Current Market Analysis

As you can see in the chart below, the Dow Jones Industrial Average has had quite a run for the past five months, rising from a low of 10,156 to its current level of around 11,300. In fact, the Dow is approaching the all-time high of 11,750 set in January 2000. While I don't understand the market's euphoria, I'm happy to enjoy the ride for as long as it lasts. I would expect the Dow to take a little breather, but as long as it remains above its rising 50- and 200-day moving averages, the upward momentum should continue.

To put this entire market in some perspective, I thought it would be interesting to take a look at the chart of the S&P 500 from December 31, 1999 to today. This chart shows not only how far the market fell during that three year bear, but how far we have recovered, and how much further we still have to go just to get back to where we were over five years ago.

I believe the Treasury market paints a somewhat more ominous picture. Since June of 2005, the yield on the 10-year Treasury has moved increasingly higher, as each high is ever higher and each dip is more shallow. The spread between the 10-year Treasury and the TIPS remained fairly steady around 2.50%, which suggests that the credit markets don't see the same risk of inflation as the Federal Reserve. While there are certainly pockets of strong inflation (health care, education and entertainment to name a few), I continue to believe that the inflation is being caused by the loose monetary policy of the Fed as it prints enough money to continue the profligate spending of our government. Without the additional hundreds of billions in new dollars being printed every year, neither the government, nor its citizenry, would likely be able to repay its mammoth, and growing, indebtedness. 

Last Month's Results

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. February produced mixed results, but on the whole, the market was generally flat for the month. With the strong showing so far this month, it would appear that the major indices will be up solidly for the first quarter.

What I'm Doing Now

To be honest, I haven't done very much in the past month. Each time energy prices dip, I think I'm going to have the chance to buy some good companies at better prices, but the dips haven't lasted long enough for me to feel comfortable buying. But I have my list and if the opportunities present themselves, I won't hesitate. In addition, there is a new ETF that I have my eye on, plus I'm eagerly anticipating the approval of another one that I would certainly buy. So for now, I'm just sitting tight and letting my interest and dividends build up. I don't like chasing stock prices in an up market, and I don't recommend that you do it.

Statistics To Watch

• The most recent four-week average for initial jobless claims remained steady at 296,000.
• There was an increase of 243,000 non-farm jobs in February, after the January increase was revised downward to only 170,000. Average hourly wages rose to $16.47 from $16.42. The average workweek fell slightly to 33.7 hours. The number of people holding multiple jobs rose to 7.67 million from 7.43 million.
• The number of unemployed workers inched up to 7.2 million in February from 7.0 million in January. The total number of people, who for economic or business reasons could only find part-time work, moved up to 4.2 million. The number of marginally attached workers remained at 1.5 million. My adjusted Comprehensive Labor Index™ rose to 9.0% while the official unemployment rate reported by the government rose to 4.8%.
• The University of Michigan Consumer Confidence Index in February fell to 86.7.
• According to CBO estimates, the government ran an estimated deficit of $121 billion in February, which raised the deficit for the first five months of the fiscal year to $219 billion. Their estimate for the full-year deficit has been raised to $371 billion.
• According to the Census Bureau, the U.S. trade deficit rose to a new all-time record of $68.5 billion in January. So we are already on track to surpass the full-year record of over $725 billion set last year.
• The Labor Department reported that on a seasonally adjusted basis, the CPI for all urban consumers advanced 0.1% in February, as falling energy costs kept prices down. The "core" CPI, which excludes food and energy, dropped to 0.1%.
• The Federal Reserve reported that total outstanding consumer credit rose fractionally in January to $2.16 billion, which continues to be at all-time high levels.
• The American Association of Individual Investors' (AAII) bullish sentiment remained rose slightly to 46% for the week ended March 17.
• According to the Census Bureau, retail trade and food service sales fell 1.3% in February after a solid January. A dip in auto sales was the primary culprit in the decline. 
• The Census Bureau reported that privately owned housing starts fell 7.9% in February to a seasonally adjusted annual rate of 2.145 million. This was a decrease of 4.8% from the same period last year.
• The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes fell 5.5% in January to a projected 1.21 million units. Then in February, it was another 10.5% to 1.08 million units, the lowest level in more than a year. The estimate of new homes for sale continues to rise, and at 548,000 represents 5.3 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 2.7% in January to a projected 6.57 million units. Then in February, it rose by 5.2% back to 6.91 million units. The estimate of homes for sale, at 3.0 million, represents 5.3 months of supply at the current rate of sales.
• The Institute for Supply Management (ISM) index of manufacturing activity measured 56.7 in February, up a little from January. This marks the 33rd 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 "preliminary estimate" of real GDP, the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 1.6% in the fourth quarter of 2005. This is a upward revision from the 1.1% "advance estimate" produced earlier this year. 
• Also according to the BEA, personal savings was a negative $63.3 billion in January, as compared with a negative $35.7 billion in December. Personal saving as a percentage of disposable personal income was a negative 0.7% in January, compared with a negative 0.4% in December. This makes seven out of the last eight months of negative personal savings.
• The Fed has discontinued the publication of M-3 data. So we'll be using M-2 data from now on. The Fed increased M-2 by $22 billion, or 0.3%, in February, after a 0.9% increase in January. The supply of M-2 has increased by 6.7% in the last three months and 4.9% in the last twelve months.
• Foreigners now hold over $1.595 trillion in US debt, a new record.

Trends To Watch

The biggest trend right now continues to be the movement on the Dow Jones Industrials as it sets multi-year highs and flirts with its historical high. With the Industrials around 11,300 and the Transports above 4,500, a bullish trend exists. The Industrials have clearly broken out of its trading range and I honestly don't know where it's headed, but the trend suggests that it could certainly go higher in the short term.

The price of West Texas Crude remains a very important trend in the market. For the past two months, the price of oil has traded between $60 and $65 per barrel. It is also interesting that the 50- and 200-day moving average has almost converged with the current price and the the RSI and MACD levels are basically level. All of this suggests no specific technical trend going forward. I remain bullish on energy prices and believe that, sooner or later, oil prices will resume its upward march.

Like oil, the price of gold appears to be consolidating. For the past two months gold has traded between $525 and $575 with $550 being a key support level, and right at the 50-day moving average. That moving average has formed a floor under every price drop for the past seven months. Again, I think this is a temporary resting spot. If you look at the chart below, you will notice that for the past year, gold has made increasingly higher highs after each decline. I anticipate that this will continue and that gold will break though to $600 in the next ascent.

Like oil and gold, the price of the dollar has been consolidating so far this year, and like oil, it is currently sitting right at its 50- and 200-day moving averages. The overall trend though continues to be upward. As interest rates and Treasury yields continue to rise, one can expect the dollar to continue to strengthen. 

Finally, let's look at the yield curve below (the green line is the current one). Right now, the Fed Funds lending rate is 4.50%. 6-month t-bills yield 4.77%,  2-year Treasuries yield 4.70%, 10-year Treasuries yield 4.66% and the 30-year Treasury yields 4.69%. 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 may 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.

Personal News and Notes

I am very pleased to report that 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.