What I'm Thinking and
Personal News and
When I wrote to you last
month, the Dow Jones Industrial Average was at 12,050 and had
recovered about half the losses from the 7% correction that climaxed
with the disaster in Japan. Now, one month later, the Dow has moved
3.8% higher and has reached a new three-year high. I'd written for
the past few months that I expected a correction, and then an
ensuing resumption to the bull market. So far, things have played
out exactly as I had suggested. Sooner or later the naysayers will
have to get on board the Bull and join the ride.
As you can see below, the chart
for the Industrials looks very bullish. Going back to late 2007 and
early 2008, it appears the next resistance level comes at about
12,800 with support around 12,250. We are also headed into the
traditionally slow time of the year where some suggest to "sell in
May and go away". We'll see what happens soon enough. Either way, I
wouldn't short this market.
One small fly in the ointment of
the bullish story is that the Transportation Average has not moved
to a new high along with the Industrial Average. While the index is
currently priced above both moving averages, which is bullish, it's
about 90 points below its closing high price of 5,379. If the
index can rise above the trendline shown below, chances are it will
eventually hit a new high along with the Industrials.
Just when many observers,
including myself, were suggesting that it was time to abandon bonds,
another disaster struck, pushing investors back to the relative
safety of Treasuries. I think this will be a relatively short
respite. I believe the bond trade is over for a while, and that
yields will continue their inevitable rise. But for now, it's simply
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. As
you can see by the results below, the broad market averages were
basically unchanged for the month, with only small cap stocks
generating any significant gains. The EAFE, not surprisingly,
finished the month poorly thanks to the disaster in Japan and
continued unrest in the Middle East. Government bonds remain
basically unchanged for the year.
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended
April 16 was 403,000, a decrease of 16,000 from the prior week's
revised figure. The four-week average was 399,000, slightly higher
than a month ago. The weekly numbers remain choppy, but the trend
is clearly better.
- Non-farm payroll employment increased by a fairly robust
216,000 in March, while only 7,000 were reported as added through
upward revisions to January and February. Job creation occurred in
most every sector except state and local government. Yet the
average hourly wages for blue collar workers actually fell
slightly to $19.30, and the average work week inched up to 33.6
hours. So while there is evidence that jobs are being created,
albeit low paying jobs, there is no wage inflation.
- The total number of workers counted as unemployed fell by
about 200,000 to 13.5 million. Therefore the unemployment rate
dropped to 8.8%. The more comprehensive U-6 rate fell by 0.5% down
to 16.2%. 6.1 million people continued to be unemployed longer
than 27 weeks. The seasonally adjusted number of people who could
only find part-time work remained at 8.4 million and the number of
marginally attached workers fell 2.4 million. The number of people
holding multiple jobs fell to 6.81 million. Overall, the
employment picture continues to improve incrementally.
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $189 billion in March, leaving us with a deficit of
$800 billion for the first six months of fiscal 2011, which is
$113 billion more than the record levels from a year ago. This
large deficit was somehow due to TARP payments.
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $45.8 billion in February, down from
$47.0 billion in January. Both imports and exports fell in the
month, but imports fell further.
- The Census Bureau reported that privately owned housing
starts rose 7.2% in March, after falling 18.5% in February,
but remained down 13.4% from a year ago, to a seasonally adjusted
annual rate of 549,000 units. The monthly results have been
extremely volatile this year, impacted partly by severe weather
across much of the country. Going forward, weather should play a
much smaller role as the snow is over. New building permits
were up 11.2% from the prior month but were still down 13.3% from
last year. The overall weakness in new construction will
ultimately set the stage for the recovery in housing as the
inventory of hew homes for sale diminishes to match a smaller
number of buyers.
- The National Association of Homebuilders/Wells Fargo
Confidence Index in April slipped back to 16, leaving the index at
16 for five of the last six months. Again, this demonstrates a
simple lack of interest in new housing at this point.
- The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in March rose 11.1%, after falling 13.5% in February, but remained 21.9% lower than a year ago, at 300,000 units. The estimate of homes for sale was 183,000, which represents 7.3 months at the current rate of sales. The median sales price was a slightly higher $213,800, which is far below the 12-month moving average price of $220,650. It's no surprise that the March numbers are better after the very harsh weather across much of the country in January and February.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes rose 3.7% in March, but remained 6.3% lower than a year
ago, to 5.1 million units. The estimate of homes for sale, at 3.5
million represents 8.4 months of supply at the current rate of
sales. The median sales price held steady at $159,600, which is
lower than the 12-month average of $170,333. The market for new
and existing homes continues to suffer, and is likely still
dominated by repossessions and foreclosures, which forces prices
- The S&P/Case-Shiller Home Price Index (10-city index),
which uses a three-month moving average to track the value of home
prices across the US, fell again in January, and was weaker than a
year ago, giving further evidence of the trend of falling home
prices across the county. While this is a trailing indicator, it
does paint a bleak picture. The good news is the rate of decline
is slowing, indicating that a bottom might not be far off.
- According to RealtyTrac, the number of foreclosures in March
increased 6.59% from the prior month, but were down 35% from a
year ago. This increase followed the biggest year-over-year
decrease since RealtyTrac began issuing reports in 2005. It is
anticipated that foreclosures will increase through the year as
the court system clears the legal hurdles currently stalling many
of the in-process foreclosures.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 61.2 in March. This marked the
twentieth consecutive month of expansion in the manufacturing
sector, and the third straight month over 60. The ISM index of
non-manufacturing activity was 57.3. This marked growth in the
service sector for fifteen consecutive months. Somehow, business
is expanding without a concurrent expansion in hiring and wages.
Eventually, higher paying jobs must be created.
- The Federal Reserve reported that in March, capacity
utilization in the industrial sector was 77.4%, which leaves it
only 3% below the average level of the period from 1972 through
2008. Capacity utilization improved slowly but steadily over the
course of last year and appears to be doing the same thing so far
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.4% in March, following an
increase of 1.0% in February. Says Ataman Ozyildirim, economist at
The Conference Board: The U.S. LEI continued to increase in March,
pointing to strengthening business conditions in the near term.
The March increase was led by the interest rate spread and housing
permits components, while consumer expectations dropped. The U.S.
CEI, a monthly measure of current economic conditions, also
continued to rise, led by gains in industrial production and
- According to the Bureau of Economic Analysis, the "final"
estimate of GDP growth in the fourth quarter was 3.1%, up from the
"second" estimate of 2.8%, but down slightly from the
"advance" estimate of 3.2%. The GDP growth in Q3 was
2.6% and 1.7% in Q2. GDP growth in Q1 was an artificially
inflated 3.7%. The slight increase this quarter was due in part to
increased spending on personal consumption and export growth.
- The Federal Reserve reported that in February the amount of
outstanding consumer credit remained steady from the prior month,
at $2.42 trillion. If consumer credit were to begin to expand
again after falling for much of the past four years, it would be a
boon to the economy.
- According to the Census Bureau, retail trade and food service
sales were 0.4% higher in March, and were 7.1% higher than a year
ago. The weather couldn't be blamed for the mediocre figures in
March. Without growth in high paying jobs, it's hard to envision
much growth in retail sales.
- The Federal Reserve reported that in March the supply of M-2
increased slightly from the prior month and was up 4.7% during the
prior six months. The supply of M-1, on the other hand, rose a
whopping 13.1% over the same six months. The Fed appears to once
again be "priming the pump" to get the economy moving again, but
ultimately, we need to see if this money will circulate more
quickly in order to stimulate business growth.
- The Conference Board's Consumer Confidence Index fell in
March to 63.4 from 72.0, which had been the highest level since
February 2008. The index remains well below a healthy reading as
inflation worries grow while real incomes decline. An overall
reading above 90 indicates the economy is solid, and 100 or above
indicates strong growth.
- According to the BEA, the personal savings rate in February
fell to 5.8% from 6.1%. I have expected the savings rate
to trend lower from a high of 6.2% last June, thanks to
a rising stock market and historically low interest rates on
savings, but it would seem that people remain overly cautious.
- According to the FDIC, 34 banks have failed through April
15, compared with 57 failures at roughly the same point last year.
There were a record 160 banks failed for the full year in 2010,
surpassing the prior mark of 140 banks that were either closed or
merged into healthier banks in 2009. By comparison, 26 failed in
2008 and only 3 failed in 2007.
The dollar has broken below a
significant resistance level that had been in place for three years
and is taking aim at an historic low. Nothing seems to help it right
now. That should tell you something about how investors view the
effects of Quantitative Easing (QE2) and our budget deficit. For
years I've been warning that the dollar is headed inevitably lower
and that's exactly what's coming to pass. I've also been investing
according to that thesis, and have made substantial profits in hard
As an investor, I have been riding
the golden bull market for nine years now. In fact, on my first
TV appearance on Fox News in December of 2002, one of my two stock
picks was Newmont Mining (which I still own today). I've championed
the long-term benefits of owning gold in virtually every issue of
this newsletter, and I see no reason to change my tune now. I've
been writing (and tweeting) that gold (and silver) prices were
moving to ever higher levels. Indeed, last week the price of gold
closed above $1,500/oz for the first time in history. Just eye
balling the pattern of advance and consolidation shown below, it
would suggest that gold could rise above $1,600/oz before it takes
its next breather.
Similar to gold, the price of
silver continues to move to ever higher levels. Indeed, the price
rise has gone parabolic, more than doubling in the past six months.
At over $46/oz, the price is the highest its been since 1979, when
the Hunt Brothers tried, unsuccessfully, to corner the silver
market. Last month I wrote that "if the price can hold above support
around $31, I think $40 is within reason this year." That was
clearly too cautious. We'll likely see $50 before summer vacation.
But as you can see below, RSI is wildly overbought, suggesting a
correction is imminent.
The price of copper is sitting in
the middle of a six month old trading range. You'll notice the the
prior trading range lasted eight months before moving higher.
Consolidations are a normal and vital part of any market move. Like
all commodities, copper is benefiting from a generally weak dollar
and strong international demand (read: China). Remember, Dr. Copper
is often thought of as a proxy for economic growth. So this chart is
telling us that the prospects for future growth look pretty good.
Should demand from the Far East slow, we'll see it quickly and the
price of copper will head south.
The price of West Texas Crude
(WTIC) remains in a clearly defined upward channel. Technically,
everything looks great to me. The trouble in the Middle East is
certainly contributing to the latest rise, leading to a mildly
overbought situation. And the spread between West Texas and Brent
Crude is now about $12, similar to last month. As& with gold and
silver, I would expect a correction in crude sometime soon. If that
happens, the price just needs to remain above $105 or so to remain
After finally throwing in the
towel and admitting defeat on my bearish view of the Financial
Sector, I may yet be proven correct. You can see below that the
latest bull run has ended and the price of this index is falling
dangerously close to its former resistance level, which now acts as
a floor. I remain almost entirely uninvested in the financial sector
(my only holding being a long-held position in JPM) as I think
severe problems remain, thanks to troubles in housing. The battle is
being waged I'm betting that the Bears prevail in the short run.
Not surprisingly (at least not to
me), the rally in housing failed, and the price of this index fell
back below resistance at 115. As was made clear by the figures
listed above, there are simply too many problems in the housing
market to believe that this sector can be a good investment. I
believe there are more losses to come.
The index for the European stock
market has gained 35% from the low set last summer, and has
recovered all of the losses from the Middle East unrest and the
disaster in Japan, to reach the highest level since before the Crash
of '08. The next resistance levels are at around $62 and $67. It
would be extremely bullish for the market to crest those two levels.
In a correction, I'd like to see the index remain above $56 as it
makes higher highs on advances and higher lows on
The emerging markets suffered less
from the recent problems than the developed markets and are again
right at their highest levels. The chart shows a normal
consolidation followed by a breakout to its highest level since the
Lehman failure. The countries in the emerging markets earn most of
the GDP growth in the world right now, so investors ignore these
markets at their own peril.
The health of the Chinese economy,
and by proxy, it's stock market, is very important to the world's
economy as they buy much of the world's output of raw materials and
produce most of the goods sold to the world. And after being in the
doldrums for more than a year, the index is again attempting to
break through major resistance at around 3,200. That would be very
bullish for China, and for the rest of the world. It is good news
that the index is now trading well both moving averages. A move
above 3,200 would be highly constructive.
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. The over-exuberance from January
was erased with the correction in late February through early March.
The bullish sentiment quickly snapped back and is heading back
towards overly optimistic levels again. I'll be keeping my eye on
As you can see below, the VIX
exploded to 31 in a paroxysm of fear before falling just as
quickly back to around 15. The fear subsided so quickly it's
almost as if it never happened. This is a perfect example of how
people panic at just the wrong time, and make snap decisions that
they quickly come to regret. The best investors and advisors remain
calm, wait for the facts, and make decisions based on information,
not emotion. It turns out that the correction provided a
wonderful buying opportunity. Now, with the VIX below the major
floor of 15, there is an almost absence of fear in the
market. This suggests another correction, or at least a
period of consolidation, is coming.
What I'm Thinking
It seems like every month
I talk about eliminating the "noise" from the market and simply
looking at the big picture, and it continues to be true now.
Investors should be laser-focused on the improving economy and
soaring corporate profits and not worry so much about one-time
events and the short-term new cycle. We still have an accommodative
Federal Reserve, stellar corporate profits, low interest rates and a
lot of cash sitting on the sidelines. The market quickly recovered
from the first correction of 2011 and powered to new highs. Anything
else at this point is simply noise.
I continue to put my money where
my mouth is by further reducing my cash position to buy great
companies during dips, like the day last week when Standard &
Poors announced that they were putting Treasury debt on a negative
watch. The market dropped over 200 points within minutes. I
immediately started buying. Within two days the entire loss had been
recovered and subsequent days saw further gains.
I remain optimistic that 2011 will
be a good year for the market. My client's portfolios are
constructed to benefit mightily if I'm right. If you haven't been
enjoying sizeable gains for the past two years, maybe you should
give me a call so we can discuss how you might be better positioned
for future growth.
Personal News and
It would appear that Spring is
finally here. The flowers are in bloom, the trees are opening up,
the grass is thick and green and the temperature is rising. Spring
Break is over and we head to the home stretch toward summer
vacation. Is it too soon to start counting the days? 42 more
The biggest news is that Lily's
bat mitzvah is only two weeks away. She already has a handle on her
prayers and her dresses have been picked out. She's going to be
simply beautiful. It should be a great day for Lily, her friends and
A few weeks after Lily's big
weekend, the kids and I will make our way down the New Jersey
Turnpike to attend my 25th Reunion at Princeton University. It
should be a fantastic weekend of renewing old friendships and
catching up with my old roommates. I can't wait to see everyone.
There will be a lot of orange and black in our future.
Don't forget that you
can connect with me on LinkedIn or follow me on
Twitter. I tweet the latest
market and economic news every day. Following me is a very easy way
for you to receive stock market updates in between my newsletters.
I'm closing in on 200 followers, up from about 50 or so at the end
of the year. I'd like to double that before year-end, so help a guy
out by 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 to you now for over seven years. 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.
"News and Views", Copyright, Werlinich Asset Management,
LLC and www.waminvest.com. All