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

April 25, 2006 Comments   |   Refer A Friend   |   Sign Me Up   

The Black Book on Personal Finance, which I co-authored with a chapter entitled "Sector Rotation Investing", can be purchased at or Barnes & The book is also available at selected bookstores around the country. Please consider buying a copy. I'm sure you will learn something. Thank you.

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

Current Market Analysis

As you can see in the chart below, the Dow Jones Industrial Average has been in an extended uptrend since the October '05 low of 10,156. to its current level of around 11,400, which is a six-year high. More importantly, the Dow is advancing towards its all-time high of 11,750 set in January 2000. While the market appears a little overbought on a technical basis, as long as it remains above both the the 50- and 200-day moving averages, the positive momentum should continue. Recent comments by the Federal Reserve hinting that they may be nearing the end of their schedule of rate hikes certainly contributed to the strong rally last week. There is also a strong feeling by market watchers that the US continues to be in a "Goldilocks Economy" - not too hot, not too cold; just right. As long as those feelings continue, the overall market should continue to chug along, regardless of the storm clouds on the horizon.

While the Industrials move up, but remain unable to pierce the old heights, the Transports continue to power to even higher all-time highs. This suggests that the economy continues to grow and that business would seem to be in good shape. And like the Industrials, as long as the Transports remain above its moving averages, this upward trend should continue.

Contrary to the positive outlook suggested by the charts above, the one below, of the yield on the 10-year Treasury, paints a gloomier picture. The yield on the 10-year Treasury has moved increasingly higher and has pierced 5% for the first time in almost four years. As I'll talk about later, this has not been good for the housing market. And what isn't good for housing, isn't ultimately good for the economy. The spread between the 10-year Treasury and the TIPS has remained steady between 2.50% and 2.60%, which suggests that the bond market is not concerned about inflation. As I said last month, while there are certainly pockets of strong inflation (energy, health care, education and entertainment to name a few), I continue to believe that the inflation is being caused by the loose monetary policy of the Fed as it prints enough money to continue the profligate spending of our government. Without the additional hundreds of billions in new dollars being printed every year, neither the government, nor its citizenry, would likely be able to repay its mammoth, and growing, indebtedness. So I expect the inflationary forced to continue.

Last Month's Results

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. March was a strong month across the board with positive results from every equity index. Growth has taken a leadership position this year while value has lagged a bit. We'll see if that trend holds up for the whole year. In general, it was a good first quarter for the market.

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

What I'm Doing Now

March was a busy month for me, and April has proven to be even busier as I've taken on four new clients. I've opened up two new positions, a small-cap precious metals company and a diversified international mining company. I have also added to a few existing positions. As I've said earlier, I'm continuing to expand my ETF holdings as a way to further develop my core sector holdings in a way that complements my individual equity positions. I continue to be excited by some of the new offerings. I'm always on the lookout for interesting new products.

Statistics To Watch

  • The most recent four-week average for initial jobless claims remains around 300,000.
  • There was an increase of only 211,000 non-farm jobs in March, after a stronger February. Average hourly wages edged up to $16.49 from $16.47. The average workweek rose slightly to 33.8 hours. The number of people holding multiple jobs fell slightly to 7.59 million from 7.67 million.
  • The number of unemployed workers dropped back to 7.0 million in March. The seasonally adjusted number of people, who for economic or business reasons could only find part-time work, moved down to 4.0 million. The number of marginally attached workers remained at 1.5 million. My adjusted Comprehensive Labor Index™ fell to 8.7% while the official unemployment rate reported by the government inched lower to 4.7%.
  • The University of Michigan Consumer Confidence Index in March rose to 88.9.
  • According to the CBO, the government ran an estimated deficit of $87 billion in March, which brought the deficit for the six-month period to $305 billion, or $10 billion more than for the same period in fiscal 2005.
  • According to the Census Bureau, the U.S. trade deficit fell slightly in February to $65.7 billion from the record high of $68.5 billion set in January.
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for all urban consumers advanced 0.4% in March, as rising energy prices boosted costs across the board. The "core" CPI, which excludes food and energy, was up 0.3% with apparel and housing costs accounting for 70% of that figure.
  • The Federal Reserve reported that total outstanding consumer credit remained steady in February at $2.16 billion, which continues to be at all-time high levels.
  • The American Association of Individual Investors' (AAII) bullish sentiment fell to 34% for the week ended April 21. I won't be reporting this figure any longer as I don't feel as though it is an important indicator.
  • According to the Census Bureau, retail trade and food service sales rose 0.6% in March after a disappointing January. Building material and garden equipment, as well as non-store retailers, were the biggest gainers in the month.
  • The Census Bureau reported that privately owned housing starts fell 7.8% in March (after a similar drop in February) to a seasonally adjusted annual rate of 1.96 million.
  • The Census Bureau report on new home sales has not been released yet, so I'm unable to report on the March numbers. I expect that the current trend of declining sales and increased unsold inventory will continue.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes rose a meager 0.3% in March, after a 5.0% gain in February, to a projected 6.92 million units. Of greater concern is that the estimate of homes for sale, at 3.2 million, represents 5.5 months of supply at the current rate of sales and is the highest level recorded in years. And after peaking at $229,000 in October, the average price of homes sold has fallen to $218,000.
  • The Institute for Supply Management (ISM) index of manufacturing activity measured 55.2 in March, down a little from February. This marks the 34rd month in which economic activity in the manufacturing sector is reported to have grown. Anything above 50.0 is considered to be an indication of growth.
  • According to the Bureau of Economic Analysis, real GDP increased at an annual rate of 1.7% in the fourth quarter of 2005. This is a upward revision from the 1.6% "preliminary estimate" and the 1.1% "advance estimate" produced earlier this year.
  • Also according to the BEA, personal savings was ($43.8) billion in February, as compared with ($51.0) billion in January. Personal saving as a percentage of disposable personal income was (0.2%) in February, compared with (1.6%) in January. This makes three straight months of negative personal savings.
  • The Fed increased M-2 by $16.5 billion, or 0.2%, in March, after a 0.3% increase in February. The supply of M-2 has increased by 6.1% in the last three months and 4.7% in the last twelve months.
  • Foreigners now hold $1.605 trillion in US debt, another new record.

Once again, I find that taken as a whole, these numbers, especially employment and manufacturing, appear to be pretty good, and the stock market clearly agrees. Many observers think that we are indeed headed for the "soft landing" that the Fed has been working so hard to create. I just can't seem to shake the specter of a weakening housing market, increased energy costs and interest rates, rising national and personal indebtedness, and unrest in too many areas around the world. I still believe we have a greater risk to the downside in this market than potential to the upside. So I remain cautiously pessimistic, yet always on the lookout for good opportunities.

Trends To Watch

One of the most important trends in the market right now continues to be the movement on the Dow Jones Industrials as it sets multi-year highs and flirts with its historical high. With the Industrial's around 11,335 (down a bit from when I started writing this letter) and the Transports above 4,700, a generally bullish trend exists. Until there is a reversal, and the Industrial's fall below its moving averages, this upward trend could continue. Beware though, this is earnings season, and while they have been reasonably good so far, some unexpectedly bad news could quickly send the average down.

The price of West Texas Crude remains a very important trend in the market. After trading between $60 and $65 per barrel for a few months, prices have skyrocketed to new highs. I have been consistently bullish on oil prices for over four years, far longer than most of the "experts" out there. And I have not wavered in my belief the prices are likely to remain in this general uptrend for quite a while. That being said, nothing goes straight up, so it wouldn't surprise me at all to see a period of retreat and consolidation. Prices are clearly overbought right now and could retreat to about $63 per barrel without violating the general trend.

Last month I wrote that "I anticipate that this [trend] will continue and that gold will break though to $600 in the next ascent." It didn't take long for that prediction to come true as the price of gold broke out of its consolidation and surged upwards to new highs of almost $650 per ounce. As with oil, I have been steadfast in my bullishness on gold for the past four years and see no reason to change my opinion. And like oil, the price of gold will certainly drop and consolidate. I think the price could fall as low as about $575 without violating the uptrend. In fact, if the price fell below $600, I would use that opportunity to open new positions, or add to existing ones.

The action on the dollar doesn't look as good. The price has fallen below both the 50- and 200-day moving averages and has formed a classic "head and shoulders" formation. If the price falls below 85, that would be a strong negative. It is especially worrisome that the dollar is falling in the face of rising interest rates. Keep on eye on this.

Finally, let's look at the yield curve below (the green line is the current one). Right now, the Fed Funds lending rate is 4.75%. 6-month t-bills yield 4.94%,  2-year Treasuries yield 4.93%, 10-year Treasuries yield 5.05% and the 30-year Treasury yields 5.13%. While the curve between 6-months and 5-years is flat, the longer end now displays a normal, upward trending curve. After holding out longer than most observers would have expected, the longer-term rates finally moved up, ending the inverted yield curve. This is bullish for the economy. Assuming the Fed lifts their lending rate at the next meeting to 5%, we can expect overall rates to rise a bit more, which could mean further trouble for housing.

Monthly Tip - Liability Insurance

This month we continue our insurance theme from last month as we move from life to liability insurance. I've asked Robbie Davis, a local insurance expert, to write an essay in which he reviews the important question of how much liability insurance is right for you. I hope this is helpful.

How Much Liability Insurance Is Enough?

Independent insurance brokers are often asked an important question by clients and prospects: how much liability insurance do I need to protect my assets or protect the assets of my business? Unfortunately, there is no simple formula that determines the perfect answer. Let’s look at some ways in which we can best determine clients’ needs.

The key in assessing the amount of liability protection needed is to examine the exposure and find out what assets are at risk. To protect the value of your assets, or the future earnings potential of those assets, you should consider a limit of liability umbrella policy. Transferring the risk to an insurance company is far less expensive than self-insuring and paying your own legal fees (defense costs).

As part of our due diligence, a good insurance broker will gather a lot of information on the potential insured. For example, we consider how many residences are owned or rented by the client. Are they private homes, co-operatives, condominiums, or rentals? Where are the residences located? What is the size of each residence? Is there a swimming pool or trampoline on the premises? Are there any pets? Are any of the properties used for rental income (business purposes)? Don’t forget to include the total value of all owned properties when calculating the value of the client’s assets. In some states, a consumer’s home(s) can be awarded as part of a court judgment.

Vehicles owned or leased sometimes create the largest exposure for a consumer. Families with newly licensed drivers should, without question, have higher limits of liability in place. Bodily injury and property damage claims caused by vehicular use prompt insurance companies to increase reserves (against possible future claim payments). This, in turn, often leads to an increase in premiums.

Watercrafts owned or leased create yet another exposure for the consumer, especially if the boat is twenty-six feet or longer.

Children pose another potential liability. A fraternity party at a college could get out of hand, and inebriated college students may get into a fight. Liability protection is provided under the parents’ personal liability policy and depending upon actions brought by injured parties, the umbrella policy limits may come into play.

Providing protection for a business is a little more complex, but the process is similar. Analyzing the exposures can differ from business to business, but the bottom line is to arrive at a limit of protection which will protect the assets of the business.

Is the premises owned or rented, and how many square feet are being occupied? What is the operation of the business? Does it manufacture, wholesale, sell to the public, own real estate, provide services to the public, or is it a not-for-profit operation? Each of these would create different liabilities.

Most businesses have employees or independent contractors working for them. In addition to workers compensation and state mandated disability benefits, businesses today are subject to wrongful termination and sexual harassment suits. Employment practices liability has become very important to provide protection against these types of lawsuits. Defense costs from an action of this sort could cost an employer $10,000.

Products manufactured then sold to retailers or to the public should be insured in the event that bodily injury or property damage is caused to a consumer. Personal injury (libel and slander) is an exposure against which most businesses should be protected. Property damage (building or contents) is another obvious exposure that must be insured. A less obvious situation, but one that still requires protection, occurs when a guest injures themselves on the premises of a business.

Vehicles that are owned or leased by a business create another exposure that the business has to protect. A serious bodily injury or property damage claim could wipe out all the assets of the business.

So how much protection should a consumer or a business buy? No one wants to become “insurance poor”, but it is extremely important to carry enough liability insurance to insulate the policyholder’s assets. Having peace of mind knowing that you have protected your personal and/or business assets with the proper amount of insurance is as important as having a will. Take a look at your entire insurance program. It’s possible that some premium dollars can be reallocated to the purchase of proper liability protection. Believe me, it is far less expensive to pay a premium each year than it is to defend yourself in court and possibly pay a judgment. Call your advisor today and ask for a comprehensive review. A one-hour meeting today may save you or your company thousands (or millions) of dollars tomorrow.

Robbie Davis is President of AKD Insurance in Purchase, NY. The firm is focused on meeting the particular insurance needs of each individual. To contact Robbie, please call (914) 701-5200 x201 or e-mail him at if you have any further questions.

Personal News and Notes

I'm proud to announce that WAM was ranked by Nelson Information as one of the top-performing money managers in the country for the third and fourth quarters of 2005. To view the results of their survey of more than 1,500 participating firms, simply click here to request a free registration.

I have a book signing event coming up at the Culinary Institute of America on June 20th as part of the Annual Conference of the National Association of College Auxiliary Services - East. If you would like more information, please let me know.

I recently was interviewed for a podcast in which I discussed sector rotation investing. If you would like to listen to this interview, please click here.

I have participated in three podcasts with Bobby Ilich, for his program "Ahead of the Curve", on You can listen to these conversations on current market events and specific stock picks, by clicking on

As always, I thank you for your interest and consideration, and invite you to contact me if you have any questions or if I can be of service to you in any way.

Best regards,

Greg Werlinich

Copyright© 2006, Werlinich Asset Management, LLC and All Rights Reserved.