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March 24, 2010

Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
Personal News and Notes

Current Market Analysis

Did you know that the last decade, encompassing 2000 - 2009, was the worst decade in the history of the stock market? It was even worse than the decade that included the Great Depression. That's the bad news. The good news is that we're in a new decade, and it is likely that this decade will generate a better result than the last one.

The first eleven weeks of this new decade has certainly taken investors on wild ride. First, the Dow Jones Industrial Average hit an intermediate high of 10,725 on January 21. Interestingly, that was the exact midpoint of the move from the low of 7,286 after the tech crash to the high of 14,164 set in October 2007. From there the market plunged over 800 points over fourteen trading days, falling to a low of 9,908 on February 8.  In the ensuing six weeks, the market has gone almost straight up, surpassing the old high of 10,725 as it heads towards 11,000. Just a few days ago we had a major Dow Theory bullish signal as the Industrial and Transportation Averages made new highs at the same time. In addition, on March 17 there were 627 new highs on the NYSE, which is the highest level for the year. Couple all of that with the fact that the market is now trading above that 50% market of 10,725 and it would seem that, at least for now, it is indeed "all clear ahead."

Notwithstanding my short-term bullishness, I continue to be bearish on our government and key areas of the economy. As much as our government would have you believe otherwise, the "Great Recession", which is already more than two years old, is not yet over. Unemployment is still way too high, the housing market is still in trouble, consumers are nervous, the federal deficit is growing unchecked, and massive tax increases loom in the not-too-distant future. Yes, the industrial side of the economy is clearly improving, as I'll talk about below. But we still have a long way to go before any intelligent person can declare that we are in anything resembling a robust recovery. In addition, there is evidence that the amount of US debt held by foreigners is shrinking. If this is true, it could have a very negative impact on interest rates as our government attempt to sell trillions in new obligations over the next few years.

So what do the charts tell us now? After recovering from that two week correction, the Industrial average got right back on track. After going up in an almost straight line for the past few weeks, and becoming oversold on RSI, it wouldn't be a surprise for the market to correct a bit on some profit taking. I would still like to see the volume increase, which would demonstrate more institutional buying.

To give you an even better perspective of the recent action on the Dow, take a look at the chart below. On this chart you can clearly see the initial rise, the breakdown, then the recovery. It has been an impressive move no matter how you look at it.

The chart of the Transportation average is also very bullish. Like the Industrials, the Transports had a big break below trend, then roared right back to hit a new high. Like the Industrials, the average is oversold on RSI, and therefore due for a correction.

Since last May, the yield on the 10-year treasury has traded between 3% and 4%. In November I wrote that "I still expect yields to remain in the 3% - 4% range for the remainder of [2009] before heading inevitably higher sometime beginning in 2010." Since December, rates have been trading at the higher end of the range, suggesting that rates could break above 4% in the near future. This could have some negative implications for the stock market if it happens.

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, not including dividends. The equity markets saw a broad and strong growth in February after a very weak January. The recovery, as it often is, was led by technology and growth stocks. That being said, the value part of the market was still performing better on a year-to-date basis. Pulling up the rear with a 5% loss so far in 2010 is the MSCI EAFE index. The good news is that the February gains were followed up by an even better March.

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 March 13 was 457,000, an decrease of 5,000 from the prior week. The four-week average was 471,250. The less publicized non-seasonally adjusted number of initial jobless claims continue to be roughly the same as the seasonally adjusted number. We're still waiting for these numbers to go down in any meaningful way.
  • Non-farm payroll employment was down fractionally in February, which isn't too bad considering the massive snow storms that blanketed much of the East Coast. December jobs losses were reduced by 41,000 while 6,000 were added back in January. About 36,000 jobs were lost in February after losing 26,000 in January. Average hourly wages for blue collar workers rose a bit to $18.93, while the average work week dropped slightly to 33.1 hours. There is certainly no inflationary pressure in wages right now.
  • In February, the total number of workers counted as unemployed rose to 14.9 million, while the unemployment rate remained unchanged at 9.7%. The more comprehensive U-6 rate was 16.8%, up from 16.5%. There were 6.1 million people who have been unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work jumped to 8.8 million and the number of marginally attached workers held at 2.5 million. The number of people holding multiple jobs increased to 7.16 million. Overall, the employment picture remains terrible.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a whopping federal budget deficit of $223 billion in February, leaving us with a deficit of $655 billion for the first five months of fiscal 2010, which is $65 billion more than the record shortfall from 2009. The biggest reason for the increased deficit is that tax receipts are way down.
  • The Census Bureau reported that the U.S. had a trade deficit of $37.3 billion in December, down from $39.9 billion in December. The trade gap with China was 49%. And we're going to be telling them what to do with their currency and their economy? I don't think so.
  • The Census Bureau reported that privately owned housing starts decreased 5.9% in February after gaining 6.6% in January, and remained at basically the same level as a year ago, to a seasonally adjusted annual rate of 575,000 units. New building permits were down 1.6% from last month but were up 11.3% from last year.
  • The National Association of Homebuilders/Wells Fargo Confidence Index fell from 17 to 15 in March. The 18-month high of 19 was set last September. There is no good reason for builders to be confident, given the state of the housing market.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in February fell 2.2% from the prior month, and remained 13.0% lower than the same period last year, to 308,000 units. The estimate of homes for sale is 236,000, which represents a daunting 9.2 months at the current rate of sales. The median sales price rose to $220,500, which is roughly equal to the 12-month moving average price of $220,308. There simply is no improvement yet in new home sales.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in February were flat from January, which had fallen 7.2% from December, but remained 7.0% higher than a year ago, to a projected 5.02 million units. The estimate of homes for sale, at 3.59 million, represents a growing 8.6 months of supply at the current rate of sales. The median sales price has fallen to $165,100, which is slightly lower than the 12-month average of $172,558. Distressed sales continue to weigh on existing home sales.
  • 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, decreased fractionally in December for the third month in a row, to 158.18, following five consecutive months of increases. Given the number of distressed sales nationally, this shouldn't be a surprise.
  • According to RealtyTrac, the number of foreclosures in February decreased 2.3% from January, but still remained 6% higher than a year ago. The number of foreclosures has declined in six of the last seven months. “This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity — albeit at a historically high level that will likely continue for an extended period. In addition, severe winter weather appears to have temporarily slowed the processing of foreclosure records in some Northeastern and Mid-Atlantic states.”
  • The Institute for Supply Management (ISM) index of manufacturing activity was 56.5 in February, down from the 5 1/2 year high set in January, but continuing the general uptrend in place from the end of last year. This marked the seventh month in a row in which the manufacturing sector expanded. This is a clear sign of economic growth. The ISM index of non-manufacturing activity was 53.0, marking the fifth time in the last sixth months that the service index indicated moderate growth.
  • The Federal Reserve reported that capacity utilization in the industrial sector increased for the eighth straight month, to 72.7% in February. Capacity utilization now remains only 7.9% below the average level of the period from 1972 through 2008. Like the ISM numbers, this is another good indication that the economy is getting stronger, at least in the industrial sector.
  • The Conference Board reported that it's index of Leading Economic Indicators rose by a narrow 0.1% in February after an increase of 0.3% in January. After a sharp increase last year, the LEI appears to be stabilizing and moving from recovery to a slow expansion. 
  • According to the Bureau of Economic Analysis, the "second" estimate of GDP growth in the fourth quarter was a whopping 5.9%, higher than the "advance" estimate of 5.7%, and much higher than the 2.2% growth recorded in the third quarter. I had expected the rate of growth to be revised lower. More than 50% of the growth was due to businesses replenishing their depleted inventories. While this is a short term boon, it is not sustainable.
  • The Federal Reserve reported that in January the amount of outstanding consumer credit increased by an annualized rate of 2.5% from the prior month, to $2,456 billion. Notwithstanding this small increase, consumer credit has declined steadily for the past year and a half and is now around it's lowest level since July 2007.
  • According to the Census Bureau, retail trade and food service sales increased 0.3% in February after growing 0.5% January, and were 3.9% higher than a year ago. The numbers would certainly have been better if not for the major snowstorms.
  • The Federal Reserve reported in that in February the supply of M-2 increased slightly from the prior month and was up 2.5% during the prior six months. The supply of M-1, on the other hand, rose a more robust 7.5% over the same six months. The rate of monetary expansion may be increasing again. We'll have to keep an eye on this. I would have expected the Fed to be tapping the brakes in advance of the inevitable rate increases later this year, should the recovery/expansion continue. 
  • The Conference Board Consumer Confidence Index fell sharply in February, to 46.0 from 56.5 in January. Consumers appear especially concerned about the job market and their near term financial situation.
  • According to the BEA, disposable personal income fell in January, which caused the personal savings rate to fall from 4.2% to 3.3%.
  • According to the FDIC, 36 banks have failed so far this year. 140 banks failed in 2009 and were either closed or merged into healthier banks. By comparison, 26 failed in 2008 and only 3 failed in 2007.

Trends To Watch

For the past few months I've written that I expected the dollar to rally due to being "relatively" better than other currencies, like the Euro. Thanks to struggling countries like Greece, this is exactly what's come to pass as the dollar index has surged above both the 50-day and 200-day moving averages. In addition, the 50-day average has moved above the 200-day average, which is bullish for the dollar. The next resistance level, as you can see below, looks to be around 82-83. We'll see if the dollar can continue to rally and crest that level. While I remain convinced that ultimately, the dollar will roll over and head inevitably lower, I would not be short the dollar right now.

I've been saying for the better part of eight years that the price of gold would go inevitably higher (and investing accordingly) but that this upward move would not happen in a straight line. I've said many times that there will be corrections and profit-taking, but that investors should not get scared out of their positions. Indeed, those corrections could be used to add to your holdings. The latest correction was about 15% over two months, and part of that was clearly due to the strength in the dollar. I would now look for gold to continue its upward trajectory. In the meantime, gold prices around $1,050 would look very appealing to me.

Not surprisingly, since the price of silver had posted a greater percentage increase than gold over the past year, the recent correction was a deeper 25%. And like gold, future corrections in silver to around $16 should be used to add to positions.

During the correction, the price of West Texas Crude fell below it's 50-day moving average and moved to the 200-day average. It then bounced right off a major support level at $70 (the bottom trend line) before moving back up again. This rising triangle is squeezing the price. It will have to break out one direction of the other. My money is betting that it breaks out higher.

The chart of the price of copper shows a tremendous rise, followed by a big break, followed by a strong recovery. I've shown, with the red lines, a pretty clear looking inverted head and shoulders pattern. If it continues, it would suggest that copper prices will continue higher and move clearly above $350.

The financial sector, as represented by the XLF, has been in a holding period for almost half a year. The XLF been unable to break through a major resistance level at $16. But look, it is right on that resistance now, and trading above its 50-day and 200-day moving averages. Should it move convincingly above $16, that will be very bullish, and I will be proven wrong. But RSI is looking dangerously oversold. And  remember, the past year has been the best possible scenario for banks: they pay nothing on deposits yet lend at 5%, thereby making tons of money on the spread. If interest rates rise, the spread will invariably tighten, ending this perfect money-making environment. So I'll stick to my negative outlook on the banking industry for the time being.

The housing market has also been treading water since last August. Remember, housing is clearly linked to the labor markets, interest rates and the overall economy. It wouldn't take much to knock housing back down. Yet flying in the face of all the negative news on the home buying front, there is the index flirting with breaking out of the trading rage, and trading higher than the 50-day and 200-day moving averages. Like the financials, I'll stick to my negative outlook until I'm proven wrong.

Developed foreign markets, as represented by the MSCI EAFE index, have been range bound for the past six months, during which they've tested both the upper and lower range. The index has managed to rise above the moving averages, which is bullish. So we just continue to watch and wait for something to happen. 

The Chinese market has traded sideways since last July. It is now sitting almost exactly in the middle of the range, and right on both moving averages. Fascinating. To me, this is a very dangerous point and it could go either way. I wouldn't want to try to call this trade.

Over the past year, the Baltic Dry Index has had two huge bullish moves followed by similarly large corrections. It's hard to tell if the recent bullish move has ended or not. And this could be a key to what is going to happen with China. If the index is to go higher, I would like to see it move above 4,700.

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. Last month I wrote that "given the general bearish sentiment evidenced below, especially in the RSI, it suggests a bullish move could be forthcoming." I was certainly right about that. Now, it's just the opposite. The chart suggests a pullback is on the horizon.

Finally, we can take a quick look at the volatility index, also known as the "investor fear gauge". It is not surprising that during the correction there was a spike in the VIX as the complacency vanished. I mentioned last month that the complacency "could be a contrary indicator for an upcoming pullback in the market." That certainly proved true. Now again, the VIX has moved to the bottom end of the range, suggesting that another pullback is likely. A VIX around 20 or so would be perfect for me.

What I'm Thinking and Doing

I am not a trained economist. I am also not trained as a stock analyst. But I have been observing the stock market for almost 20 years now and I've been managing money professionally for over 13 years. I certainly don't always get the trends right, and I'm often a little off on my timing. But over the past seven years I think I've gotten it right more often than not. I was particularly on target with my calls on oil, gold and unemployment. I also managed to get out of all real estate holdings well before the crash. I'm afraid we could be headed for a double-dip recession sometime in 2011. I think it's inevitable due to the high levels of unemployment, the lousy residential and commercial real estate markets, the out-of-control federal deficit and the massive tax increases that are headed our way. This is a recipe for disaster. I really hope I'm wrong, and I suppose things could change over the next year or so. But I'm worried that our elected officials have their heads up the butts and don't have a clue as to what's really going on in this country. Therefore I remain very vigilant. I'm keeping a close eye on interest rates and the dollar. Any hint that the Fed is preparing to raise rates, which isn't too likely right now, or that the market is demanding higher rates for our debt, which is quite likely, will spook the equity markets.

On the plus side, the industrial side of the economy is clearly improving. Corporate profits and dividend payouts are rising. M&A activity is stirring. Even the IPO market is beginning to show signs of life. If businesses become more confident maybe they'll start hiring again. That would have an enormously palliative effect on the entire economy. And I think the mid-term elections in the Fall will likely go strongly to the Republicans. More and more prominent Democrats are reading the same tea leaves and refusing to even run for re-election. Should the Republicans recapture the House, and maybe even the Senate, a divided Congress could prohibit the President and Congress from doing anything too stupid. And maybe we can have a real debate on tax policies for 2011 and beyond.

Also on the plus side is how the market is performing. It has shaken off, or already priced in, all of the current and future problems, and decided to move to new intermediate highs. This is very bullish. As a result, I have started to deploy some of my large cash reserves. Indeed, I've put almost 3% of my cash, or $1 million, back into the market this month. Of that $1 million, the majority went towards the purchase of a leading industrial company with a great track record and strong dividend payments. I have a couple of other stocks that I'd like to buy for the right price. Stay tuned.  

Personal News and Notes

My damaged heels are recovering nicely. I had all the remaining stitches removed earlier this week. That makes it much more comfortable to wear shoes. I can now finally walk without a limp. I'm hoping to start swimming again in early April, although I will do so while being VERY careful with my turns. The plastic surgeon who stitched me up told me that it takes a full year for this injury to fully heal. 

One benefit from this injury is that I decided to join a gym and start taking yoga classes while I recovered. I'm hoping that yoga will keep me limber and help prevent back problems in the future. I've now taken a half dozen classes and still have a LOT to learn. But I'm doing my best. Any good stories out there?

Tomorrow I'm taking Nola to Dallas for her second fencing tournament, which will be held at the Dallas Convention Center. We'll be in Dallas through the weekend. I've never had the chance to spend four straight days with any one child of mine since all three were born. I'm really looking forward to this time together. We'll be staying with my good friend, and former college roommate, Danny Stromberg. I also get to see my Uncle Tom, my cousin Josh, and his new bride Christine. I may even get to visit with an old friend that I haven't seen in more than 25 years! Anyone else from Dallas out there? The first beer is on me.

Next week, five and a half months after I bought it, my kids and I finally get to move into our new house! For those of you in the New York area, details of the housewarming party, tentatively scheduled for mid-May, to follow.

Following up on my panel discussion at the 3rd Annual Inside ETF conference in Florida, at which I spoke about Leveraged and Inverse ETFs, I was part of a panel discussion at the 2010 ETFs Investing Summit in NYC earlier this month where I discussed the competitive advantages of ETFs over mutual funds. I'm becoming one of the "go-to-guys" for ETFs.

Don't forget that you can friend me on Facebook, connect with me on LinkedIn, or follow me on Twitter. I try to "tweet" something about the market every day or so, so if you follow me, you'll get a quick update on what's going on almost every day. 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.

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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