Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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March 20, 2012

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

Current Market Analysis

We're almost finished with the first quarter of 2012 and in spite of all the problems still confronting the domestic and global economies, so far, so good. The best January in 35 years was followed by a superb February, which has been followed (to this point) by a solid March. Notwithstanding the decline in early trading today, the Dow is now at its highest level since late in 2007. Optimism has returned as our economy continues to improve and the ECU has at least temporarily forestalled disaster. While the huge gains we've enjoyed for the past eight months suggest a correction must be coming sometime soon, looking at the big picture right now, one should feel pretty good.

As you can see below, the chart of the Dow Jones Industrial Average continues to paint a very bullish picture. This extended move higher pierced the last resistance level at around 12,753 before making a new closing high of 12,890 in late February. Then, after a small dip, it powered to almost 13,300 before selling off a bit today. Notice that the index is well above both moving averages, and the 50-day is much higher than the 200-day, which is very bullish. It's a bit worrisome that RSI is in mildly oversold territory, so don't be surprised if there's a pullback of 5-10% sometime soon before trying to pierce the next resistance around 13,780 (or about 3.5% higher than yesterdays closing price). After that, Dow 14,000 might be back in play.

The chart of the transportation average looks similar to the industrial average with one major difference. The transports have not managed to surpass the previous high of 5,618.25 set last July. According to Dow Theory, the industrial and transportation averages need to move to new highs together in order to confirm a bullish move. A lagging transportation average suggests some latent concern about the economy. Of positive note is that the 50-day moving average has crossed above the 200-day average and the index is now trading above both averages. Now we need the index to move to a new high, which will require a gain of about 5%.

The chart of the Dow Jones Utility average is very interesting. After being one of the best performing sectors in the market last year, utilities continue to under perform thus far in 2012. The current price for the index is trading very close to both moving averages in a tight trading range (see the red circle below). The conclusion I draw is that it is simply a rotation of money out of a previously hot sector into riskier assets. Should the sector weaken much further, it may provide a nice entry point for new investors looking for steady income because utilities should continue to do well in a low interest rate environment. If though rates were to spike higher, that would be a negative for the sector. I think negative sentiment for coal and nuclear energy is also weighing on the sector.

Treasury yields have spiked almost 0.5% higher over the past two months as investors have moved out of the safe haven and into riskier assets like stocks. That might not seem like much of a move, but should it continue, bond investors will begin to see significant losses on the fixed income securities. Could the market subvert the policy of the Federal Reserve to keep treasury yields at historically low levels at least into 2014?

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, including the reinvestment of dividends. 2012 has started with a bang, enjoying what would be great year-end results after only two months. The riskiest assets continue to lead the way, powered by tech stocks. The returns on bonds were basically flat, and have probably turned negative by mid-March. Even the downtrodden EAFE has enjoyed excellent returns so far this year, rewarding investors who didn't bail on the sector last year. Remember, I suggested in December that if the ECU doesn't blow up (which it didn't), investors could earn big returns in that sector. So far, that has proven to be correct.

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

* Return numbers include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended March 10 was 351,000, a decrease of 14,000 from the prior week's revised figure. The four-week average of 355,750, a decrease of about 10,000 from the prior month. The overall trend of jobless claims continues to move lower. About 3.34 million people continue to collect unemployment insurance, a decrease of 100,000 from the prior month. This trend is clearly helping the market.
  • Non-farm payroll employment increased by a solid, if unspectacular 227,000 in February, with 233,000 jobs added in the the private sector while government jobs remained largely unchanged. The majority of the gains came in professional and business services, half of which were temporary help jobs. Computer and IT jobs also enjoyed healthy gains. Revisions added an additional 20,000 jobs in December and a huge 41,000 in January. I expect that the February totals will be revised higher once more data is in. The total number of workers counted as unemployed remained at 12.8 million, which kept the unemployment rate at 8.3%. The more comprehensive U-6 rate, which was as high as 16.7% last June, continued moving lower, down to& 14.9% from 15.1% last month.
  • A slightly lower 5.4 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work dipped back to 8.1 million and the number of marginally attached workers fell to 2.6 million. The number of people holding multiple jobs rose to 7.12 million. The average hourly wages for blue collar workers rose to $19.64 while the average work week held at 33.8 hours. On balance, the employment picture continues to improve slowly.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $229 billion for February and $578 billion for the first five months of fiscal 2012, which was about $63 billion less than the same period a year ago as tax receipts are up and government outlays are slightly lower. The extension of the payroll tax holiday will mean that the budget deficit will likely grow more than the anticipated $1.1 trillion.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $52.6 billion in January, up from the revised higher figure in December, but still within the range of the rest of the year. It's a bit worrisome that the trade deficit seems to be growing every month again.
  • The Census Bureau reported that privately owned housing starts fell 1.1% in February, after rising 2.5% in January, but was still 34.7% higher than a year ago, to a seasonally adjusted annual rate of 698,000 units. These results continue to fluctuate wildly from month to month, so a reliable trend is not yet in evidence. New building permits were up 5.1% from the prior month and 34.3% from the year before. Like starts, the number of permits are fluctuating from month to month, do they do seem to be trending higher.
  • The National Association of Homebuilders/Wells Fargo Confidence Index was unchanged in March, holding at a revised lower 28. This broke the streak of five straight months of gains. Still, this is the highest level the index has reached in almost five years (June 2007) as optimism grows for a recovery in the moribund and still fragile housing market.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in January fell 0.9%, but at 321,000 units, sales were 3.5% lower than a year ago. The estimate of homes for sale was only 151,000, which represents only 5.6 months at the current rate of sales. The median sales price of $217,100 was well below the falling 12-month moving average price of $221,125. New home sales just cannot show any meaningful signs of life until the market clears the glut of existing homes for sale at distressed prices.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were 4.3% higher in January to 4.57 million units, and were 0.7% higher than a year ago. The estimate of 2.3 million homes for sale means there's an estimated 6.1 months supply on the market. The ever lower median sales price of $154,700 is below the 12-month average of $164,275.
  • As I predicted, 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, slipped for the fourth straight month in December. The index is now at its lowest level since the housing crisis began in mid-2006. Unfortunately, I believe the trend will continue in January and probably February as well.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 52.4 in February, a decline from January. Still this marks 31 consecutive months of expansion in the manufacturing sector. New orders, production and employment all grew in February although at somewhat slower rates than in January. The ISM index of non-manufacturing activity was 57.3, a mild increase from January. This marks growth in the service sector for 26 consecutive months. These numbers demonstrate that business is still growing, slowly but steadily, and moving further and further away from a risk of recession.
  • The Conference Board reported that it's index of Leading Economic Indicators increased by 0.4% in January, the same increase as in December. Says Ataman Ozyildirim, economist at The Conference Board: "This fourth consecutive gain in the LEI reflected fairly widespread strength among its components, pointing to somewhat more positive economic conditions in early 2012.."
  • According to the Bureau of Economic Analysis, the "second" estimate of GDP growth for Q4 for 3%, slightly higher than the "advance" estimate of 2.8%. This was up from the weak 1.8% in Q3, 1.3% in Q2 and and 0.4% in Q1. This compares with 2.3% in Q4, 2.5% in Q3, 3.8% in Q2 and 3.9% in Q1 of 2010. The increase in real GDP in the fourth quarter reflected positive contributions from private
    inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed
    investment, and residential fixed investment that were partly offset by negative contributions from
    federal government spending and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, increased.
  • The Federal Reserve reported that in January the amount of outstanding consumer credit was $2.51 trillion, up 0.7% from the prior month. This followed slightly higher increases in November and December which were the largest month-over-month increases in total outstanding consumer credit since November 2007. Consumer credit is now growing at a 8.5% annual rate, demonstrating clearly that after years of retrenching, the American consumer has cut back on saving and is spending again.
  • According to the Census Bureau, retail trade and food service sales were up 1.1% in February, which was better than January, and were 6.5% higher than a year ago. Gasoline stations, auto-related sales and building materials led the way. This was a solid number; I hope these gains continue over the next few months.
  • The Federal Reserve reported that in February the rate of growth in the supply of M-2 (a broader view of money) continued to slow a bit from prior months, moving "only" 6.4% higher over the prior six months, after double digit growth rates for the prior months. The supply of M-1 (the most narrow definition of money), on the other hand, rose 11,1%, down from 23.5% in December. This is good news.
  • The Conference Board's Consumer Confidence Index in February rose strongly to 70.8 from 61.5 in January. Given the gains in the stock market, and improvements in employment, this gain comes as no surprise. A reading above 90 indicates the economy is solid, while 100 or above indicates strong growth. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "The Index is now close to levels last seen a year ago (Feb. 2011, 72.0.). Consumers are considerably less pessimistic about current business and labor market conditions than they were in January. And, despite further increases in gas prices, they are more optimistic about the short-term outlook for the economy, job prospects, and their financial situation."
  • According to the FDIC, 4 banks failed in February, bringing the total number of bank failures in the first two months of 2012 to 11, which is an improvement over 2011. I expect far fewer bank failures this year than the 90 banks that failed in 2011, which was itself a big improvement over the record 160 banks that were either closed or merged into healthier banks in 2010, and 140 in 2009. By comparison, only 26 failed in 2008 and a paltry 3 in 2007.

Trends To Watch

In 2011 the relative value of the dollar was the most important factor determining the direction of the stock market. When the dollar went up, the market went down, and vice versa. The big increase in the value of the greenback in the second half of last year had a particularly deleterious effect on the relative values of hard assets like gold, copper and iron ore. In the December newsletter I suggested that after such a big rise, "one might expect the dollar to take a breather." Almost right on cue, the dollar declined in January and February, which helped power the stock market to big gains. This will be a very important relationship to watch throughout the rest of the year.

The action on the price of gold has turned somewhat bearish in the past few weeks as the price has fallen below both moving averages and is well below the high set last September. Last month I wrote that "there have been three straight lower highs, which would suggest the current high of $1,765 will hold and the price will roll over to make a lower low, which would bring the price below $1,500. On the other hand, the current price is higher than both moving averages, which is bullish. My bet is that the price will trade in a tight range for a while before breaking up and above resistance." So far that has been the case. Looking at the chart, RSI is very oversold, which suggests a rally could be coming up. Also, the price remains above an interim support level around $1,600 and well above major support at around $1,535. I'm not selling.

To put the movement in the price of gold into greater perspective, I'm showing you a three-year picture below. The decline in December violated the trendline which wasn't good. The subsequent rally brought the price right back to trend and above the moving averages. The latest selloff has again caused the index to fall below the trendline and both moving averages. We'll see if support holds.

After a terrible fourth quarter, the price of silver had begun to show signs of life before tumbling with gold in March. It too is oversold, but not as much and it is also trading just below both moving averages. The trading range is delineated between the green and blue lines. Let the battle between the bulls and bears commence.

The price of copper continues to rise, giving credence to the data showing that the global economy is improving. Earlier this year the price broke above resistance at around $3.75 and is now in a holding pattern, trading slightly above both moving averages. This is bullish. The next resistance would come in around $4.20.

After moving steadily higher for give months, the price of West Texas Crude has leveled off so far in March, trading between $105 and $110. The current price is well above both moving averages and at the high end of the trading range with interim resistance at $105. A little profit-taking and consolidation is normal after such an extended rally. It will be very important for the bulls for the price to remain above the psychologically important $100/barrel. Please notice, in addition to the clear trading range (in green) the clear inverse "head and shoulders" pattern. This pattern suggests the bull movement should continue unless the right shoulder breaks down to $100 or below. We'll see this pattern a few more times below.  

I've made no secret of my bearishness on the financial sector since early 2008, and until recently, that was a very good stance to take. The tide began to turn in October. Then beginning in earnest in December, this sector has really taken off. The index is now trading right below a major resistance level around $16.50 and is above both moving averages. I may finally have to drop my bearish stance on the sector, although I do expect a pullback as the index is oversold. Still, momentum could take the financials even higher should the overall market rally continue. The final impediment to a prolonged rally is the weak housing market. Should that turn around the banks will likely soar.

I have been bearish on the housing sector since 2007, and like the financial sector, I saved my clients a lot of money by avoiding stocks in this sector. I admit I'm completely amazed by the 80% gain in this index in only six months, especially in light of all the dismal numbers I've been reporting. While builder sentiment has improved, the number of homes being sold and the prices that they've sold for simply don't justify the gains in this index. So should investors believe the numbers or the pictures? I'm still sticking with the numbers because if the numbers don't improve, this sector could be headed for a big fall. On the other hand, I've clearly missed a big run, and pictures don't (usually) lie.

After taking a beating in the second half of last year, the equity markets of the developed international countries have staged a 20% rally over the past four months, even more impressive given that the problems in Greece have only recently found a temporary solution. The next interim resistance comes in around 58, but the big one is at 64. If Europe can continue to work around it's debt crisis, the index could seek that level in the next few months.

The chart for the emerging markets index, like many others, is showing a clear inverse head and shoulders pattern; falling below 42 would break the pattern while moving above 45 would continue it. Since the emerging markets don't have the same crushing debt burdens as the developed world, and enjoy a much higher GDP growth rate, I suggest that investors should have a toe in this sector because given some global economic stability, there could be some explosive gains coming from the emerging markets region. Note that the 50-day moving average has crossed above the 200-day average; that's very bullish. 

So how's China doing? I ask this because one could make that case that as China goes, so goes much of the rest of the world. Like a broken record, I wrote repeatedly last year that the weakness in the Shanghai Index made me very nervous because of China's importance to the world economy. After falling in December  to a level not seen since the Lehman failure, I wrote that RSI was extremely oversold, suggesting a rally was on the horizon. Fortunately, as you can see below, the SSEC has indeed popped a bit, moving above the 200-day moving average and closing in on the 50-day average. Still, there's a long way to go before I'll call a recovery. But moving back above 2,700 would be extremely bullish.

According to the NYSE Bullish sentiment index, the market is mildly bullish right now after managing to work off the extreme oversold position without a major market decline. I wrote last month that any forthcoming correction would likely be mild and that was the case. Now I expect some sideways action to reduce the bullishness even further before the market continues to climb.

This chart shows that about 75% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. It suggests that we have a market decline in our future, but my guess is that the decline will be gentle, setting up the next rally.

Finally we have the somewhat busy chart of the "Fear Index". The VIX is disturbingly complacent right now, and that makes me nervous. While I'm enjoying the relative stability in the market and I don't look forward to the agita caused by greater volatility, a VIX this low usually means something is coming up to stir the pot.

What I'm Thinking and Doing

Clearly the domestic and global economic landscapes are much better than they were six months ago, but there is still work to be done, so it's not all rainbows and unicorns. Frankly, I'm amazed the market is doing so well. That being said, while I can't shake my nervousness, I think things are heading in the right direction, at least for now. If the housing market can finally find the bottom and join the rest of the recovery I think the stock market could revisit its all time high. I also believe that when the Republicans finally choose their candidate, and there is (hopefully) some intelligent dialog about what to do about the deficit and taxes in this country, maybe some progress can be made on our problems. Or maybe nothing will happen. Either way, the next few months should be interesting.

One thing I've been thinking quite a lot about is the price of gold, and the rationale for investing in the shiny metal. I made my first investment in gold, Newmont Mining to be specific, back in June of 2002. At that time the price was around $325/oz. In the subsequent 10 years, the price has increased over five times. Indeed, the price has gone up for 11 years in a row, beginning in 2001. Over the same period I have increased my stake in gold stocks, mutual funds and ETFs to represent over 10% of my business. Now what? Now I sit tight. I'm not in this trade to make a quick buck. I'm in it for a number of reasons: political and economic uncertainty, a hedge against future inflation, a hedge against the ongoing debasement of the dollar and the fact the gold is, had always been, and will continue to be, the only currency that will stand the test of time. So I'll sit with my position, and add to it should the price go much further, because sooner or later, it will continue its ascent.

WAM began the year holding only about 2.25% of its investments in cash because I was confident about the near term prospects for the market. In hindsight, that was the right stance to take as the market soared. In January I added over $800k to cash by selling some non-core and underperforming assets. Throughout the quarter I've continued to trim unwanted sectors and a select few dogs. I subsequently deployed that cash, and more, by taking a large stake in a new stock and carefully adding to existing positions. As the quarter comes to a close I've never been more pleased with the overall look of our portfolios. While a few laggards remain, I'm very confident that our portfolios will meet or exceed our expectations for the year.

Professional News and Notes

Last week I completed the painstaking transition from my old CRM (customer relationship management) solution to the new one. I expect that this new software will allow me to be even more efficient and proactive in working with my clients and prospects. Last week I also introduced a new procedure that will simplify and make more secure the way I deliver any sensitive documents, including statements, invoices and forms containing social security numbers and birthdays. All of these documents will now be stored in highly encrypted "online vaults" to which my clients will have easy access. This cloud-based initiative is the future of secure correspondence and I'm excited to be delivering it now.

Since I was upgrading so many of WAM's processes and procedures, I figured it was time to bite the bullet and finally migrate the contacts, memos and contacts off of my beloved Palm Pilot and port it into Outlook. That was easier said that done. After combining a free utility I found of the web with a painstaking process of copying and pasting, this project too was completed over the weekend. I have to say, I'm glad to have these projects behind me.

Next, it's time to focus a bit on social media. As you know, you can connect with me on Facebook, LinkedIn and Twitter. I would say Twitter is the best of the three for staying current with me as I tweet the latest market and economic news every day. Following me is an easy way for you to receive stock market updates in between my newsletters. I'm up to about 325 followers now. I'd like to double that by the end of this year. So if you use Twitter, please consider following me, 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 News and Views for eight and a half 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 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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