• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended February 9 was 341,000, a decrease of 27,000 from the prior week's revised figure. The four-week average of 352,500 is about 7,000 lower than the prior month's tally. About 3.1 million people continue to collect unemployment insurance, a drop of about 100,000 from the prior month.
• Non-farm payroll employment in January, once again, was a mixed bag. The establishment survey reported that 1575,000 jobs were added in the month while the household survey said that the unemployment rate was 7.9%. The jobs added were consistent with the monthly gains for the past two years. Revisions to November and December added back 86,000 and 41,000, respectively, much larger than recent revisions. The total number of workers counted as unemployed remained at 12.2 million and the labor force participation rate remained at 63.6%. The more comprehensive U-6 "underemployment" rate also held at 14.4%.
• 4.7 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work inches up to 8.0 million and the number of marginally attached workers rose to 2.8 million. The number of people holding multiple jobs fell to 6.8 million. The average hourly wages for blue collar workers rose to $19.97 while the average work week dipped to 33.6 hours. Overall, the job increases are solid, if under whelming, but there are still far too many people who can't find a highly paid full time job.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $2 billion in January, and $275 billion for the first four months of the fiscal year, which is $54 billion less than the record figure reported for the same period of fiscal 2012. They claim that without shifts in the timing of certain payments each year, the deficit would have been about $84 billion lower this year. We'll see what happens as the budget negotiations progress.
• The Census Bureau reported that the U.S. trade deficit of goods and services was $38.5 billion in December, down almost $10 billion from November. It was also the smallest deficit since November 2010. The reduced deficit was due, in large part, to a big drop in energy imports.  
• The Census Bureau reported that privately owned housing starts jumped 12.16% in December, following a small decline in November. Housing starts are now a whopping 36.9% higher than a year ago, to a seasonally adjusted annual rate of 954,000 units, the highest level since June 2008. New building permits were flat after a 3.6% the prior month, but were still 28.8% higher than the year before. The recovery in the housing market continues.
• The National Association of Homebuilders/Wells Fargo Confidence Index held steady in January at 47, breaking the string of eight straight monthly increases, but holds at the highest level since May 2006. Builder confidence is slowly approaching a healthy figure of 50, which is considerable progress from the desultory figure of 19 a little over a year ago.
• The Census Bureau reported that on a seasonally adjusted annualized basis, 369,000 new homes were sold in December, about 7.3% fewer than the revised November totals and 8.8% better than a year ago. The estimate of number of homes for sale was 151,000, which represents a slim 4.9 months of inventory at the current rate of sales. The median sales price rose to $248,900, which remains above the rising 12-month moving average price of $241,033. Even though the number of homes sold dropped this month, the overall trend remains good and a tight market augurs well for future price increases as we move towards the spring selling season.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, after significant revision to the full year, sales of existing homes were 1.0% lower in December, to 4.94 million units, but remained 12.8% higher than a year ago. The estimate of only 1.82 million homes for sale means there's only a tiny 4.4 months supply on the market. The median sales price rose to $180,800, which is above the rising 12-month average of $175,492. As with new homes, the existing home market is getting tighter and tighter, which suggests a bright future in the spring.
• The S&P/Case-Shiller Home Price 10-city index, which uses a three-month moving average to track the value of home prices across the US, dropped slightly in November, mostly due to seasonal factors, but remains 4.5% higher than a year ago. I expect the general trend of the index to move higher in the months ahead.
• The Institute for Supply Management (ISM) index of manufacturing activity was 53.1 in January, indicating that economic activity in the manufacturing sector was more robust in the month. In addition, the ISM index of non-manufacturing activity was 55.2, which marked growth in the service sector for 37 consecutive months.The service sector continued its unabated expansion. These were positive reports.
• The Conference Board reported that it's index of Leading Economic Indicators increased by 0.5% in December after a decrease of 0.2% in November. Says Ataman Ozyildirim, economist at The Conference Board: "The U.S. LEI rose sharply in December, led by a large improvement in initial claims for unemployment insurance and positive contributions from the interest rate spread and the Leading Credit Index. The increase in the LEI brought its six-month growth rate well above zero, with roughly two-thirds of the components advancing in the last six months. However, consumer expectations and manufacturers' new orders remain weak." Says Ken Goldstein, economist at The Conference Board: "The latest data suggest that a pickup in domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag, has turned into a positive for growth, and will help improve consumer balance sheets and strengthen consumption. However, for growth to gain more traction we also need to see better performance on new orders and an acceleration in capital spending."
• According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth for Q4 2012 showed a decline of 0.1%, whereas growth was 3.1% in Q3, 1.3% in Q2 and 2.0% in Q1. It is also far worse than the 3.0% growth recorded in Q4 2011. The decrease primarily reflected negative contributions from private inventory investment, government spending and exports. This could be a sign of weak growth expectations for 2013.
• The Federal Reserve reported in November that the amount of outstanding consumer credit was $2.78 trillion, up from the prior month and growing at a 6.25% annualized rate. Consumer credit grew for the fifth consecutive month, which should be helpful to retail sales, which in turn, would boost the economy.
• According to the Census Bureau, retail trade and food service sales increased a meager 0.1% in December, and 4.4% year over year. General merchandise retailers and sporting goods stores led the way but overall, these results are disappointing.
• The Conference Board's Consumer Confidence Index fell for the third month in a row in January, from 65.1 to 58.6. Says Lynn Franco, Director of The Conference Board Consumer Research Center "Consumer Confidence posted another sharp decline in January, erasing all of the gains made through 2012. Consumers are more pessimistic about the economic outlook and, in particular, their financial situation. The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock."
• According to the FDIC, only 2 banks failed in January, versus the 7 that failed last January. I would be surprised if more than 25 or 30 banks go under this year.

Trends To Watch

The dollar index continues to be bound in a tight range between 78.5 and 81.75 (the two dotted red lines). Most of the world is in a race to devalue their currencies, so I wouldn't expect the dollar to get much weaker any time soon. Indeed, I'd expect it to remain basically where it is for a while. The only reason it might drop much would be if there is no meaningful resolution to the "sequester" or the debt situation. If a reasonable deal is finally reached, the dollar index could move higher.

For more than a year and a half the price of gold has ping-ponged between $1,500 - $1,800/oz. During this period, there seems to be two bands of interim support or resistance, around 1,625 and 1,700 (the two green dotted lines). This band has formed a new trading range for the past two and a half months. Ominously, the 50-day moving average has fallen perilously close to the 200-day average. Gold bulls, of which I am one, would like to avoid the "death cross".

To put the move in gold into greater perspective, below you'll see a chart of the price of gold going back four years. You'll notice that gold has been consolidating for more than a year, during which time a declining triangle pattern has formed (red lines). While this is normally a bearish trend I expect a powerful reversal to occur at some point this year, after which the price will move sharply higher.

Like gold, the price of silver is creeping lower and headed towards a "death cross" with resistance just south of $30. Neither RSI or MACD are telling us much. So we simply sit and wait for a sign of what's to come.

The chart of the price of copper suggests that there continues to be economic growth in the world. The current price continues to move higher and is above both moving averages. RSI and MACD show neither strength nor weakness, suggesting stability. On the whole, this is very bullish. Let's see if the price can penetrate resistance around $3.85.

The chart of West Texas crude continues to improve. The price is above interim resistance around $93 (green dotted line) and above both moving averages. Even better, we just got the bullish "golden cross" signal (red circle). While I'm a longtime oil bull, I'd prefer the price to remain between $95 - $100. Anything above $100 would likely cause damage to the economy.

The financial index continues to move onward and upward to new highs as the bull remains solidly in control. The current price remains well above the trendline and both moving averages. If you want to quibble, RSI is mildly overbought, suggesting the next consolidation may be forthcoming.

The housing index is also solidly bullish as the price remains above the trendline and both moving averages. The next big move would be to piece 200.

The index for the developed international markets continues to move higher. Indeed, it is poised to attack resistance at 62, last achieved almost a year and a half ago. Investors seem to be discounting all the potential problems in the Euro zone, which is kind of hard to believe. But charts don't lie.

The Shanghai index continues to rally, up about 25% in just over two months. The next big resistance level comes in around 2,500. Clearly, the rally I called for in December is in full swing. This can only be good news for the rest of the world's markets.

Now we come to our three contrarian market indicators. And to be honest, they give one pause. The NYSE Bullish sentiment index shows an extreme level of bullishness right now. RSI is wildly overbought. History shows that when bullish sentiment gets this high, a correction isn't far behind.

Next we see that about 81% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average, down from almost 90 a month ago, and trending lower. Recent history suggests that we're likely to fall further if this is a real correction.

Finally, the VIX, or the "fear index", shows the absence of fear, or utter complacency. The VIX hasn't been this low since early 2007, shortly before the DJIA reach 14,164. That's something to keep in mind.

What I'm Thinking and Doing

Right now, I'm enjoying the rally and rooting it on to achieve a new all time high. At the same time, I'm worried about the fragile underpinnings of the market. In a way, the market appears "reasonably priced" according to metrics light price-to-earnings (PE ratio) and returns relative to treasuries. Corporate balance sheets are as flush as they've ever been and earnings have been solid, if unspectacular. The Fed continues to provide fiscal stimulus at unprecedented levels. There is some certainty as to tax policy for at least the next year or two. The developed and emerging markets are moving towards recent highs and China is moving steadily higher. The good news is plentiful and impressive.

Yet, with all the good news, I remain somewhat nervous. I don't believe things are as good in Europe as the equity markets would have us believe. I'm always dubious about what comes out of China. There is still much work to be done in the US to fix our debt crisis, and all of it will likely negatively impact the economy. There is too much exuberance in the market, as evidenced by the three charts above, and things could easily come tumbling down if corporate earnings come in weaker than expected this year.

So where does all of that leave me and my investors? Pretty much where I left things last month. We remain basically fully invested in the market and enjoying the rally. I've taken new positions in a REIT (real estate investment trust) and a BDC (business development company). The former yields about 6.75% and the latter distributes a rich 12.5%. Both securities fit nicely in my strategy to maximize income. According to Ibbotson, about 45% of the historical return from equities comes from dividends. And dividends provide a nice cushion against the inevitable downturns.

Professional News and Notes

It looks like I'll be introducing my new website on March 1. I'm very pleased with the look and the content. My new webmaster is putting the final touches on it, although I expect that I'll continue to refine certain things even after it goes "live". I can't wait to unveil it to all of you. I hope you'll let me know what you think.

I continue to add content to my blog. I've now written more than 30 articles on topics ranging from the politics, the economy, the Fiscal Cliff and debt negotiations, taxes, gold, and of course, the stock market. I'm very excited to expand on that exciting beginning. Please join me in a dialogue about what interests you and what you need to know in order to protect and increase your wealth by clicking here.

As always, I thank you, my readers, and remind you that this newsletter is for you. I have been writing News and Views for over nine years now. If you'd like to read any prior edition, simply go to my website and click on the link to my newsletter archives. I hope you have learned something about our economy and our stock market, and that you will continue to follow along with me in 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, or if you know someone that might benefit from my guidance, I'd be pleased to be of service. Simply give me a call or drop me an email.

Best regards,

Greg Werlinich
President

                               

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