|Current Market Analysis|
Last Month's Results
Statistics to Watch
What I'm Thinking and Doing
Personal News and Notes
Current Market Analysis
The first four months of the year are almost over,
and it has been a wild ride for the stock market. First, the Dow
Jones Industrial Average hit an intermediate high of 10,725 on
January 21. Interestingly, that was the exact midpoint of the
move from the low of 7,286 after the tech crash to the high of
14,164 set in October 2007. From there the market plunged over 800
points during fourteen trading days, falling to a low of 9,908 on
February 8. Since then, the market has gone almost straight up,
surpassing the old high of 10,725 as it blew right past the
psychological barrier of 11,000. Just yesterday we had another Dow
Theory bullish signal as the Industrial and Transportation Averages
made new highs at the same time. Couple that with the fact that the
market is now trading well above the 50% level of 10,725 and it
would seem that, at least for now, it remains "all clear ahead."
The economic statistics that I talk about below
continue to improve. Even the housing and financial sectors have
broken out of long trading patterns and moved higher. The one key
domestic laggard is the labor market. If our economy can begin to
generate a meaningful amount of new jobs (more than 150,000 per
month), then the overall picture would brighten considerably. Now,
my greatest worry is our debt, and the debt of other troubled
nations (see: Greece, Spain and Portugal). Should sovereign debt
across the globe be called into question it could have a
catastrophic effect on currencies and interest rates. Which is
another good reason to own gold.
So what do the charts tell us now? The Industrial
average is right on track and making new highs almost daily. Last
month I suggested that the market was due for a bit of a correction
and some profit-taking. That hasn't really happened yet. And volume
still isn't as strong as I'd like, but as I've been saying on
Twitter for weeks, I would not short this market.
The Transportation average has traced a bumpier
path than the Industrials, but it too has achieved new highs. And it
too is likely due for a breather. But as long as it remains above
its rising trendline, it remains bullish.
Since last May, the yield on the 10-year treasury
has traded between 3% and 4%. In November I wrote that "I still
expect yields to remain in the 3% - 4% range for the remainder of
 before heading inevitably higher sometime beginning in 2010."
Since December, rates have been trading at the higher end of the
range, suggesting that rates could break above 4% in the near
future. So far, each attempt to move above 4% has failed. For our
economy, let's hope that this continues.
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. The equity markets
enjoyed broad and very strong growth in March, continuing the
gains enjoyed in February. As is often the case, the gains were led
by technology and growth stocks. The MSCI EAFE index continues to
pull up the rear so far this year with a nominal gain so
far. There are two more months until we are advised to
"sell in May and go away". We'll see what happens
Dow Jones Industrial
Russell 1000 Growth
Russell 1000 Value
Russell 2000 Growth
Russell 2000 Value
Europe, Australia, Far
Lehman High Yield
- According to the Department of Labor, the most recent figure
for seasonally-adjusted initial jobless claims for the week ended
April 17 was 456,000, an decrease of 24,000 from the prior week.
The four-week average was 460,250. There was an even bigger drop
in the non-seasonally adjusted number of initial jobless
claims. We're still waiting for these numbers to drop in a
- Non-farm payroll employment rose by 162,000 jobs in March, due
in large part to the government hiring people for the census.
January and February job losses were both reduced after revisions.
Average hourly wages for blue collar workers fell a bit to $18.90,
while the average work week increased slightly to 33.3 hours.
There is certainly no inflationary pressure in wages right now.
- In March, the total number of workers counted as unemployed
rose to 15.0 million, while the unemployment rate remained
unchanged at 9.7%. The more comprehensive U-6 rate was 16.9%, up
from 16.8%. There were 6.5 million people who have been unemployed
longer than 27 weeks. This number keeps increasing. The
seasonally adjusted number of people who could only find part-time
work jumped to 9.1 million and the number of marginally attached
workers slipped to 2.3 million. The number of people holding
multiple jobs dropped slightly to 7.06 million. Overall, the
employment picture remains poor.
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $62 billion in March, leaving us with a deficit of $714
billion for the first six months of fiscal 2010, which is $67
billion less than the record shortfall from 2009. The March
deficit was $129 billion less than last year, mostly due to the
accounting for the TARP payments.
- The Census Bureau reported that the U.S. had a trade deficit
of $39.7 billion in February, up from $37.0 billion in January.
The trade gap with China dropped to 41.5%. Smoothing these
figures out over a few months shows very little real change in the
trade deficit. And this modest deficit really doesn't worry me too
- The Census Bureau reported that privately owned housing
starts increased 1.6% in March after gaining 1.1% in February,
and was 20% higher than a year ago, to a seasonally adjusted
annual rate of 626,000 units. New building permits were up
7.5% from last month and were up 34% from last year. If this is
not simply a one month aberration due to the expiration of tax
credits this could be the start of a very positive trend.
- The National Association of Homebuilders/Wells Fargo
Confidence Index increased to 19 from 15 in April, matching
the 19-month high set last September. Again, we'll see if
this is simply a one month aberration or the start of a real
recovery in new construction.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in March exploded
by 26.9% from the prior month, and were almost 24% higher
than the same period last year, to 411,000 units. The estimate of
homes for sale is 228,000, which represents "only"
6.7 months at the current rate of sales. The median sales
price fell to $214,000, which is slightly below the
12-month moving average price of $217,667. The sales totals for
the prior three months were all revised slightly higher. Again,
beginning of the recovery or a government fueled aberration?
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes in March rose 6.8% from February, and
were 16.1% higher than a year ago, to a projected 5.35
million units. The estimate of homes for sale, at 3.58
million, represents a shrinking 8.0 months of supply at the
current rate of sales. The median sales price rose to $170,700,
which is slightly lower than the 12-month average of
$172,583. Distressed home represent about 35% of all sales.
- The S&P/Case-Shiller Home Price Index, which uses a
three-month moving average to track the value of home prices
across the US, decreased fractionally in January for the fourth
month in a row, to 157.89, following five consecutive months of
increases. Given the number of distressed sales nationally, this
shouldn't be a surprise. But the "rate of change" is improving.
- According to RealtyTrac, the number of foreclosures in March
surged 19% from February, and were 8% higher than a year ago.
This is the highest monthly total since they began tracking
foreclosures in January 2005. The only good news is that it seems
the pipeline of foreclosures is being worked through, so maybe
things could improve later in the year.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 59.6 in March. This marked the eighth
month in a row in which the manufacturing sector expanded, and the
growth is accelerating. The ISM index of non-manufacturing
activity was 55.4, marking the sixth time in the last seven months
that the service index indicated moderate growth.
- The Federal Reserve reported that capacity utilization in the
industrial sector increased for the ninth straight month, to 73.2%
in March. Capacity utilization now remains only 7.4% below the
average level of the period from 1972 through 2008, but 3.7%
higher than a year ago. Like the ISM numbers, this is another good
indication that the economy is getting stronger, at least in the
- The Conference Board reported that it's index of Leading
Economic Indicators rose by 1.4% in March, following a 0.4%
increase in February and a 0.6% increase in
January. "The indicators point to a slow recovery that should
continue over the next few months. The leading, coincident and
lagging series are rising. Strength of demand remains the big
question going forward. Improvement in employment and income will
be the key factors in whether consumers push the recovery on a
- According to the Bureau of Economic Analysis, the "third"
estimate of GDP growth in the fourth quarter was a very strong
5.7%, slightly lower than the second estimate of 5.9%, but much
higher than the 2.2% growth recorded in the third quarter. More
than 50% of the growth was due to businesses replenishing their
depleted inventories. While this is a short term boon, it is
not sustainable. We'll see what happens in Q2.
- The Federal Reserve reported that in February the amount of
outstanding consumer credit decreased by an annualized rate
of 5.5% from the prior month, to $2,448 billion. The amount of
consumer credit has declined steadily for the past year and a half
and is now around it's lowest level since July 2007. The
amount of revolving credit is falling particularly quickly.
- According to the Census Bureau, retail trade and food service
sales increased 1.4% in March, and the February numbers were
revised up to 0.5%. Maybe consumers will start to spend a bit
more. The employment numbers will lead the way.
- The Federal Reserve reported in that in March the supply of
M-2 decreased slightly from the prior month but was up 1.4%
during the prior six months. The supply of M-1, on the other hand,
rose a more robust 6.2% over the same six months. It seems like
the Fed may finally be tapping the monetary brakes in advance
of the inevitable rate increases later this year or early next
year, now that the economic expansion is building.
- The Conference Board Consumer Confidence Index rose again
in April to 57.9 from 52.3 in March. Consumers
remain concerned about the job market and their near term
financial situation but their outlook clearly is improving.
- According to the BEA, disposable personal income fell again in
February, which caused the personal savings rate to fall
from 3.4% to 3.1%.
- According to the FDIC, 57 banks have failed so far this year,
through April 23. 140 banks failed in 2009 and were either closed
or merged into healthier banks. By comparison, 26 failed in 2008
and only 3 failed in 2007.
Trends To Watch
For the past few months I've written that I
expected the dollar to rally due to being "relatively" better than
other currencies, like the Euro. Thanks to struggling countries like
Greece and Portugal, this is exactly what's come to pass as the
dollar index has surged above both the 50-day and 200-day moving
averages. In addition, the 50-day average has moved above the
200-day average, which is bullish for the dollar. The next
resistance level, as you can see below, looks to be between 82-83.
We'll see if the dollar can continue to rally and crest that level.
While I remain convinced that ultimately, the dollar will roll over
and head inevitably lower, I would not be short the dollar right
I've been saying for the better part of eight years
(and investing accordingly), that the price of gold would go
inevitably higher, but that this upward move would not happen in a
straight line. I've said many times that there will be corrections
and profit-taking, but that investors should not get scared out of
their positions. Indeed, those corrections could be used to add to
your holdings. The latest correction was about 15% over two months,
and part of that is clearly due to the strength in the dollar. Yet
now gold is rising along with the dollar, which demonstrates the
interest in gold. I would look for gold prices to eventually rise
above $1,200 again and head towards the high of $1,226
I believe that silver continues to be in a stealth
bull market, and is very undervalued right now relative to gold.
I expect the price of silver to eventually move out of its
trading range and trade above $20 per ounce.
The price of West Texas Crude is heading for a
major breakout, one way or another. The trading range pictured below
cannot last much longer. It will have to break out one direction of
the other. My money is betting that it breaks out higher.
The chart of the price of copper shows a tremendous
rise, followed by a big break, followed by a strong recovery. I've
shown, with the red lines, a pretty clear looking inverted head and
shoulders pattern. Since last month it appeared that the bullish
trend would continue. But it isn't yet clear. The picture will
likely become more clear in the next few weeks.
After being in a holding pattern for almost a year,
the financial sector, as represented by the XLF, finally broke out
above the trading range. This is very bullish, and to be honest,
very surprising to me. I've had a negative outlook on the
financial sector for years. The accommodate monetary policies of the
Federal Reserve have finally allowed the domestic banking sector to
get healthier, in spite of themselves. As I've been saying, the
past year has been the best possible scenario for banks: they pay
nothing on deposits yet lend at 5%, thereby making tons of money on
the spread. It's almost impossible not to make money under these
The housing market too has finally broken above a
year-long trading range. After reading all of the positive
statistics that I listed above, this should come as no surprise. It
seems a bottom has finally been made in residential housing and
things may be improving. So I suppose I've been proven wrong here
Developed foreign markets, as represented by the
MSCI EAFE index, remain range bound. The index has managed to rise
above the moving averages, which is bullish. So we just
continue to watch and wait for something to happen. The
sovereign debt problems in Europe could drag this index lower.
The Chinese market has traded sideways since last
July. It is now sitting almost exactly in the middle of the range,
and slightly below both moving averages. Fascinating. To me,
this is a very dangerous point and it could go either way. I
wouldn't want to try to call this trade. Should the Chinese market
roll over and head lower, it could have very negative implications
for the global economy.
Not surprisingly, the Baltic Dry Index has
been trading in a range right along with China, the country with the
largest influence on the index. The question is does China lead the
BDI or does the BDI lead China. I think it's probably the former. As
China goes, so goes global commerce.
After showing nothing but optimistic charts, I'm
going to close with two that are more worrisome to me. 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. This chart shows an almost extreme amount
of bullishness, which suggests trouble ahead. RSI is almost off the
charts and bullish sentiment is near a high. This portends a
pullback is coming.
Finally, let's take a quick look at the
volatility index, also known as the "investor fear gauge". Right
now, investors are showing almost no fear. Like prior chart,
this is a contrary indicator and suggests trouble on the horizon.
Too much investor complacency points to an upcoming pullback in the
What I'm Thinking and Doing
I am neither a trained economist nor a
trained stock analyst. But I have been observing the stock
market for almost 20 years now and I've been managing money
professionally for over 13 years. I certainly don't always get the
trends right, and I'm often a little off on my timing. But over the
past seven years I think I've gotten it right more often than not. I
was particularly on target with my calls on oil, gold and
unemployment. I also managed to get out of all real estate holdings
well before the crash. I'm afraid we could be headed for a
double-dip recession sometime in 2011 or 2012. I think it's
inevitable due to the high levels of unemployment, the lousy
residential and commercial real estate markets, the out-of-control
federal deficit and the massive tax increases that are headed our
way over the next few years. This is a recipe for disaster. I really
hope I'm wrong, and I suppose things could change over the next year
or so. But I'm worried that our elected officials just don't get
it. I'm keeping a close eye on interest rates and the
dollar. Any hint that the Fed is preparing to raise rates, which
isn't likely right now, or that the market is demanding higher
rates for our debt, which is more likely, will spook the equity
Now that I've given you the Gloomy Gus view, let's
review the optimistic outlook. The industrial side of the economy is
clearly expanding. Corporate profits and dividend payouts are
rising. M&A activity is stirring and the IPO market is
beginning to show signs of life. Importantly, the housing sector may
finally have bottomed out. I'm not ready to declare all is clear in
housing yet, but some signs are appearing. What remains stagnant is
the unemployment picture. If businesses finally start hiring then
the positive effects would spread throughout the entire economy.
And I still think the mid-term elections in the
Fall will likely go strongly to the Republicans. More and more
prominent Democrats are reading the same tea leaves and refusing to
even run for re-election. Should the Republicans recapture the
House, and maybe even the Senate, a divided Congress could prevent
the President or Congress from doing anything too stupid. Then
maybe we can have a real debate on more constructive tax
policies for 2011 and beyond.
I've been saying for months now, both in this
newsletter and on my daily Tweets (@gwerlinich) that this market is
in a strong bull cycle and wants to go higher. Over the past two
months I have put my money where my mouth is by spending more than
$1.5 million in cash on new equity positions. This has reduced my
cash from almost 12% to about 6.5% of my holdings. I plan to
further spend down that cash to around 5% before I write to you
Personal News and Notes
The big news is that the kids and I have finally
moved into my new house! A lot of blood, sweat and tears (and money)
have been expended but the place looks amazing. I've worked my butt
off over the past two weeks and all the boxes are gone and
everything has been put away. Now I can take my time and fill in
the missing furniture over the next few months. And I couldn't
have done any of it without my fantastic design team of Jenni and
Pia at Cashmere Interiors. If anyone in the New York area needs some
help with their home I can highly and enthusiastically recommend
Nola has completed her three fencing competitions
for the season. She made tremendous progress from the first to the
last. I love the fact that she's so into it. Lily has begun her
spring softball season. She scored the winning run in the final at
bat on Saturday. She's like a little Jose Reyes. Ezra is also
fencing and playing tennis. Amazingly, there are only two more
months until summer camp and teen tours begin. We're in the home
On Friday I leave for a long weekend in Myrtle
Beach to recharge the batteries. A few rounds of golf and a few days
on the beach. Just what the doctor ordered. Any readers in the
area? If so, join me for a beer.
Don't forget that you can friend me on Facebook, connect
with me on LinkedIn, or follow me on Twitter. I
try to "tweet" something about the market every day or so, so if you
follow me, you'll get a quick update on what's going on almost every
day. It's a very easy way for you to receive updates from me in
between my newsletter. I've been using these three 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.
That's it for this month. I thank you, my readers,
and remind you that this newsletter is for you. 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.
"News and Views",
Copyrightę, Werlinich Asset Management, LLC and www.waminvest.com. All