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

May 17, 2007

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

Current Market Analysis

Correction? What correction? There's no correction here. What we're seeing is practically stock market euphoria. Through the close yesterday, the Dow Jones Industrial Average had gone up for 28 of the past 33 trading days, or an astonishing 85% of the time. It has also risen for nine of the past ten months. On Friday April 20th and Wednesday the 25th, the Industrials, Transports and Utilities all hit new highs at the same time. That performance has been repeated at least once or twice since then. As of the close of trading yesterday, the Dow set a new closing high of 13,383.84, an amazing 580 points, or 4.5%, higher than when I wrote to you last month. Again, most of the technical indicators appear favorable for the market to rise to even further highs. As I wrote last month, although I remain leery about the future of the economy, I'm not willing to fight the tape. So let's continue to enjoy the gains.

When you look at the chart of the Dow Industrials, you can't help but notice the two parabolic upward trends, separated only by a brief correction in February. I think the current gain shows the Dow "climbing a wall of worry" with so much being written about the tenuous state of the world and the domestic economy. Yet nothing seems to be bothering the market right now. Relative strength indicates that the Dow is clearly oversold right now, so there should be a correction coming soon, but that's to be expected, and it's unlikely to derail the overall positive trend.

As you can clearly see in the chart, the Transports are much more volatile than the Industrials, yet they too are within shouting distance of their recently set high price. Having the Transports and Industrials making new highs together is a highly bullish indicator

To reinforce what I mentioned earlier, I'm including a chart of the Dow Utility Index for the first time this month. Utility stocks, previously thought of as investments for "widows and orphans", thanks to high dividend payments, have certainly shed their stodgy image and conservative results. In fact, the Utilities are one of the best performing sectors in the market over the past year. Again, the concurrent new highs set by the Utilities, Industrials and Transports is highly bullish.

Not surprisingly, the daily chart of the S&P 500 remains quite bullish too. In fact, it appears as though it may have broken above the trading range I've identified in blue. We'll know for sure in the next week or so. At the same time, the S&P is close to its all time high of 1,553, set in early 2000. To surpass that figure would be very bullish. And also like the key Dow indices, the S&P remains solidly above both moving averages and yet is not oversold according to its RSI. These are all good indicators.

So what is the bond market telling us? Honestly, it really isn't telling me much of anything right now. The yield on the 10-year Treasury has narrowed from the larger range of 4.4% to 4.9% to a very tight 4.6% to 4.7% over the past month or so. I think bond investors are taking a "wait and see" approach. The Fed is clearly going to hold rates firm for the time being, and the economy keeps giving mixed signals. So the bond market just remains stable, waiting for a clear indication of future direction. So we will do the same.

Last Month's Results

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. April proved to be a great month, with large gains across the board in all indices. Thanks to those gains, year-to-date results through April left most of the major averages up between 4.5% and 5.0%. And so far, the action in May is proving to be every bit as favorable as April.

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

Lehman Aggregate




US government bonds

Lehman High Yield




High-yield corporate bonds

Statistics To Watch

  • The most recent four-week average for initial jobless claims, for the week ended May 12, fell to 305,500 from 329,250 four weeks ago. We'll see if this decline is the beginning of any meaningful trend.
  • According to the Department of Labor, non-farm payroll employment rose by a meager 88,000 in May, much worse than the revised 177,000 number in April, with the service sector generating most of the gains. Average hourly wages rose to $17.25 from $17.21 as wages continue to rise slowly but steadily. The average workweek fell slightly to 33.8 hours. The number of people holding multiple jobs rose slightly to 7.85 million.
  • The number of unemployed workers rose slightly to 6.8 million. The seasonally adjusted number of people, who for economic or business reasons, could only find part-time work, dropped to 3.8 million and the number of marginally attached workers held at 1.4 million. My Comprehensive Labor Index™ fell to 8.23% while the unemployment rate reported by the government rose to 4.5%.
  • The Conference Board reported that it's index of Leading Economic Indicators decreased 0.5% in April after a 0.1% increase in March. The Leading Index has fallen 0.2% over the past six months, suggesting slow to moderate economic growth in the near future.
  • The University of Michigan Consumer Confidence Index fell to 87.1 in April from 88.4 in March. The damaging impacts of rising gasoline prices and falling home values have been offset somewhat by higher wages and higher stock prices.
  • According to the CBO, the government posted a budget surplus of $176 billion in April. That resulted in a deficit of $83 billion for the first seven months of the fiscal year, which was $101 billion less than a year ago.
  • According to the Census Bureau, the U.S. trade deficit in March was $63.9 billion, up from $57.9 billion in February. I'm surprised that the trade deficit is rising in the face of the weakened dollar.
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for urban consumers rose 0.4% in April while the "core" CPI, which excludes food and energy, rose only 0.2%. I think that next to the GDP figures, the CPI is among the most bogus number reported by the government. It is mostly guesswork, how it is calculated changes too often, and it doesn't really represent what real things cost for real people in the real world. End of sermon.
  • The Federal Reserve reported that the amount of outstanding consumer credit increased by a whopping 6.75% (annualized) in March, to remain at about $2.425 billion. There appears to be no end in sight to how much debt will be accumulated by the American consumer.
  • According to the Census Bureau, retail trade and food service sales fell 0.2% in April from the prior month, but were still up 3.2% from a year ago. Some retailers also posted disappointing earnings in recent months.
  • The Census Bureau reported that privately owned housing starts rose 2.5% in April from a revised lower March figure, but was still down 16.1% from a year ago, to a seasonally adjusted annual rate of 1.53 million units. New building permits were down about 9% from last month and 28% from last year, so the outlook for future housing starts is not good.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in March rose 2.6% from revised lower February levels, and were down 23.5% from the same period last year, to a projected 858 million units. The estimate of homes for sale is now 545,000, which represents a whopping 7.8 months of supply at the current rate of sales. The median sale price rose to $254,000. These figures can be misleading because they do not take into consideration selling incentives, like cash or renovations, used to entice buyers.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in March plunged 8.4%, and were 11.3% lower than the same period last year, to a projected 6.12 million units. The estimate of homes for sale, at 3.75 million, represents 7.3 months of supply at the current rate of sales. The median price of homes sold inched up to $217,000. This is the lowest monthly sales figure in the three and a half years I've been tracking it.
  • According to RealtyTrac, foreclosure filings actually fell 1% in April but were still up a staggering 62% from a year ago. Nevada, Colorado and Connecticut had the highest foreclosure rates, while California, Florida and Ohio had the highest absolute number of foreclosures.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 54.7 in April, up from down from 50.9 in March. The ISM is zig-zagging right now, with no clear trend. Nonetheless, it is clear that manufacturing activity in this country is slowing and that the economy is slowing along with it.
  • The Bureau of Economic Analysis announced that the "advance estimate" of the growth in GDP for the first quarter of 2007 was a rather anemic 1.3%. But we all know by know that these early estimates are meaningless (but then again so are all the subsequent estimates too). This follows the Q4 2006 growth rate of 2.5% and the full year growth rate of 3.3%. Even though these figures are worthless, they do show a clear trend of slowing economic growth.
  • Also according to the BEA, personal savings was estimated to be only a negative $79.3 billion in March, or 0.8% of personal disposable income. Granted, one month does not make a trend, but the negative savings rate diminished quite a bit this month. We'll see what happens next month. This could be one reason for the poor retail numbers.
  • The Fed increased M-2 by 0.7% in April after a 0.8% increase in March. The supply of M-2 has increased by a huge 7.5% in the last three months and 6.5% in the last twelve months. Their stated concerns about inflation are laughable as they are inflating the money supply at a staggering rate. They are obviously more worried about the economy than they are letting on. I'm certain this increase in the money supply is one of the reasons for the rise in the stock market.

Trends To Watch

The "Big Picture" of the market, represented by the Wilshire 5000, like most of the rest of the market, looks very bullish. It has already exceeded the high of 14,828 from the last rally and has powered right past 15,000 to set a new all time high. As with the other major indices, the Wilshire paints the picture of a major bull market in progress.

The chart of West Texas Crude has not changed much since last month. It is still looking like an inverted "head and shoulders" pattern (see the image formed where I've drawn the blue lines). If the right shoulder were to completely form itself, we could easily see prices again rise past $70 per barrel, which I expect to happen at some point in the not-too-distant future. Last month I wrote that "I expect prices to consolidate for a while, and possibly drop (which it could do to as low as $57 without violating the pattern), I believe that prices are heading inevitably higher." I'm perfectly happy sticking with that prediction.

Let's now take a look at gold. The chart below shows gold consolidating in an upward trend (the purple lines) after breaking out of a classic declining triangle pattern (the blue lines). I suggested last month that prices would "consolidate and likely fall a bit near-term" and that is exactly what has happened. To me, this is a very long-term story, so I am unconcerned about any short-term movements. This story will be played out over years, not months.

Like gold, the chart of the Dow Jones Commodity Index (which represents 19 physical commodities) broke upward out of a declining triangle pattern. In this case though, the upward trend broke down as the price began to consolidate. The index is neither overbought or oversold, so it's hard to guess the near term direction, although I'm confident that the long-term trend is bullish.

So how is the dollar doing? The chart suggests that the dollar is on very shaky ground. Last month I suggested that the dollar could rally off of an oversold position, and it appears to be doing just that. I have no idea how long this rally might last, but my feeling is that long-term, the trend for the dollar is clearly lower. This should be good for the trade deficit (as our goods become cheaper to export) but bad for foreign investors (who continue to lose money on the dollar denominated investments). Eventually though, having a weak currency is not in the best interests of our country.

So what's going on with housing? I wondered last month whether the right shoulder of a head and shoulders pattern was forming, which would suggest a downward move coming up. Now it's hard to say as the index has been consolidating a bit over the past few weeks. I still believe that the worst is yet to come and that the index will likely revisit its lows before the year is over.

Before we look at the yield curve, I'd just like to show you another bull market going on right now, and that's in the overseas markets. The following chart shows the price action of the EAFE index (Europe, Asia and Far East). What this chart shows you is the important of having some international investments in your portfolio. This index is in a powerful bullish trend that shows no signs of weakening.

Finally, let's look at the yield curve. While it remains inverted, it is not "clean" as the long end looks more like a normal curve. The Fed Funds lending rate is holding at 5.25%. 6-month t-bills now yield a lower 4.89%, 2-year Treasury yields are up to 4.78%, 10-year Treasury yields are now 4.75% while 30-year Treasury yields are up to 4.91%. The spread between the 10-year Treasury and the 10-year TIPS remains steady at around 2.35%, suggesting very little fear of inflation in the bond market.

Monthly Tip - How To Check On Yourself

The following tip is an abridged version of an article entitled "Why You Should Spy on Yourself", written by M.P. McQueen that appeared in the Wall Street Journal on April 21,2007. For the full text of this article, click here.

Used to be, the best way to pry into someone's past was to hire a detective. However, today everyone from prospective employers to identity thieves -- even first dates -- can do surprisingly sophisticated searches, looking for skeletons in your closet. Even some schools are using investigators to weed out fibs and padded resumes.

In the past few years, 47 states have released some court records online, with files ranging from gun possessions to littering violations. Specialist companies like ChoicePoint Inc. and Reed Elsevier PLC's LexisNexis Group quickly mine and sell information like this to companies for a fee.

Just Googling yourself isn't sufficient to spot all the problems. As a result, an array of new services have cropped up in recent months that claim to help you pre-emptively check if your personal and financial data are inaccurate or exposed to abuse.

Some services from identity theft-protection firms TrustedID Inc. and MyPublicInfo Inc. check for unauthorized use of your social security number, which is a growing problem., a new free service from TrustedID, lets you find out whether your Social Security number or credit card numbers are among some 2.3 million compromised pieces of identification in its database.

Another company, Kroll Fraud Solutions, a unit of Marsh & McLennan Cos. helps victims of identity theft restore their good names. LexisNexis and ChoicePoint have also rolled out consumer versions of their services, including a personal-records profile and pre-employment self-check. The services cost from less than $10 to about $50. A newer entrant, ReputationDefender Inc., recently began marketing an online service that claims it can sometimes help you remove or bury negative or embarassing Web postings.

It's impossible to know how many errors are contained in background checks. However, a 2004 study by U.S. Public Interest Research Group found that 79% of consumer-credit reports contained at least one mistake.

The first step in running a background check on yourself: order your credit report. These are from major credit-reporting agencies Equifax, TransUnion and Experian and can be obtained from numerous sites like, or Check for unauthorized credit-card accounts and loans, bad addresses and unfamiliar names that could be evidence of identity theft. Notify the agencies and creditors if anything seems amiss.

The good news: background reports prepared by agencies like these are regulated by the federal Fair Credit Reporting Act. As a result, you're supposed to be notified of the reason if a negative report results in a missed opportunity, giving you a chance to correct mistakes.

You can also check if anyone else has been using your Social Security number by reviewing the annual Social Security earnings statement that your should receive in the mail, or get a copy at

Each company listed above can be reached on the web, where you can read more about their products and compare prices. If you have ever had a problem, or would like to help forestall potential future problems, looking into some of these services may be time and money well spent.

What I'm Thinking and Doing

Like many market observers, and perhaps like many of my readers, I'm a little puzzled as to why the market continues to power ahead to new highs in the face of so many negative indicators in the economy. That being said, I am growing more confident in my belief that this rally is being caused in large part by blatant manipulations of the money supply by the Fed and by more and more stock being taken "off the table" by corporate buybacks and private equity takeovers. We are in the midst of a leveraged buyout frenzy right now where private equity firms are tripping over each other to take companies private. They can afford to do so in large part thanks to the easy money policies of the Fed. As more and more stock is being retired, there is less and less stock to buy. So we have a supply and demand situation occurring, where there is too much money chasing too little stock.

I haven't bought any new positions in the past month. And while I have nibbled a bit at a few high yielding securities in select accounts, on the whole, I've been a net seller in recent weeks. As a general rule, I don't like having any one stock represent more than 10% of an account, so I've been taking some profits on my biggest winners. As I've said many times, I don't mind having some cash available as "attack capital" for opportunistic purchases during the inevitable correction. I know, I know - I've been talking about "the correction" for quite some time now. But unless the laws of nature have been repealed, what goes up must at some point go down. And sooner or later, the market will always revert to the mean. That being said, I do believe that we are in the midst of a magnificent bull market right now that may be a once in a lifetime magnitude, so I continue to enjoy the ride.

Personal News and Notes

That's it for this month. It's late and I'm getting on a plane tomorrow morning for a brief but much needed vacation. I'm looking forward to a few days of rest and relaxation. I may even read a novel or two while I'm away!

As always, I thank you for your continued interest and I look forward to being of service to you sometime soon.

Best regards,

Greg Werlinich

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