Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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April 25, 2011

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

Current Market Analysis

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 dead money.

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. 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





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

Barclays Aggregate




US government bonds

Barclays High Yield




High-yield corporate bonds

Statistics To Watch

  • 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 lower.
  • 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 this year.
  • 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 employment.
  • 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.

Trends To Watch

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 assets.

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 bullish.  

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 corrections.

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 this indicator.

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 and Doing

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 Notes

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 days.......

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 our family.

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.

Best regards,

Greg Werlinich

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