Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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March 21, 2011

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

When I wrote to you last month, it was coincidentally the day that the Dow Jones Industrial Average achieved the highest closing level since before the failure of Lehman Brothers and the ensuing financial collapse. The market had been climbing higher and higher, seemingly impervious to any and every economic, political or societal reason to fall. For that, we could likely thank the Federal Reserve and surging corporate profitability. The government had created a party and we were all invited. And then, suddenly, the party ended.

After hitting a high of 12,391.25 on February 18, the Dow fell 6.7% over the next four weeks, amid all the turmoil in the Middle East and the horrific disaster in Japan, to a low of 11,613.30. In December I wrote about excessive optimism in the market, which suggested that a correction might be forthcoming, Then last month I wrote that "the Dow is still rising unabated, so watch out; the correction will come, sooner or later. But when it comes, I believe it will just be a pause that refreshes, setting the stage for a continued bull market." Well, that correction arrived with a vengeance. And if three trading days are any indication, it may have abated just as quickly. As I write this, after only three trading days, the Dow has already recouped half of its losses.

As you can see below, in the RSI section of the daily chart of the Industrial Average, after being severely overbought, the index quickly dropped to an oversold level. It is now right in the middle. Anyone that had the guts to buy last week probably picked up a few bargains. Technically, the chart looks good to me. I expect a rally with an attempt to piece the high of 12,391. If the index can move above that level it will be very bullish.

The Transportation Average also experienced a quick, but more severe, correction of 8%. It too has recovered about half its losses. Again, on a technical basis, this index looks pretty good to me. In the decline, support in the mid-4,900's held pretty well. Now we're looking for a upward movement that takes it past 5,306.

Just when many observers, including myself, were suggesting that it was time to abandon bonds, another disaster struck, pushing investors back to the relative safety of Treasuries. I think this will be a relatively short respite. I believe the bond trade is over for a while, and that yields will continue their inevitable rise.

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. As you can see by the results below, the broad market averages built upon the gains that were started in January. Small cap stocks snapped back after a weak start to take a leadership role, but large cap still leads the way for the year. Not surprisingly, bonds finished the month relatively poorly. I'll continue to preach that 2011 will be a bad year for bond investors.

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

Barclays Aggregate




US government bonds

Barclays High Yield




High-yield corporate bonds

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended March 12 was 385,000, a decrease of 16,000 from the prior week's revised figure. The four-week average was 386,250, near the lowest figure since July 2008. The numbers have been very choppy for the past few weeks, possibly thanks to the bad weather throughout much of the country, but the trend is clearly better.
  • Non-farm payroll employment increased by a fairly robust 192,000 in February, while another 59,000 were reported as added through upward revisions to December and January. Job creation occurred in most every sector except state and local government. Yet the average hourly wages for blue collar workers held at $19.33, and the average work week remained at 33.5 hours. So while there is evidence that jobs are being created, there is no wage inflation yet.
  • The total number of workers counted as unemployed fell by about 200,000 to 13.7 million. Therefore the unemployment rate dropped to 8.9%. The more comprehensive U-6 rate remained stubbornly high at 16.7%. 6.0 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work dropped to 8.4 million and the number of marginally attached workers ticked down to 2.7 million. The number of people holding multiple jobs rose to 6.88 million. Overall, the employment picture appears to be improving slightly.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $223 billion in February, leaving us with a deficit of $643 billion for the first five months of fiscal 2011, which is $10 billion less than the record levels from a year ago. The good news is that this marked the 10th consecutive month of year-over-year increases in monthly tax receipts.
  • The Census Bureau reported that the U.S. had a trade deficit in goods and services of $46.3 billion in January, up from $40.3 billion in December. Exports rose nicely, but imports rose faster. It is mildly worrisome that the trade gap continues to widen month after month.
  • The Census Bureau reported that privately owned housing starts plunged 22.5% in February, after jumping 18.4% in January, and remained down 20.8% from a year ago, to a seasonally adjusted annual rate of 479,000 units. Clearly, weather played a part in these volatile results. The March numbers should paint a more accurate picture. New building permits were down 8.2% from the prior month and 20.5% from last year. This weakness in new construction will ultimately set the stage for the recovery in housing as the inventory of hew homes for sale diminishes to match a smaller number of buyers.
  • The National Association of Homebuilders/Wells Fargo Confidence Index in March inched up to 17, after remaining at 16 for four months. Can we move to 18 in April?
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in January fell 12.6% from the prior month, and remained 18.6% lower than a year ago, to 284,000 units. The estimate of homes for sale was 188,000, which represents 7.9 months at the current rate of sales. The median sales price was a slightly lower at $230,600, which is above the rising 12-month moving average price of $220,975. I would expect the February numbers to be better after the very harsh weather in January across much of the country.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes rose 2.7% in January, and were actually 5.3% higher than a year ago, to 5.36 million units. The estimate of homes for sale, at 3.38 million represents a declining 7.6 months of supply at the current rate of sales. The median sales price dipped slightly to $158,800, which is lower than the 12-month average of $171,975. The market for new and existing homes continues to suffer, and is likely still dominated by repossessions and foreclosures, which will keep downward pressure on prices. .
  • The S&P/Case-Shiller Home Price Index (10-city index), which uses a three-month moving average to track the value of home prices across the US, fell again in December, and was weaker than a year ago, giving further evidence of the trend of falling home prices across the county. While this is a trailing indicator, it does paint a bleak picture. The good news is the rate of decline is slowing, indicating that a bottom might not be far off.
  • According to RealtyTrac, the number of foreclosures in February decreased 13.9% from the prior month, and 17% from a year ago. This was the biggest year-over-year decrease since RealtyTrac began issuing reports in 2005. Much of this decline is simply technical as the legal process for foreclosures are now often stuck in litigation. Eventually, the courts will clear the hurdles and the number of foreclosures will certainly rise again.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 66.1 in February, up strongly from the prior month. This marked the nineteenth consecutive month of expansion in the manufacturing sector. The ISM index of non-manufacturing activity was 59.7, also up slightly from the prior month. This marked growth in the service sector for fourteen consecutive months. Somehow the business is expanding without a concurrent expansion in hiring. Eventually, jobs must be created.
  • The Federal Reserve reported that in February, capacity utilization in the industrial sector was 76.3%, which leaves it only 4.2% below the average level of the period from 1972 through 2008. Capacity utilization improved slowly but steadily over the course of last year and appears primed to improve again this year.
  • The Conference Board reported that it's index of Leading Economic Indicators increased by 0.8% in February, following increases of 0.8% in December and 0.1% in January. Says Ataman Ozyildirim, economist at The Conference Board: "With February's large gain, the U.S. LEI returned to the strengthening upward trend that began last September. The LEI is pointing to an economic expansion that should gain more momentum in the coming months. In February, improvements in labor markets, financial components, and consumer expectations more than offset falling housing permits.
  • According to the Bureau of Economic Analysis, the "second" estimate of GDP growth in the fourth quarter was 2.8%, down from the "advance" estimate of 3.2%. The GDP growth in Q3 was 2.6% and 1.7% in Q2. GDP growth in Q1 was an artificially inflated 3.7%. The slight increase this quarter was due in part to increased spending on personal consumption and exports.
  • The Federal Reserve reported that in January the amount of outstanding consumer credit remained steady from the prior month, at $2.41 trillion. If consumer credit were to begin to expand again after falling for much of the past four years, it would be a boon to the economy.
  • According to the Census Bureau, retail trade and food service sales were 1.0% higher in February, and were 8.9% higher than a year ago. The January figures were certainly muted by the horrible weather, so the increase in February was to be expected and autos and gasoline sales led the way.
  • The Federal Reserve reported in that in February the supply of M-2 increased slightly from the prior month and was up 5.3% during the prior six months. The supply of M-1, on the other hand, rose a whopping 13.9% over the same six months. The Fed appears to once again be "priming the pump" to get the economy moving again, but ultimately, we need to see if this money will circulate more quickly in order to stimulate business growth.
  • The Conference Board Consumer Confidence Index jumped in February from 64.8 to 70.4, the highest level since February 2008. Imagine how confident people would be if they had jobs. The index is still well below a healthy reading. An overall reading above 90 indicates the economy is solid, and 100 or above indicates strong growth.
  • According to the BEA, the personal savings rate in January increased to 5.4% from 5.8%. I would expect the savings rate to continue to trend slightly lower from a high of 6.2% last June, thanks to a rising stock market and historically low interest rates on savings.
  • According to the FDIC, 25 banks have failed through March 11, compared with 36 failures at the same point last year. There were a record 160 banks failed for the full year in 2010, surpassing the prior mark of 140 banks that were either closed or merged into healthier banks in 2009. By comparison, 26 failed in 2008 and only 3 failed in 2007.

Trends To Watch

The dollar has once again lost its mojo. Even unrest in the Middle East, a disaster in Japan and military action in Libya can't propel the dollar higher. That should tell you something about how investors view the effects of Quantitative Easing (QE2) and our budget deficit. Last month I wrote that "unrest in the Middle East could temporarily bolster the dollar, but I believe our budget woes mean that the dollar is headed inevitably lower."  I've said repeatedly, and have backed with my investment choices, that a weak dollar tends to be good for hard assets. You'll see by the next few charts that I've been correct.

As an investor, I have been riding the golden bull market for nine years now. In fact, on my first TV appearance on Fox News in December of 2002, one of my two stock picks was Newmont Mining (which I still own today).  I have championed the long term benefits from owning gold in virtually every issue of this newsletter. And I see no reason to change my tune now. I've been writing (and tweeting) that gold (and silver) prices were simply taking a breather and correcting for a bit. Last month I wrote that "I'm confident that the price of gold will again move north of $1,400 before falling below $1,300." No sooner had I written it than it happened. The price of gold is now heading towards a new all-time high price above $1,450 per ounce.

The chart of the price of silver is very impressive. People are finally starting to take notice of the rise in the price of the other precious metal. Fortunately, my investors were staked to their positions long before the media got wind of things. If the price can hold above support around $31, I think $40 is within reason this year.

After a tremendous surge in price over eight months, the price of copper is taking a much needed breather. If it remains in the trading range I've identified below for a few months, it would a good thing. Consolidations are a normal and vital part of any market move. Like all commodities, copper is benefiting from a generally weak dollar and strong international demand (read: China). Remember, Dr. Copper is often thought of as a proxy for economic growth. So this chart is telling us that the prospects for future growth look good.

The price of West Texas Crude (WTIC) is trading in a clearly defined upward channel. Technically, everything looks great to me. The trouble in the Middle East is certainly contributing to the latest rise. Last month I talked about the $18 spread between the price of WTIC and Brent Crude. I said that "this disconnect must close either by Brent falling or West Texas rising; I'm betting on the latter." So far, that is proving correct as the spread has narrowed to $11.50. I expect this disparity to narrow even further in coming months.

After finally throwing in the towel and admitting defeat on my bearish view of the Financial Sector, I may yet be proven correct. You can see below that the latest bull run has ended and the price of this index is falling dangerously close to its former resistance level, which now acts as a floor. I remain almost entirely uninvested in the financial sector (my only holding being a long-held position in JPM) as I think severe problems remain, thanks to troubles in housing. The battle is being waged; I'm betting that the Bears prevail in the short run.

Not surprisingly (at least not to me), the rally in housing has stalled and fallen back below resistance around 115. There are simply too many problems in the housing market to believe that the housing sector can be a good investment. I believe there are more losses to come.

In January and February the European stock index rose above powerful resistance, and a classic "rising triangle" pattern, to move to the highest level since the Crash of '08. Then came all the unrest and natural disasters and the index cratered. The rally over the past couple of days has brought the index right back to the resistance line. I would expect the recovery to continue and for the index to challenge the next resistance levels at around $62 and $67.

The emerging markets have suffered from the recent problems less than the developed markets. Indeed, the chart simply looks like a normal consolidation following a breakout to its highest level since the Lehman failure. The countries in the emerging markets earn most of the GDP growth in the world right now, so investors ignore these markets at their own peril.

The health of the Chinese economy, and by proxy, it's stock market, is very important to the world's economy as they buy much of the world's output of raw materials and produce most of the goods sold to the world. Given the robust results from the US and Europe, you might think the Shanghai Composite would also be hitting new highs, but that's clearly not the case. The index remains stuck in the middle of the narrow trading range in blue shown below. The good news is that the index has turned up and is now trading above both moving averages, which is bullish. A strong move above 3,200 would be highly constructive.

I had been warning for months that the following chart was very worrisome. 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. I was concerned because the over-abundance of optimism in the market suggested that a move to the downside was forthcoming. Well, it happened. After a gentle fall below overbought levels, the bullish index plunged. Interestingly, it's now oversold. While this can be scary in the short-term, in the long-run, this is very healthy and will help set things up for further gains.

Last month I wrote that "should the Middle East devolve into violence, the VIX could jump higher in a hurry." Add in the devastation in Japan and I was unfortunately correct. The fear returned in a hurry. As you can see below, the VIX exploded from around 18 to 31 in a paroxysm of fear, before falling even more rapidly back to around 20. The fear subsided so quickly it's almost as if it never happened. This is a perfect example of how people panic at just the wrong time, and make snap decisions that they quickly come to regret. The best investors and advisors remain calm, wait for the facts, and make decisions based on information, not emotion.

What I'm Thinking and Doing

I keep talking about eliminating the "noise" from the market and simply looking at the big picture. Given recent events, I believe that's even more important than ever. As I've said for months, the picture for the stock market, for the most part, looks pretty good. We have an accommodative Federal Reserve, stellar corporate profits, low interest rates and a lot of cash sitting on the sidelines. The economy is clearly better than it was a year ago, even if the employment situation remains problematic. In fact, now that we've survived one of the corrections that I've been predicting, I'm even more bullish for 2011.

I'd like to share with you now a portion of an email I sent last week (3/16/11) to my clients. It is very instructive as to my thinking.

"Given the turmoil in the stock market right now resulting from the horrific devastation in Japan and the continuing unrest in many Middle East countries, I thought I would send out a brief note to let you know what Iím thinking and what Iím doing on your behalf. Most importantly, I am not panicking. As Iíve been writing for months in my newsletters (which you are all hopefully reading), the market was due for a correction. Indeed, when I wrote to you in January I said ďthere will almost certainly be a correction of 5-10% sometime this year, after which I expect the rally to continue. So when this correction happens, just relax and donít panic. Itís a normal part of any bull market.Ē As I write this, the market has declined between 5-6% over the past few weeks. While the reasons for the decline are quite out of the ordinary, the decline itself is very normal, and nothing to worry about.

Demonstrating my belief that this decline is simply a normal correction in an otherwise general uptrend, I just bought for us an initial position in a great stock.....


Notwithstanding all the problem worldwide right now, I remain cautiously optimistic that 2011 will be a positive year for the market. In a way, the recent selloff, although temporarily painful, is a good thing as it wrings some of the froth out of the market by shaking out the weak players and putting shares in stronger hands, like ours."

Personal News and Notes

My kids and I enjoyed a fantastic vacation a few weeks ago. We spent a week at Club Med in Ixtapa, Mexico. The weather was perfect, the food was better than expected, the staff was friendly, the booze was free and each of the kids found at least one friend to hang with throughout the week. It really couldn't have been any better. For those of you with children and looking for a good vacation destination, I can highly recommend it.

Speaking of my children, Lily's bat mitzvah is only six weeks away. It seems like she already has a handle on her prayers and her dress has been picked out. She's going to be simply beautiful. It should be a great day.

A few weeks after Lily's big weekend, the kids and I will make our way down the New Jersey Turnpike to attend my 25th Reunion at Princeton University. It should be a fantastic weekend of renewing old friendships and catching up with my old roommates. I can't wait to see everyone. There will be a lot of orange and black in our future.

Don't forget that you can connect with me on LinkedIn or follow me on Twitter. I  tweet the latest market and economic news every day. Following me is a very easy way for you to receive stock market updates in between my newsletters. I've been using these 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.

As always, I thank you, my readers, and remind you that this newsletter is for you. I have been writing to you now for over seven years. I hope some of you have learned something about our economy and our stock market, and that you will continue to follow along with me into 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, 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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