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

May  6, 2005 Comments   |   Refer A Friend   |   Sign Me Up   

As a reminder, the chapter entitled "Sector Rotation Investing" that I contributed to The Black Book on Personal Finance is available for sale. If you haven't already downloaded a copy, please take a moment and check it out. The suggested retail price for the e-book is $19.95. As a special accommodation to my readers, I have negotiated a 20% discount off the list price. To purchase the chapter, please click here to visit the publisher's website. When you are asked for a priority code, type in "WAM" (this must be in all caps). From there, just click the "buy now" button and follow the instructions.Thank you.

Market Analysis...Struggling
Last Month's Results - Ugly
What I'm Doing Now...Raising Cash
Statistics...Growing Concerns
Things To Watch
Personal News and Notes

Market Analysis...Struggling

April marked the second consecutive poor month for the market, leaving most investors with losses in three of the first four months of the year. That doesn't bode well for the remainder of the year as the first half was supposed to have been the "good" half by many accounts, including my own. As I write this, the Dow has closed for the day at around 10,340, or about 150 points lower than when I wrote to you last month. The good news is that it's up from the flirtation with 10,000 a few weeks ago. Our trading range survives, albeit barely. When I wrote last month that we would test the 10,000 level, I didn't think it would happen so quickly. So far, we've passed the test. I still think we'll drop below 10,000 before we rise above 11,000. As you can see from the chart below, the trend is not an encouraging one. My guess is that over the next few months, we'll approach the November low of 9,708.

The dance with oil prices continues. As the price of oil fell recently to just below $50 per barrel, the Dow managed to rally. And while the price of oil is only one of many important factors, it is one that is often seized on by the press. I still believe that high oil prices are here to stay. Maybe we'll see oil at $40 a barrel again, maybe not. But I don't think we're ever going back to $25. And in the long run, over the next 5 to 10 years and beyond, I believe we should be prepared for higher prices than we've ever seen before. Keep in mind that forgetting any other factors, inflation alone could bring oil prices to $60 per barrel in about five years.

Let's not forget interest rates. The ebb and flow of the bond market also has a major impact on the stock market. The drop in yield that began as I wrote to you last month has reduced the yield on the 10-year note back to about 4.15% today. This is good for the market, and has helped fuel the rally. In addition, the spread between the 10-year Treasury and the TIPS has fallen slightly from 2.8% to 2.73%That suggests that inflations fears have stabilized. The Fed did its part on Tuesday by lifting rates, as expected, by another quarter of a percent, bringing the discount rate to 3%. More importantly they retained the "measured pace" language. My feeling is that we have one or two more rate hikes left before the Fed pauses to reassess things.

Last Month's Results...Ugly

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. It is not a pretty picture. The growth investors are getting creamed this year. And while value is still down, it's doing much better than growth. Interestingly, only the bond market is showing a gain for the year, albeit a very small one. I continue to suggest that every investor should be focused on safety, income and those sectors with the best chance to outperform the broad market. Now is not the time for broad diversification.






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

What I'm Doing Now...Raising Cash

I have been using rallies to take a little money off the table, mostly in a couple of my losing positions. I am focusing my holdings even more tightly on my core sectors and on stocks that have earnings and pay dividends. While energy stocks took a bit of a beating in April, it did not shake my confidence in that sector at all. I still think the long term trends are solidly in my favor. The trick is to buy intelligently and be patient. Don't get scared out by short-term movements. I have also added to my foreign holdings. I won't mind holding a bit of cash right now. If the market does correct below 10,000, as I think it might before the year is over, I'd like to able to go bargain hunting. 

Statistics to Watch...Growing Concerns

  • April was a solid month for job creation, as 274,000 new jobs were added. Average hourly wages rose further, to $16.00. Yes it was reported that wages in 2004, after adjusting for inflation, actually fell for the year. The average workweek increased slightly to 33.9 hours. Overall, very good numbers.
  • The number of unemployed workers remained steady at 7.7 million. The number of part-time workers remained steady at 4.3 million while the number of "marginally attached" workers fell to 1.5 million. These figures caused my "underemployment rate" to fall to 9.57%, while the official unemployment rate reported by the government remained at 5.2%. 
  • There were 7.4 million people holding more than one job in April, up from 7.2 million last month.
  • The four-week average for initial jobless claims fell slightly to 328,250. This figure has been fairly stable for some time.
  • The University of Michigan Consumer Confidence Index dropped precipitously to 87.70, by far the lowest reading since I've been tracking it.  
  • According to the CBO, the federal deficit for the first half of fiscal 2005 was $291 billion after posting a deficit of $68 billion in March.
  • According to the Census Bureau, the U.S. recorded a massive trade deficit of $61.0 billion in March, which I believe is a new record. 25% of that deficit was with China, which ran a surplus of $5.7 billion in the month.
  • The Labor Department reported that the CPI, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, rose 0.8% in March on a seasonally adjusted basis, while the "core" CPI, which excludes food and energy, rose 0.4%. These numbers continue to stoke inflation fears.
  • The Federal Reserve reported that total outstanding consumer credit rose fractionally in February to another new record of $2.122 trillion. This growing indebtedness will be a big problem, and will likely be a factor that stalls the growth of the economy as rates continue to rise.
  • The American Association of Individual Investors' (AAII) bullish sentiment jumped last week, concurrent with the latest market rally, hitting 36.80%.
  • Retail same store sales were up a strong 2.2%, after a sluggish March. As long as consumers are willing to go further into debt, these figures will continue to grow.  
  • The Census Bureau reported a second straight strong month as sales of new homes rose 12.2% on a seasonally adjusted annualized basis in March to 1.431 million. 
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes rose 1.0% in March to 6.890 million 
  • The Institute for Supply Management (ISM) index of manufacturing activity slipped to 53.3 in March, down from 55.2 in March. This marked the ninth consecutive month that the index remained below 60.0. As the index approaches 50, it will indicate a slowing economy. 
  • The NYSE reported that a membership seat was sold recently for $1.62.

So what does all this mean to you? It means that the economy is doing well enough for the Fed to continue raising interest rates in an effort to stave off inflation. Jobs are being created. Housing and retail sales remain strong. But personal indebtedness is rising and confidence is falling. So what do you do? Keep working, save more, pare down debt wherever possible and drive a more fuel efficient vehicle. My outlook for the year continues to be "cautious pessimism."

Things To Watch

The trading range of 10,000 to 11,000 for the Dow continues to hold. Today the Dow closed at 10,340, or about 1.4% lower than this time last month. So let's see what happens next. As I said earlier, if we break below 10,000, we would next test the November lows. 

Gold remains in a trading range of about $425 - $440. I still look for gold to make a move above $450 before the year is over.

One disturbing trend to watch is the dwindling number of new highs and rising number of new lows made by stocks traded on the New York Stock Exchange. For the week ended April 25, there were a paltry 10 new highs new versus 134 new lows. I haven't seen so few new highs since I started tracking the figure.  

The Mergers & Acquisitions theme continues as Neiman Marcus is taken private for $5.13 billion,  Verizon "wins" the takeover fight for MCI with a bid of $8.44 billion, Valero (one of my big positions) agrees to buy rival Premcor for $6.9 billion and Adobe buys Macromedia for $3.4 billion.

I think there are two new signs of a market top: the NYSE going "public" through a merger with a rival, and the staggering sums raised by LBO firms. Goldman Sachs alone just closed on an $8.5 billion fund.

The dollar has steadied, closing today at 1.2954 vs. the Euro, up a fraction from last month.

Oil prices have also steadied, with the June contract selling for $50.83. .

The yield on the 10-year Treasury closed at 4.15%, down from last month.

Monthly Tip

This month I don't have a guest article. If you would like to contribute a column for a future newsletter, please let me know. I expect to have something interesting for you next month.

Personal News and Notes

I shot my very first commercial this week. It should start appearing on Northern Westchester and Southern Westchester cable systems within the next week. I will also have a copy on my website for those of you out of the area.

Tomorrow I'm taking my three beautiful children to Myrtle Beach, SC for a week of sun and fun. I hope each of you is enjoying Spring and making plans to spend time with your loved ones, wherever they may be.

As always, I thank you for your interest and consideration, and invite you to contact me if you have any questions, any feedback on "Sector Rotation Investing" or if I can be of service to you in any way.

Best regards,

Greg Werlinich

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