million in January from 7.4 million in December. The greatest increase in employment were in construction, trade contractors and mining. The number of people, who for economic reasons could only find part-time work, remained at 4.1 million. The number of marginally attached workers remained at 1.6 million. My adjusted Comprehensive Labor Index™ dropped to 8.9% while the official unemployment rate reported by the government fell to 4.7%.
  • The University of Michigan Consumer Confidence Index in January remained steady at 91.2.
  • According to CBO estimates, the government ran a surplus of about $24 billion in January, which reduced the deficit for the first four months of the fiscal year to $95 billion. The current estimate for the full-year deficit is $355 billion.
  • According to the Census Bureau, the U.S. trade deficit rose slightly to $65.7 billion in December. For the year, the trade deficit was a stunning $725.8 billion. This was a 17.5% increase from 2004!
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for all urban consumers jumped 0.7% in January, with an increase in energy prices accounting for 70% of that increase. The "core" CPI, which excludes food and energy, remained steady at 0.2%.
  • The Federal Reserve reported that total outstanding consumer credit rose further in December to  $2.16 billion.
  • The American Association of Individual Investors' (AAII) bullish sentiment remained surprisingly weak, holding around 40% for the week ended February 20. This mild pessimism doesn't match up with the consumer confidence numbers. 
  • According to the Census Bureau, retail trade and food service sales rose 2.3% in January after a sluggish December.
  • The Census Bureau reported that privately owned housing starts in January rose 14.5% from December to a seasonally adjusted annual rate of 2.276 million. This was an increase of 4.0% from the same period last year.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes rose 2.9% in December to a projected 1.27 million units. The estimate of new homes for sale continues to rise, and at 516,000 represents 4.9 months of supply at the current rate of sales.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes fell 5.7% in December to a projected 6.60 million units. The estimate of homes for sale, at 2.8 million, represents 5.1 months of supply at the current rate of sales.
  • The Institute for Supply Management (ISM) index of manufacturing activity measured 54.8 in January, down from 55.6 in December. This marks the 32nd 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 "advance 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 1.1% in the fourth quarter of 2005. This is quite a slowdown from the 4.4% showing in the third quarter.
  • Also according to the BEA, personal savings was a negative $67.4 billion in December, compared with a negative $21.6 billion in November. Personal saving as a percentage of disposable personal income was a negative 0.7 percent in December, compared with a negative 0.2 percent in November. December marked the seventh consecutive month of negative personal savings.
  • The Fed increased M-3 by $92 billion in January. The Fed has increased the supply of M-3 by 8.9% in the last three months.
  • Foreigners now hold over $1.557 trillion in US debt, a new record.

The employment numbers continue to improve but the housing picture troubles me, as do the debt (government and personal) figures. Short-term interest rates are expected to rise further after the next Fed meeting in March. That can only mean further pain for adjustable rate debt. The inverting yield curve also troubles me greatly. I don't think that party is going to last too much longer.  

Trends To Watch

Certainly the biggest trend to watch right now is the movement on the Dow Jones Industrials and the Transports. With the Industrials above 11,000 and the Transports above 4,400, a bullish trend exists. It's hard to say what the potential upside, or how long this run will last. But until there is a definitive break above 11,000, I'd say that the basic trading range that has held for some time now continues to be in force.

As can be seen clearly in the chart below, the price of gold has grown increasingly volatile over the past three months. The peak price of $575 from a few weeks ago is a 25-year high. I find it interesting that since August of 2005, every price drop has basically found a floor at the 50-day moving average, which is basically where the price is right now. So the overall trend continues to be onward and upward.

Concurrent with rising short-term interest rates and Treasury yields, the value of the dollar is making a recovery. I mentioned last month that I wouldn't be surprised to see a rally, and that has come to pass. 

Finally, let's look at interest rates and the yield curve. Right now, the Fed Funds lending rate is 4.5%. 2-year Treasuries yield 4.68%, 10-year Treasuries yield 4.53% and the 30-year Treasury yields 4.49%. This is a partially inverted yield curve, as you can see from the graph below. When the Fed increases the lending rate to 4.75% at their next meeting, that will very likely create a complete inversion. And while you will likely hear many arguments how "it's different this time", I will be betting on a recession occurring in the subsequent 9- to 12-months.

Monthly Tip - Credit Scores

I thought it would be worthwhile to follow up on last month's article on credit card agreements with a quick look at credit scores. The information in this article was sourced from a comprehensive article written by Toddi Gutner called "Anatomy of a Credit Score" in the November 28, 2005 edition of Business Week. If you would like to read the complete text of the article, please click here.

According to a survey by the Consumer Federation of America and Fair Isaac Corp. (the company that created the FICO score), 49% of the people polled did not understand that credit scores measure credit risk. People also don't know what their credit score is, what hurts or helps that score, and how their score can be used against them.

While credit scores are most often used to predict a consumers' future bill-paying performance, they are increasingly being requested by insurance companies, cell-phone providers, utilities, landlords, and even prospective employers. Therefore, managing your FICO score has become increasingly important.

So what is a credit score? Fair Isaac uses 22 pieces of data culled from the three major credit bureaus (Equifax, Experian and TransUnion) to calculate a score between 850 and 300. The score is a composite of five different ratings: payment history (35%), length of credit history (15%), new credit (10%), types of credit used (10%) and debt (30%).

The higher your FICO score, the better a credit risk you are. The median credit score is 723. Generally speaking, borrowers with scores above 740 receive the best rates. To see how different FICO scores can affect a typical mortgage payment, visit

So how can you determine your FICO score? You can start by ordering your credit reports. You're entitled to a free credit report from each major credit bureau once a year. You can order them from Each bureau will offer to calculate a FICO score for you for a modest fee, but a more comprehensive score can be accessed through, although it will cost more. One report will cost $14.95, or you can buy all three for $44.85.

While negative factors that bring down your score remain on your credit report for seven years, lenders typically look back only two years when they make credit decisions. One mistake won't necessarily hurt you too badly; lenders are looking for trends.

So if you want (or need) to raise your FICO score, what can you do?

  • Pay all bills on time.
  • Keep well-managed, long-held credit card accounts active. It's important to maintain a lengthy history.
  • Minimize credit-card applications. Don't apply for unnecessary credit.
  • Keep balances low. You want a small total outstanding balance relative to your available credit - this is called credit utilization.

I hope you found these tips helpful and that you will be able to take greater control of your credit score. As always, if you have any questions, don't hesitate to contact me.

Personal News and Notes

I hope you will permit me a little pat on the back for a moment. WAM was ranked, out of over 1,500 participating firms, as one of the top-performing money managers in the third and fourth quarters of the 2005 edition of Thomson Nelson Information's World's Best Money Managers.

I want to thank all of you who attended my book signing and discussion on Sector Rotation Investing at the Barnes & Noble last week. It was a great evening. If you haven't already bought a copy, I hope you'll consider buying a copy of the book.

[Here I'm just going to repeat something that I wrote last month. I hope it resonates with you.] 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

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