Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595

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As a reminder, the chapter entitled "Sector Rotation Investing" that I contributed to The Black Book on Personal Finance is available for sale. You can read a short excerpt in the Personal Tip section of last month's newsletter. Please read the Personal News and Notes at the bottom for more information on how you can order either the e-book of the chapter, or the entire book. Thank you.

Market Analysis...Struggling
What I'm Doing Now...Adding To Strength
Statistics...Growing Concerns
Things To Watch
Monthly Tip...Wealth Preservation
Personal News and Notes

Market Analysis...Struggling

The stock market continued its roller coaster ride in March as losses in the month followed a good February and a poor January. Most investors will find they have lost money so far this year when they get their first quarter statements from their brokers. (Give me a call to find out how my clients are faring). The Dow closed today at 10,486, or about 500 points below the high set last month. This leaves us in the same trading range we've been in for more than a year. My feeling is that in the next few months we have a greater chance to test the 10,000 level than the 11,000 level. I think the next important support level for the Dow is around 10,350.

It seems that the linkage between the price of oil and the fortunes of the Dow has resumed, although rising oil prices is just one in a myriad of factors that is causing weakness in the stock market. As oil has surged to as much as $58 per barrel, the Dow has fallen by about 500 points. Where will the Dow be when oil gets to $60 per barrel? And what will be the effect on the economy? We're going to find out in the not-too-distant future.

Let's not forget interest rates. The last few days notwithstanding, interest rates have been on the rise recently as you can see in the chart below. It shows that in the past two months rates have increased from just below 4.0% to 4.43% today. That can't be good for the mortgage business, or by extension, the housing market. Yields have traded in a range of 4.0% - 4.6% for the past six months. In addition, the spread between the 10-year Treasury and the TIPS has widened to 2.8%, up from 2.4% a year ago. That suggests a greater worry about inflation. 

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. What's instructive to note is that with one very minor exception, every single major index is down for the year, and growth continues to lag the rest of the market. As I have said in my book, and as I have been saying for almost three years, now is not the time to invest according to a broad, asset allocation strategy. One should be focused on safety, income and those sectors with the best chance to outperform the broad market. 






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

What I'm Doing Now...Adding To Strength

Once again, my investment stance remains unchanged. In fact, after two and a half years of very strong results, I'm more convinced than ever that my investment posture is correct. In fact, I have been selectively adding to my positions in the energy and commodity sectors over the month, including some foreign stocks trading as American Depository Receipts (ADRs). I have also sold some of my weak performers in order to put that money to better use. 

Statistics to Watch...Growing Concerns

  • March was a very poor month for job creation, with only 110,000 new jobs created. There was an average of 173,000 new jobs created per month in the quarter, which is very close to the target set by the White House to create 2.1 million new jobs in 2005. Average hourly wages rose further, to $15.95. The average workweek remained stable at 33.7 hours.
  • The number of unemployed workers remained steady at 7.7 million. The number of part-time workers dropped a bit to 4.3 million while the number of "marginally attached" workers fell to 1.6 million. These figures caused my "underemployment rate" to fall to 9.68%, while the official unemployment rate reported by the government remained at 5.2%. 
  • There are 7.6 million people reported as holding more than one job, an increase from last month.
  • The four-week average for initial jobless claims jumped to 329,750, thanks to a sharp rise to 350,000 last week, the highest figure reported this year.
  • The University of Michigan Consumer Confidence Index continued to fall, hitting 92.6. The American consumer may finally be slowing down. Keep a close eye on this figure. 
  • According to the CBO, the federal deficit for the first five months of fiscal 2005 was $224 billion after posting a deficit of $115 billion in February.
  • According to the Census Bureau, the U.S. in January recorded another huge trade deficit of $58.3 billion, which was the second largest monthly deficit ever.
  • The Labor Department reported that the CPI, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, rose 0.6% in February on a seasonally adjusted basis, while the "core" CPI, which excludes food and energy, rose 0.3%. These numbers are stoking fears of increasing inflation.
  • The Federal Reserve reported that total outstanding consumer credit rose 0.80% in January to a record $2.103 trillion.
  • The American Association of Individual Investors' (AAII) bullish sentiment continues to fall, hitting 28.40% as the average investor continues to worry about the market.
  • Retail same store sales were up a meager 0.50% in March after a strong January and February. Rising interest rates and gas prices, combined with an overwhelming personal debt load, may finally be hurting retail sales. Pay close attention to these numbers in the coming months. 
  • The Census Bureau reported that after a poor January, on a seasonally adjusted annualized basis, sales of new homes rose 10.8% in February to 1.226 million. 
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes fell 0.1% in February to 6.790 million 
  • The Institute for Supply Management (ISM) index of manufacturing activity was 55.2 in February, down from 56.4 in January and 58.6 in December. This marked the eighth consecutive month that the index remained below 60.0. So the economy continues to grow, but more slowly.
  • The NYSE reported that a membership seat was sold recently for $1.6 million this week. That's a bullish indicator.

So what does all this mean to you? It means that the economy is showing some evidence of increased inflation, while also demonstrating weakness in job growth, retail and confidence. Also keep in mind that the figures listed above are all backward-looking numbers while the stock market is a forward-looking indicator. And the market is telling us that there is reason for concern. I see no reason to change my "cautiously pessimistic" outlook for the year.

Things To Watch

The trading range of 10,000 to 11,000 for the Dow continues to hold. Today the Dow closed at 10,486, or about 4% lower than this time last month when it got ever so close to 11,000. Let's see what happens next. The next key price level would be 10,350. If this support level is broached, the Dow could be in real trouble. 

Gold is also in a trading range of about $425 - $440 right now. It seems to me that gold is consolidating at increasingly higher levels. I wouldn't be surprised to see gold over $450 before the year is over.

One interesting trend to watch is the number of new highs and new lows made by stocks traded on the New York Stock Exchange. For the week ended February 11 there were 357 new highs and only 5 new lows. Last week there were only 36 new highs but 70 new lows.

The Mergers & Acquisitions theme continues as both Toys R Us and Sunguard are being taken private and MCI continues to the the object of a takeover fight between Verizon and Quest. There was also the announcement of May Department Stores by Federated.

The dollar continues to be volatile, closing today at 1.2867 vs. the Euro, up from 1.32 last month. 

Oil prices continue to hit new highs. April oil closed today at $56.89 after getting perilously close to $60 in recent days.

The yield on the 10-year Treasury closed at 4.43%.

Monthly Tip - Wealth Preservation

This month, I've asked Adam Chodos of Wealth Preservation Group to write a piece on wealth preservation. Simply put, Adam and his associates help their clients protect their hard-earned assets from creditors or other potential losses. I think you'll find this very provacativeprovocative

Many of us spend hours each month analyzing and adjusting our investments. How much time though do we spend on protecting the assets we have accumulated?

The United States is saturated with litigation; we are host to ninety five percent of the world’s lawsuits. Expanding theories of liability and significant judgments have made lawsuits big business, and to be profitable, one sues people who have assets and an ability to pay. While the lawsuits that get press tend to be class actions against big companies, the day to day cases affect regular families. Some of the more common lawsuits today are divorce, business breakups, leases, social liability (hosting events), actions occurring on real estate, employee lawsuits, serving as a board or committee member, etc.

The concern with protecting assets is not new. In the past, many would use a corporation, buy large amounts of liability insurance, or move assets into the name of a child or a non-working spouse. A corporation is intended to limit business claims to business assets, meaning a creditor could take the business but not personal assets. Corporations are routinely pierced and personal liability attached. Even if the corporate entity stays intact, wouldn’t we also want to protect the business? Liability insurance is important, however there are many claims it does not cover (divorce, most employment claims, business disputes) and it has limits. Using other family members as owners merely shifts the risk to another person, makes controlling children or dealing with a divorce very difficult and costly, and might potentially trigger a gift tax.

The way we own an asset is directly linked to a creditor’s ability to reach it. To protect assets we must examine how we own them. Assets owned personally, jointly, corporately, in general partnership, etc. can be reached by a creditor. A successful lawsuit can put a lien on the property which would prevent the owner from selling or borrowing against the asset until the lawsuit is resolved, which could be years. While one cannot prevent a lawsuit from being filed, one can own assets in a legal entity that make the assets unattractive.

There are generally three layers of protection, either as stand alone or in combination: A Good Level of protection involves using limited liability companies or limited partnerships as vehicles to own assets. State law prohibits the claimants of a partner from attaching to the underlying assets of the entity. Some states are more business owner oriented and a preferred state can be chosen even if you do not live or work there. LLCs and LPs offer moderate protection and can be penetrated if a serious event occurs; a results oriented judge may try to work around the entities.

A Better Level of protection adds an asset protection trust, which is a special trust that is set up to benefit a family but is not reachable by any creditors of the family. Thus the protection goes on for all future generations. There are five states that offer asset protection trust laws, and because of variations in state law, two have become leaders. A domestic asset protection trust offers substantial protection but carries one caveat; the structure has not been thoroughly tested by case law.

The Best Level of protection available places that asset protection trust in a country outside of the United States. While many countries claim to have protection, there are only a handful that are well conceived, respected, and executed. Offshore asset protection trusts have held up under strong case testing. Offshore trusts are legal and fully reported to the US government.

Asset protection is most attractive after a claim has developed. Similar to insurance, you must act in advance. Protection is effective for those who currently have no litigation problems. Once a family is aware of, or should be aware of, a potential claim, most protection programs would be risk for being undone.

When undertaking protection planning, control is a key issue. None of the above steps require, or suggest, a family give up control over their assets. Control is typically concentrated in the hands of the senior generations.

The best plans will not work unless the assets are properly owned by the protection entities. In this case, only the titles to the assets change. The assets themselves stay in the same place and continue to be managed by the same owners or advisors; nothing has to be sold.

Asset protection steps also provide some tax relief as a significant added benefit of using protection strategies is that they can discount or eliminate death and estate taxes while coordinating with estate planning goals. As for income taxes, virtually all plans are neutral, meaning income taxes do not change.

For those who wish to learn more, the first step is to meet with an asset protection attorney in order to learn about your options. Understanding risk exposure and defining goals allows a family to better determine what steps they wish to take. The attorney should then coordinate with the family accountant, insurance agent and investment advisor to organize the overall program.

Juries today are not shy about handing out large awards that can eliminate a lifetime of accumulated net worth in one day. For some families, this occurs at a point when the funds cannot be re-earned or replaced. That being the case, it is in the interest of every family with significant assets to become informed about how they can protect those assets.

Adam Chodos, Esq., CPA, is an asset protection attorney based in Greenwich, Connecticut and serves as General Counsel to Wealth Preservation Group LLC, a planning organization specializing in wealth preservation, business succession, and executive benefits. Adam can be reached at 203-629-9074 or

Personal News and Notes

As I announced last month, The Black Book on Personal Finance is finally done. The suggested retail price for the e-book is $19.95. As a special accommodation to my readers, I have negotiated for each of you a 20% discount off the list price. To purchase the chapter, please click here to visit the publisher's website. When you are asked for a priority code, type in "WAM" (this must be in all caps). From there, just click the "buy now" button and follow the instructions. I am very pleased with the chapter and I'm confident that you will find reading it to be time and money well spent.

I am proud to offer a free copy of The Black Book to anyone who meets with me (either in person or over the phone) to review their investment needs. Just pick up the phone and call 800-746-6926. I'm looking forward to speaking with you.

I'm heading to Knoxville, TN tomorrow to witness the wedding of a beautiful and talented young woman who I met while on vacation almost 17 years ago. She was 9 years old at the time, frolicking in the pool with her family. Now she's preparing to be a doctor. It is amazing how time flies.

As always, I thank you for your interest and consideration, and invite you to write or call me if you have any questions, feedback on "Sector Rotation Investing" or if I can be of service to you in any way.

Best regards,

Greg Werlinich

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