Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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April 20, 2012

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

Current Market Analysis

It's been a bit of a rough start to the second quarter as the DJIA has dropped about 2% so far this month in fairly turbulent trading. Earnings for Q1 have, for the most part, been pretty good so far. The recent economic news has been a bit tepid. And Spain is a growing concern. With all of that taken in consideration, the market is acting pretty well.  Notwithstanding the modest decline in the past couple of weeks, the Dow remains near its highest level since late in 2007. It remains to be seen if this is the sum of the correction I looked for last month or if further losses are still to come. Either way, I feel pretty good heading into summer when historically, the market tends to sell off as traders head off on vacation.

As you can see below, even with the recent drop, the chart of the Dow Jones Industrial Average continues to paint a very bullish picture as the upward trending channel remains unblemished. Of minor concern is that the current price is slightly below the 50-day moving average. But both remain well above the 200-day average. Last month I wrote not to "be surprised if there's a pullback of 5-10% sometime soon before trying to pierce the next resistance around 13,780". Well, between March 15 and April 10 we had a 4% pullback. Let's see if the market is now poised for the next leg up.

The chart of the transportation average looks similar to the industrial average with one major difference. At the peak of the last move in March, the index did not surpass the previous high of 5,618.25 set last July. According to Dow Theory, the industrial and transportation averages need to move to new highs together in order to confirm a bullish move. A lagging transportation average suggests some latent concern about the economy. I think the sagging coal industry is hurting the railroad stocks a bit and the high cost of gasoline can't be helping the airlines and trucks. A positive note is that the 50-day moving average is well above the 200-day average and the index is now trading above both averages. To achieve a new high the index would have to rise about 7.5% from the current level, which won't be easy.

The chart of the Dow Jones Utility average is telling two stories. The first is the long-term story of steady growth over the past year and a quarter. The second shows a decline and consolidation over the past four months, which given the strength of the prior gains shouldn't be a huge surprise. The current price for the index is trading very close to both moving averages and in a pretty tight trading range between 450 and 460. The conclusion I draw is that it is simply a rotation of money out of a previously hot sector into riskier assets. Should the sector weaken to 450, or even 440, it may provide a nice entry point for new investors looking for steady income because utilities should continue to do well in a low interest rate environment. If rates were to spike higher, that would be a negative for the sector. I think negative sentiment for coal and nuclear energy is also weighing on the sector, but cheap natural gas should be a head wind.

After spiking ominously higher in March, Treasury yields have fallen back below 2% in April as investors have again moved out of risker assets like stocks and back to supposedly safer Treasuries. This should quiet, at least for now, the worries about higher rates threatening the housing market and overall economy. It seems safe to assume that rates will remain relatively quiescent for at least the rest of this year and into next year.

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, including the reinvestment of dividends. The only way to describe the first quarter of 2012 is wonderful. We've had a good year after only three months. The riskiest assets continue to lead the way, powered by tech stocks. It's interesting to see the divergence between the DJIA and the S&P 500, the reason for which I can attribute in large part to the inclusion of Apple in the latter versus its exclusion in the former. Of note is that the return on bonds turned negative as rates went up in March. This could be the year in which bond investors lose money for the full year. Unfortunately, the returns on the EAFE also moved into the red last month, although the YTD results remain stellar. Just watch out for what's going on in Spain.

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

* Return numbers include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended April 14 was 386,000, a decrease of 2,000 from the prior week's revised figure. The four-week average of 374,750, an increase of about 16,000 from the prior month's revised tally. Initial claims have jumped higher the past two weeks. We'll have to wait and see if this is the beginning of an ominous new trend. About 3.30 million people continue to collect unemployment insurance, a small decrease from the prior month.
  • Non-farm payroll employment increased by a disappointing 120,000 in March, all in the private sector, while government jobs remained largely unchanged. The majority of the gains came in manufacturing and food services. Health care and even financial services grew also. Unfortunately the retail sector shed 34,000 jobs in the month. Revisions subtracted 9,000 jobs in January and added an additional 13,000 in February. I hope the March totals will be revised higher once more data is in. The total number of workers counted as unemployed dipped to 12.7 million, as people simply left the job market, which helped move the unemployment rate to 8.2%. The more comprehensive U-6 rate, which was as high as 16.7% last June, continued moving lower, down to 14.5% from 14.9% last month.
  • A slightly lower 5.3 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work fell to 7.7 million and the number of marginally attached workers fell to 2.4 million. The number of people holding multiple jobs fell to 7.05 million. The average hourly wages for blue collar workers rose to $19.68 while the average work week held at 33.8 hours. On balance, the employment picture weakened a bit, but still shows modest improvement.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $196 billion for March and $777 billion for the first six months of fiscal 2012, which was about $53 billion less than the same period a year ago as tax receipts are up and government outlays are slightly lower. The CBO estimates that the full year deficit will be about $1.2 trillion, assuming no new tax legislation is enacted between now and the end of the year.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $46 billion in February, a big drop from January. My guess is that we are beginning to import less foreign oil, which would be a tremendous thing for the US economy.
  • The Census Bureau reported that privately owned housing starts fell 5.8% in March, after dropping 2.8% in February, but was still 10.3% higher than a year ago, to a seasonally adjusted annual rate of 654,000 units. It's mildly worrisome to see housing starts trending lower again after seeing gains a few months ago, especially with such unseasonably warm weather throughout much of the country. New building permits were up 4.5% from the prior month and 30.1% from the year before, which suggests a recovery in starts down the road.
  • The National Association of Homebuilders/Wells Fargo Confidence Index dropped three points in April to 25. This was the first monthly decline in seven months. “What we’re seeing is essentially a pause in what had been a fairly rapid build-up in builder confidence that started last September,” said NAHB Chief Economist David Crowe. “This is partly because interest expressed by buyers in the past few months has yet to translate into expected sales activity, but is also reflective of the ongoing challenges that are slowing the housing recovery – particularly tight credit conditions for builders and buyers, competition from foreclosures and problems with obtaining accurate appraisals.”
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in February fell 1.6%, but at 313,000 units, sales were still 11.4% higher than a year ago. The estimate of homes for sale was only 150,000, which represents only 5.8 months at the current rate of sales. The median sales price of $233,700 was a big $22,000 higher than the prior month and $10,000 above the 12-month moving average price of $223,408. I'll be interested to see if that number is revised lower in subsequent months. Either way, new home sales continue to be going in the wrong direction.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were 2.6% lower in March to 4.48 million units, but remained 5.2% higher than a year ago. The estimate of 2.4 million homes for sale means there's an estimated 6.3 months supply on the market. The median sales price rose to $163,800 is below the 12-month average of $165,242.
  • As I predicted, the S&P/Case-Shiller Home Price 10-city index, which uses a three-month moving average to track the value of home prices across the US, slipped for the fifth straight month in January. The index is now at its lowest level since the housing crisis began in mid-2006. Unfortunately, I believe the trend will continue in February and possibly March as well.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 53.4 in March, an increase from February. This marks 32 consecutive months of expansion in the manufacturing sector. New orders, production and employment all grew in March. The ISM index of non-manufacturing activity was 56.0, a mild decrease from February. This marks growth in the service sector for 27 consecutive months. These numbers continue to demonstrate that business is growing slowly but steadily.
  • The Conference Board reported that it's index of Leading Economic Indicators increased by 0.3% in March, a small decrease from a strong February. Says Ataman Ozyildirim, economist at The Conference Board: "The LEI increased for the sixth consecutive month, pointing to a more positive outlook despite subdued consumer expectations and weakness in manufacturing new orders."
  • According to the Bureau of Economic Analysis, the "final" estimate of GDP growth for Q4 was 3%, which was in line with the second estimate. This was up from 1.8% in Q3, 1.3% in Q2 and and 0.4% in Q1. This compares with 2.3% in Q4, 2.5% in Q3, 3.8% in Q2 and 3.9% in Q1 of 2010. The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending.  Imports, which are a subtraction in the calculation of GDP, increased.
  • The Federal Reserve reported that in February the amount of outstanding consumer credit was $2.52 trillion, up 0.4% from the prior month. This followed slightly higher increases in December and January, which were the largest month-over-month increases in total outstanding consumer credit since November 2007. Consumer credit is growing steadily as low interest rates leave Americans with no reason to save, creating more incentives to spend.
  • According to the Census Bureau, retail trade and food service sales were up 0.8% in March, which was in line with gains from the past few months, and 6.5% higher than a year ago. Gasoline stations, auto-related sales, building materials and home furnishings led the way. This was a solid number; I hope these gains continue over the next few months.
  • The Federal Reserve reported that in March the rate of growth in the supply of M-2 (a broader view of money) accelerated a bit from the prior month, moving up 7.4% higher over the prior six months after "only" 6.4% in February. The supply of M-1 (the most narrow definition of money), on the other hand, rose 9.6%, down from 11.1% in February.
  • The Conference Board's Consumer Confidence Index in March slipped a bit to 70.2 from 70.8 in February. Given the pullback in the stock market, and the weaker gains in employment, this slippage comes as no surprise. A reading above 90 indicates the economy is solid, while 100 or above indicates strong growth. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumer Confidence pulled back slightly in March, after rising sharply in February. The moderate decline was due solely to a less favorable short-term outlook, while consumers’ assessment of current conditions, on the other hand, continued to improve. The Present Situation Index now stands at its highest level in three and a half years (61.1, Sept. 2008), suggesting that despite this month's dip in confidence, consumers feel the economy is not losing momentum."
  • According to the FDIC, 5 banks failed in March, bringing the total number of bank failures in the first three months of 2012 to 16, which is a big improvement over 2011. I expect far fewer bank failures this year than the 90 banks that failed in 2011, which was itself a big improvement over the record 160 banks that were either closed or merged into healthier banks in 2010, and 140 in 2009. By comparison, only 26 failed in 2008 and a paltry 3 in 2007.

Trends To Watch

After enjoying large gains in the second half of last year, the dollar has settled into a trading range of 78 to 82 so far this year. Like last year, the direction of the dollar often indicates the direction of the equity market: when the dollar goes up, the market goes down, and vice versa. A strong dollar also has a deleterious effect on the relative values of hard assets like gold, copper and iron ore. Looking ahead, this will be a very important relationship to watch throughout the rest of the year.

The action on the price of gold has been bearish for almost eight months now, as you can see below in blue declining wedge. As the wedge tightens, the pressure builds The spot price has now fallen below both moving averages and the 50-day as dropped under the 200-day. All of this is bearish. If the price were to fall below $1,600/oz, there would be little to hold it above a very key resistance at $1,500. All of that being said, I believe that after trading in a tight range for a while, the price of gold will break up and above resistance and move higher in the second half of the year.

The price of silver has been trading in a tight range (between the green line and the lower blue line) since the plunge in September. And like gold, the spot price is trading below both moving averages. It's not a pretty chart. That being said, silver is mildly oversold and like gold, it trades in an inverse relationship to the dollar. And my feeling is that as our government dithers through the election, and is invariably unable to come together on a budget, the dollar will fall again, helping the relative values of gold and silver.  

Right on cue, after enjoying strong gains in the first quarter, the price of copper has dropped precipitously this month (see the red circle). This coincides with tepid economic news this month suggesting that the recovery is slowing. But it's only been one month; let's see what happens in the next couple of months.

As the price of West Texas Crude has corrected over the past two months it has struggled to remain above the key psychological level of $100. Will the year-long reverse head and shoulders pattern hold? If it falls below $95 I'd say we're in trouble.

After an amazing run to begin the year, bringing the sector right up to resistance around $16.50, the index of the financial sector backed off in April with the rest of the market. The gains happened so quickly the 50-day moving average hasn't yet caught up to the 200-day, but the current price is above both. Last month I said that "I do expect a pullback as the index is oversold", and that's happened. I still believe the final impediment to a prolonged rally is the weak housing market. Should that turn around the banks will likely soar. If not, I expect the sector to slowly sink back down.

My bearish stance on the housing sector for the past five years was dead on correct, until the past six months, when inexplicably, this housing index began to surge higher. I truly cannot understand why this sector has improved so much when the news on housing has been so bad. But the facts don't lie; big gains were made through the end of March. Yet the news isn't all good. Notice the steep drop in April. Is this simply a breather before the index moves even higher, or is it an indication that the rally got too far ahead of the news? Personally, I'm still sticking with the numbers because if the they don't improve, this sector could be headed for a big fall.

The equity markets of the developed international countries remain range-bound, as demonstrated by the chart below. Technically, things are muddled with the current price between the two moving averages and RSI a bit oversold. So there is no clear direction at the moment. The big issue is Spain; if they fall apart all bets are off.

The chart for the emerging markets index, like many others, is showing a clear inverse head and shoulders pattern. The problem is that should the price fall much below 42 it would break the pattern while possibly falling below both moving averages. That would be very bearish. Under normal circumstances, since the emerging markets don't have the same crushing debt burdens as the developed world, and enjoy a much higher GDP growth rate, I suggest that investors have an allocation to this sector. But the investment is not without its risks, and should be viewed as a long-term play. 

So how's China doing? I ask this because one could make that case that as China goes, so goes much of the rest of the world. As you can see below, the SSEC rallied nicely in January and February before dropping back in March. After some gains in April it's just above the 50-day moving average and close to the 200-day. Should it move above both, and if the 50-day can surpass the 200-day, it would be extremely constructive. There's a long way to go before I'll call a recovery. But moving back above 2,500 would be quite bullish.

According to the NYSE Bullish sentiment index, the market is neither bullish nor bearish right now after managing to work off the extreme overbought position (see the red circle) without a major market decline. I wouldn't be surprised to see more sideways churning for a while before the next major trend reveals itself.

This chart shows that only 42% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. Also, RSI is mildly oversold. Together with the general lack of bullishness, this suggests that we could be setting up for the next rally.

Last month I wrote that the "Fear Index" was "disturbingly complacent . . . and that [made] me nervous." Well, my nervousness was well placed as the market declined, causing the VIX to stir from its complacency. Now the index has returned to almost the middle of it's normal trading range, which is positive, again suggesting that a rally could be forthcoming.

What I'm Thinking and Doing

Repeating what I said last month, I believe the domestic and global economic landscapes are much better than they were six months ago, but there is still work to be done. I mentioned my surprise that the market was doing as well as it was yet remained nervous that it had gotten ahead of itself. Now, a month later, the economic news is a little less good and the market reflects that. Still, I believe that, at least for now, things are generally headed in the right direction. If the housing market can somehow find the bottom and join the rest of the recovery I think the stock market could revisit its all time high. Standing in the way are the continuing debt problems in Europe and right here in the good old U.S.A. This ongoing global debt crisis is my number one biggest fear. But I'll talk more about that in the coming months. For now, I prefer to focus on the positives.

It's been a relatively quiet time in our portfolios over the past few weeks. While I didn't initiate any new positions, I did add to a core diversified medical holding for a number of clients who didn't already own it. I anticipate owning this stock for years to come. I'm constantly on the lookout for new ideas that make sense for me and my clients. As we move through the second quarter, I am very pleased with the overall composition of our portfolios. While a few laggards remain, many of which will be culled in the coming months, I'm very confident that our portfolios will meet or exceed our expectations for the year.

Professional News and Notes

One personal note this week. As some of you know, in addition to running WAM and being a father to my three children, I'm also a competitive swimmer. This week I will be competing in the United States Masters National Swim Championships in Greensboro, NC. I'll be racing in six events beginning Thursday the 26th and ending Sunday the 29th. I've been training for this meet since early September. If you have an interest, you can follow my progress by going to From there you'll be able to see how I'm doing.

There are a number of places that you can find out more about me and WAM on the web including the Paladin Registry ( and Brightscope ( I'll be adding a third resource in the next month that I expect to be able to share with you next month.

Let's not forget about social media. You can connect with me on Facebook, LinkedIn and Twitter. I would say Twitter is the best of the three for staying current with me as I tweet the latest market and economic news every day. Following me is an easy way for you to receive stock market updates in between my newsletters. I'm up to about 325 followers now. I'd like to double that by the end of this year. So if you use Twitter, please consider 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 News and Views for eight and a half years now. If you'd like to read any prior edition, simply go to my website and click on the link to my newsletter archives. 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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