|Current Market Analysis|
Last Month's Results
Statistics 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
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
 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.
Dow Jones Industrial
Russell 1000 Growth
Russell 1000 Value
Russell 2000 Growth
Russell 2000 Value
Europe, Australia, Far
Lehman High Yield
- 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
- 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
- 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
- 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
- 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
- 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
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
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
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
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.
"News and Views",
Copyright©, Werlinich Asset Management, LLC and www.waminvest.com. All