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

April 22, 2008
Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
Monthly Tip
What I'm Thinking and Doing
Personal News and Notes

Current Market Analysis

The stock market looks much better today than when I last wrote to you. As I've been writing for the past couple of months, I believe the overall picture has brightened a bit. Indeed, the "second half rally" that I've been predicting may end up being a "second quarter rally" instead. It appears as though the market has discounted all of the bad news and in the face of the "worst economic picture since WWII", has climbed a wall of worry and resumed its long-term rise.

I wrote this last month but I think it bears repeating: "It's interesting how market sentiment works. The more bearish investors and pundits get, the more likely it is that things are already getting better. The best investors usually trade opposite the crowd because that's how the big money is made. When everyone is saying the same thing it's usually time to look the other way. So when investors are putting all of their money in cash and bonds, even when those instruments are yielding less than inflation, and the experts are predicting the end of the banking system as we know it, smart investors are putting their money back to work in equities." Add to all the negative sentiment is the startling high short-interest building right now. Eventually, those short-sellers will be forced to close losing short positions, adding strong buying power to a rising market.

Talk is cheap; let's see what the markets are telling us. On Friday, a very important thing happened: both the Dow Jones Industrial and Transportation Averages surpassed old support levels. According to Dow Theory, this suggests that even better times are ahead for the broad stock market. This would confirm what I've been feeling and writing about, although it is contrary to much of what is being written and spoken of in the popular press. The market is telling us that while the worst of the economic news may not have happened yet, it has in fact been anticipated and discounted. If this is the case, the next support level on the upside to surpass would be around 13,500 (a 5% increase from current levels).

The Transportation average has really been one of the bellwethers of the stock market so far this year, as you can see in the chart below. And this overall strength has been presented in contrast to the weakness of the airline and trucking segments that are part of the larger average. Last month I wrote that "should this index manage to move above support at 5,000, [it] would be very bullish." It has now done so, and it is very bullish. Also bullish is the fact that the index is now above both moving averages. It wouldn't surprise me to see a little correction and consolidation before it attempts to revisit the high set last summer.

The S&P 500 is also showing some strength as you can see below. The index has risen towards the upper boundary of its four-month trading range. I would deem it bullish if it were to surpass 1,400.

As the equity markets cratered, the bond market boomed, reducing yields on the 10-year Treasury to historic lows. Conversely, as stocks have rebounded, bonds sold off, which increased yields almost 60 basis points. And even though the recent rise in yield surpassed the trading range, it has not yet broken the almost perfect series of lower highs and lower lows. This suggests that the trend might not be over yet.

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. While the stock market was wildly volatile on a day-to-day basis, when looked at in its entirety, not much happened in the month of March. And that is an important lesson; investors need to sometimes tune out the daily noise of the market and take a longer view of action of the stocks they own. It was certainly a difficult quarter, with growth stocks, represented by the NASDAQ Composite, leading the way down. But no matter how you looked at it, the market was down broadly in the first quarter. I take some solace in the fact that the market performed "relatively" well in March in the face of all of the negative news and the weakening economy. Indeed, while I expect the second quarter to continue to be highly volatile, I'd like to see a general upward trend leading towards a better second half of the year. With the great results to-date in April, it's so far so good.

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

Statistics To Watch

  • According to the Department of Labor, the most recent four-week average for seasonally-adjusted initial jobless claims, for the week ended April 12, was 376,000, an increase of about 11,000 from the prior week. These numbers continue to increase slowly but surely.
  • Non-farm payroll employment fell by 80,000 in March. This was the third month in a row that payrolls dropped, as 76,000 jobs were lost in February. These statistics continue to be revised lower and the current numbers will likely end up being far worse than the current estimates. Average hourly wages grew a bit to $17.86 while the average workweek inched up to 33.8 hours.
  • The number of unemployed workers reversed last month's anomalous drop by rising to 7.8 million, the highest number since January 2005, leading to an unemployment rate of 5.1%. The number of unemployed people is estimated to have risen by 1.1 million since last year. My guess is that the true number is probably closer to 2 million. The seasonally adjusted number of people who could only find part-time work held steady at 4.9 million and the number of marginally attached workers fell to 1.4 million. The number of people holding multiple jobs inched lower to 7.5 million. My Comprehensive Labor Index™ rose to 10.23%.
  • According to the CBO, the government posted a budget deficit of $47 billion in March, which was $50 billion less than a year ago. This was partly a factor of timing, as certain outlays happened in February rather than March. The deficit for the first six months of the fiscal year is running about $51 billion more than a year ago.
  • According to the Census Bureau, the U.S. trade deficit in February was $63.3 billion, up from a revised higher $59 billion in January. I'm surprised that the weak dollar and the weak economy didn't help lower the trade deficit.
  • The Census Bureau reported that privately owned housing starts plunged 11.9% in March, after a small decrease in February, and was down 36.5% from a year ago, to a seasonally adjusted annual rate of 947 million units. New building permits were down 5.8% from last month and down 40.9% from last year, which suggests that the outlook for future housing starts remains bleak and continues to worsen. Housing starts and permits are below 1991 levels.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in February fell 1.8% from the prior month and 29.8% from the same period last year, to a projected 590 million units. That is the lowest figure in the four plus years I've been tracking new home sales. The estimate of homes for sale is now 471,000, which represents a whopping 9.8 months of supply at the current rate of sales. The median sales price rose to $244,100 and is up from revised higher figures.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in March fell 2.0% from the prior month, and were down 19.3% from the same period last year, to a projected 4.93 million units. The estimate of homes for sale, at 4.05 million, represents 9.9 months of supply at the current rate of sales. The median sales price rose to $200,700, which remains below the falling 12-month average of $212,817, and was down 7.7% from a year ago.
  • According to RealtyTrac, foreclosures increased 4.9% in March to 234,685 after a surprising decrease in February. Foreclosures are still 57% higher than a year ago. Nevada, California and Florida, respectively, reported the highest foreclosure rates in the country.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 48.6 in March, marking the third out of the past four months in which the manufacturing sector failed to grow. The ISM index of non-manufacturing activity increased to 49.6. So both the service and manufacturing sectors are still contracting.
  • The Conference Board reported in March that it's index of Leading Economic Indicators rose 0.1%, breaking a string of five consecutive months that the index had declined. The leading index fell 1.6% for the past six months, or 3.2% annualized. Big surprise, the economy remains weak.
  • According to the Bureau of Economic Analysis, the "final" estimate of GDP growth in the fourth quarter was 0.6%, in line with the "preliminary estimate". This allows the pundits to claim that the US was not in recession in the fourth quarter. I don't buy this at all because I don't think the way they calculate GDP growth is realistic. That being said, I expect the first quarter figure to be lower.
  • The Federal Reserve reported that the amount of outstanding consumer credit increased by 0.2% from the prior month in February, to $2,539.8 billion. The rate of growth is slowing as the consumer may finally be closed to being tapped out.
  • According to the Census Bureau, retail trade and food service sales rose 0.2% in March after declines in both January and February, and remained a meager 2.0% better than a year ago. Retail sales are holding up, but just barely.
  • The Fed increased M-2 by a large 1.0% in March, one of the largest single month increases I can remember. The supply of M-2 has increased by a massive 12.6% in the last three months and 7.0% in the last twelve months. According to John Williams on his website "Shadow Government Statistics" (, the increase in M-3 now approaches 17% as the Fed tries to inflate us out of this recession.
  • The Conference Board Consumer Confidence Index, which had declined sharply in February, fell further in March. The Index now stands at 64.5 (1985=100), down from 76.4 in February. According to the American Bankruptcy Institute, lenders continue to be swamped by delinquent mortgages. Food, gasoline and commodity prices are rising out of control. In other words, the economy is in terrible shape. Indeed, things could be just about as bad as they're going to get. I look for things to start improving in the next few months.

Trends To Watch

While the situation has improved somewhat, at least as far as the action in their stocks is concerned, I don't think the financial sector out of the woods yet. The writedowns, already in the hundreds of billions, are likely to continue for another quarter or two. It's really hard to make a strong case for buying the bank stocks just yet. I think that while a bottom MAY have been made in March, I think they'll likely fall again as the writedowns and losses continue.

While the picture for the housing sector looks a little better, I'm still not convinced that the worst is over. I have long been bearish on housing as there have been many false "bottoms" that have sucked investors back in, only to leave them with big losses as the sector continued its downward spiral. We've now had the rally I called for two months ago. For this rally to have some legs, I'd like to see the index cross north of 155 and move higher. My feeling is that the next move is likely to be lower as the housing market continues to get worse.

At least for now, the selloff in oil is over! The price of West Texas Crude has surged to almost $120 per barrel! Last month I wrote that I didn't believe that we'd seen the high price for oil this year. I just didn't expect it to move so high so quickly. Oil prices are now oversold and should therefore correct and consolidate a bit. As long as prices stay north of $95 per barrel, the upward trend will continue.

As I've suggested, the price of gold is now consolidating after hitting an all-time high in March. I've traced a trading range between $1,050 and $850. I expect the price to remain there for a while before continuing its inevitable upward march.

Dr. Copper tells me that the economic outlook is not nearly as dire as the Talking Heads would have us believe. If this was indeed the worst economy since the Great Depression, how could copper, and almost all commodity prices, remain so stubbornly high? The answer is that they wouldn't. One concern would be that it looks like the chart is forming a double-top formation. That could auger negative things ahead. This will bear watching. Otherwise, things look pretty good.

I believe that the recent bump in the dollar is a false rally and will likely peter out before any real gains are made. In fact, it looks as though the rally has already ended. Given the extremely lax monetary policy, it's hard to imagine a scenario in which the dollar has any lasting strength. I still believe the long-term trend for the dollar is lower.

Below is a chart I've never shown before. This chart shows the percentage of stocks trading on the New York Stock Exchange that are in bullish trends. You can clearly see the big increase over the past few months. This is a good sign.

When I wrote in February, the Shanghai Index, which I use as a proxy for China, had dropped about 30% from the October peak. By last month, the decline had increased to 42%. Now the index has plunged a total of 49%! The next support level is about 2,500. So much for making easy money in China.

The yield curve continues to steepen as the spread between the 2-year and 30-year notes widens. This suggests a stronger economic outlook. It will be very interesting to see what the Fed does at their meeting next week. They could do nothing or cut rates as much as 50 basis points. My feeling is that the Fed should do nothing, but may cut a maximum of 25 basis points. If they do nothing the dollar will rally a bit. If they cut, it will sink further. Either way, it won't have much of an impact on the economy.

Monthly Tip - Mortgage 101: New Fundamentals for Borrowers?

This month I have asked Sol Skolnick, an experienced mortgage consultant, to share with us some of the changes that have occurred in the mortgage industry resulting from the credit crisis and mortgage debacle. I hope you'll find his article to be interesting and informative.

The real estate and mortgage landscape has been altered by the weakness in the domestic and world credit markets revealed by the deterioration of sub-prime lending. In the past two years over two-hundred and fifty lenders have either become insolvent or withdrawn from the residential mortgage business. The resulting changes in regulations, expectations and lending criteria require that even the savviest home-owners or real estate investors acquaint themselves with the “new” fundamentals of obtaining residential financing.

Pay Attention to Details

  • Lenders have revised their qualifying guidelines and generally require verifiable income and assets for salaried workers but may accept realistically stated income, with verifiable assets, from those who are self-employed for at least two years.
  • Underwriters are anticipating that property values will continue to decline and are decreasing loan-to-value (LTV) ratios to protect themselves from potentially over-lending against the value of a property. For example: a lender who may have allowed you to have a first mortgage of 80% LTV of your home’s appraised value and a 10% equity line for loans that equaled 90% combined loan-to-value (CLTV) is likely to have reduced the maximum CLTV to only 80 or 85%. Here are some of the implications of declining values:
  • Purchasers are more likely to need a minimum of 20% for a down payment in order to obtain funding.
  • If you are refinancing, you need to ascertain the appraised value of your property to make sure that the total that you want to borrow falls within the reduced loan-to-value requirements.
  • If you have a Home Equity Line of Credit (HELOC) sitting behind your primary mortgage you need to check the terms of your loan for a clause that reads something like this: “XYZ bank can refuse to make additional extensions of credit or reduce your credit limit if any of the following occur: the value of the property securing the line declines significantly below its appraised value for purposes of the line.” You may have excellent credit and made your payments with precision and still find yourself in a situation where your HELOC limit has been reduced due to declining values.
  • There may be opportunities for serious investors to purchase multi-family dwellings. These types of non-owner occupied residential properties were the favorite flavor of speculative investors. Many of these speculators bought on the high side of the market and were under-funded. Consequently, the values of these types of properties have fallen more quickly than their owner occupied single-family counterparts and may soon represent a value purchase.
  • Dumbo was an elephant with ears so big that they allowed him to fly, but Jumbo was a mortgage amount that was so big that it could no longer get off the ground. Mortgage backed securities, a favored instrument for funding loan amounts over $417,000, had become suspect, pushing the interest rates for non-conforming, or Jumbo loans, to nearly 8%. Conforming loans are those that are funded through Fannie Mae or Freddie Mac and implicitly backed by the Federal Government. Congress, in response to the escalation in rates, authorized a temporary increase of the conforming mortgage limits, (through 12/31/2008) based on the median value of single-family homes, to a maximum of $729,750. This has essentially created three-tiers for interest rates and house value ratios: Conforming for loan amounts up to $417,000 which carries the lowest interest rates and highest LTVs; Temporary Conforming also known as “Agency Jumbo” for loans from $417,001 to $729,750 with rates that are higher than conforming but lower than Jumbos before the new law was enacted; and true Jumbo for amounts that are higher than the temporary Agency limits.

Sol's Mortgage Tip

“Opt-out” before you sign in. Why is it that when you apply for a mortgage your home phone (and now your cell phone too) starts ringing? Once you make your first inquiry and provide a source with information and permission to pull your credit report you become the subject of calls like this one. “Good evening, this is Si Locke of the Venice Merchant Mortgage Company. I am just following up on your inquiry regarding a mortgage.” You know that you have made an inquiry but you don’t remember having called the Venice Merchant Mortgage Co. and you certainly don’t want to know Si Locke. So how did he find you?

Your initial inquiry set off a “trigger” that legally puts your name on a list that credit reporting agencies can sell to lenders and brokers. Under the Fair Credit Reporting Act (FCRA), Consumer Credit Reporting Companies are permitted to include your name on lists to make what is known as a “Firm Offer”. This type of “trigger” is not affected by your being on a “do not call list” so even if you have placed your name on one of those lists you can receive these calls. To avoid having your name and information sold you must either go to or call this toll free number: 888-567-8688. You can “Opt-out” of this trigger process for five years or more. “Opt-out” as soon as you are considering looking for financing so that there is ample time for your name to be added to the restricted list and eliminate these unwanted calls.

Sol Skolnick is a Mortgage Consultant and broker with at Asset Center ( He writes a mortgage column for The Hudson Independent, and has been published by Random House, Walker Books and Hyperion. If you have any questions, he can be reached by phone at 914-273-6666 or by email at

What I'm Thinking and Doing

I believe that the stock market made a bottom in the first quarter and that barring a plunge below the support levels shown on the charts for the Dow Industrials and Transports, I expect the bull market to continue. That being said, I would still avoid the banks, housing, airlines, drugs, most of technology and many other segments of the market. I still prefer the core sectors that have been working for me for most of this decade.

I continue to believe that the domestic economy is in recession, and has been for about six months. This recession is likely to continue into the third quarter. Sectors like housing will likely remain weak far longer. Yet I believe the stock market has discounted all of that and is looking forward to the recovery. Investors who can ignore the daily noise of the market and the pundits are able to earn profits from their foresight and patience.

While I haven't been buying as aggressively as I was last month, I have continued to buy certain stocks (and some ETFs and mutual funds), in favorable sectors, at attractive prices. I believe that in the months ahead, we'll look back on the month or so following "Bear Stearns Monday" as having been a tremendous buying opportunity. Among the keys for me are to have an intelligent plan and the courage and patience to follow through on it. You have to be willing to be wrong for a while in order to be right for the long haul. While I don't know what prices will be in the next few months, I'm very confident that everything I'm buying now will be worth significantly more after a few years.

Personal News and Notes

I wish I could tell you how wonderful April has been so far but I'd be lying. Both Shaena and I have been sick and the kids have struggled with colds. Yet we're all on the mend and looking forward to better days ahead. And speaking of Shaena, her birthday was two days ago and the celebration continues. Happy Birthday Sweetheart!

It is Spring Break time and families (and college students) across the country are enjoying some vacation time. The same holds true in the Werlinich household. My kids are on break this week. On Thursday we're heading out of town for a quick vacation. After the crazy market of the last few months, plus the time out sick, I'm very much looking forward to a few days of R&R to help recharge the batteries as we head towards summer.

That's it for this month. Remember, this newsletter is for you, my readers. If you have any thoughts or suggestions on how to make it even better, please let me know. If you have some ideas for future "Monthly Tips", or even better, if you'd like to be write a Tip, let me know that too. 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. As always, I thank you very much for your continued interest and support and I look forward to writing to you again next month.

Best regards,

Greg Werlinich

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