Werlinich Asset Management, LLC
14 Birch Lane
Rye Brook, NY 10573
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May 23, 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 tumultuous and painful time in the market since I last wrote to you. The DJIA is down 4% since April 20, but down 5.85% since the closing high of 13,279 on May 1. That's a pretty steep drop in just over three weeks, although not yet the 10% needed to be called a "correction". There's been a lot of negative news helping the market head down: a $2 billion trading loss at JP Morgan, worries that Greece will have to leave the Euro zone and the disappointing Facebook IPO to list a few. The good news is that corporate earnings for Q1 were, for the most part, better than expected. The bad news is that as you'll see below, recent economic news continues to be tepid. There is a growing fear that we may be slipping back towards a recession. Given all the uncertainty at home and abroad, it's not surprising that the market has dropped a bit. But keep things in perspective; the Dow was about 6,600 on March 5, 2009.

After six mostly good months, the chart of the Dow Jones Industrial Average is looking rather painful right now with a 7.5% drop from peak to trough over the past three weeks. Ominously, the upward trending channel has been pierced and support around 12,250-12,300 is in danger. RSI is very oversold, suggesting a relief rally could be forthcoming. Watch the moving averages; should the price fall below both we could be in trouble.

The chart of the transportation average mirrors the recent action in the industrial average. Both have broken below their trading channel and are headed toward support. The lagging transportation average did indeed portend future danger. According to Dow Theory, it is bearish that both averages have made concurrent intermediate lows. Fortunately, the index remains above the 200-day moving average. And falling oil prices should eventually help transportation companies like truckers and airlines. A bounce is needed.

Just to prove there are some sectors performing well, check out the chart of the Dow Jones Utility average. For the past year this average has made consistently higher highs and higher lows as it's worked it's way ever upward. The current price is trading above both moving averages and very close to the recent high. I've suggested a few times that people add to positions in this sector; I hope you did as utilities will continue to benefit from a low interest rate environment.

Treasury yields have traded between 1.7% and 2.4% for the past ten months. Now, yields are again testing the floor at 1.7% as fears of a global economic slowdown and troubles in Europe are driving people out of risky assets into the supposed safety of government securities. I'll leave the discussion of after-tax, after inflation returns for another time, but suffice it to say that I'm not putting my clients' money in treasuries. I'll repeat my belief that rates will remain relatively quiescent for at least the rest of this year and into next year, but that once they begin to rise, bond investors will endure significant losses.

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. After a wonderful first quarter, things began to get a little less better in April. Money started to flee the riskiest assets and again seek the safety of bonds. Unfortunately, things have only gotten worse through the first three weeks of May as the stock market has dropped steadily. I guess it's not yet time for rates to rise and bond investors to lose their collective shirts. Concerns in Greece and Spain dragged the EAFE down further than any other index and I'm afraid there are likely more losses to come.

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 May 12 was 370,000, the same number as the prior week's revised figure. The four-week average of 375,000, roughly the same as the prior month's tally. It appears that initial claims have leveled off over the past few weeks after a brief increase. While it's positive that initial claims aren't increasing, they're not decreasing appreciably either. About 3.30 million people continue to collect unemployment insurance.
  • Non-farm payroll employment increased by a disappointing 115,000 in April, as the economy appears to slow a bit. The majority of the gains came in the lower paid professional business services rather than in higher cost manufacturing jobs. Revisions added 19,000 jobs in February and an additional 34,000 in March (as I suggested would happen in last month's newsletter). There's every reason to believe this weak number will also be revised up in future months. The total number of workers counted as unemployed dipped to 12.5 million, which helped move the unemployment rate to 8.1%. The more comprehensive U-6 rate, which was as high as 16.7% last June, remained steady at 14.5%.
  • A slightly lower 5.1 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work rose to 7.9 million and the number of marginally attached workers held at 2.4 million. The number of people holding multiple jobs inched down to 6.95 million. The average hourly wages for blue collar workers rose to $19.72 while the average work week held at 33.8 hours. On balance, the employment picture weakened a bit, but still shows incremental improvement.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget surplus (that's not a typo) of $158 billion for April (our tax dollars at work) and $721 billion for the first seven months of fiscal 2012, which was about $149 billion less than the same period a year ago as tax receipts were 10% higher than a year ago (and 6% higher YTD) and outlays are slightly lower. The higher tax receipts are a direct result of an improved economy.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $51.8 billion in March, recovering the drop from February. Over time, I expect the deficit to shrink as we grow less dependent on foreign oil.
  • The Census Bureau reported that privately owned housing starts reversed the losses in March, rising 2.6% in April. Housing starts are now 30% higher than a year ago, to a seasonally adjusted annual rate of 717,000 units. Also positive is that the results for the prior three months were all revised higher. New building permits were down 7% from the prior month but remained 23.7% higher than the year before. These are inconclusive, and mixed, messages.
  • The National Association of Homebuilders/Wells Fargo Confidence Index gained five points in May to 29. After a one month month decline, this was a return to the growth in builder confidence that started last September and marked the index's strongest reading since May 2007. “While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back,” said NAHB Chief Economist David Crowe.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in April rose 3.3%, and at 343,000 units, were 9.9% higher than a year ago. The estimate of homes for sale was 146,000, which represents only 5.1 months at the current rate of sales. The median sales price of $234,700 was the same as last month and about $8,500 higher than the rising 12-month moving average price of $226,208. For the second straight month, the reported number of sales for the prior three months were all revised slightly higher, so things continue to get a bit better.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were 3.4% higher in April to 4.62 million units, and remained 10% higher than a year ago. The estimate of 2.54 million homes for sale means there's an estimated 6.6 months supply on the market. The median sales price rose to $177,400 is well above the 12-month average of $166,000. Acute inventory shortages in certain markets (Miami, Phoenix, Orange County, North Dakota and Seattle) is helping to propel the average sales price higher.
  • I'm beginning to sound like a broken record, but once again, 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 sixth straight month in February. The index is now at its lowest level since the housing crisis began in mid-2006. Clearly, the trend will continue in March and possibly April as well.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 54.8 in April, an increase from March. This marks 33 consecutive months of expansion in the manufacturing sector. New orders, production and employment all grew in April. The ISM index of non-manufacturing activity was 53.50, a second straight monthly decline, but still marks growth in the service sector for 28 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 decreased by 0.1% in April, a large decrease over the past two months. Says Ataman Ozyildirim, economist at The Conference Board: "The LEI declined slightly in April. Falling housing permits, rising initial claims for unemployment insurance and subdued consumer expectations offset small gains in the remaining components. The LEI’s six-month growth rate fell slightly, but remains in expansionary territory and well above its growth at the end of 2011."
  • According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth for Q1 2012 was 2.2%, which is down from the Q4 2011 GDP growth rate of 3%. The GDP growth rate was 1.8% in Q3, 1.3% in Q2, and 0.4% in Q1. The increase in real GDP in Q1 primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending.
  • The Federal Reserve reported that in February the amount of outstanding consumer credit was $2.54 trillion, up 0.8% from the prior month. There is no question that low interest rates leave Americans with no reason to save, creating more incentives to borrow and spend.
  • According to the Census Bureau, retail trade and food service sales were up a miserly 0.1% in April, a disappointing drop from the prior three months, but still 6.4% higher than a year ago. Furniture and sporting good stores had the greatest advances while building materials, clothing stores and general department stores dragged the numbers down. If consumers start to retrench it will have a very deleterious effect on the economy.
  • The Federal Reserve reported that in April the six month rate of growth in the supply of M-2 (a broader view of money) was 6.7% after 7.6% in March. The supply of M-1 (the most narrow definition of money), on the other hand, rose an even faster 10.3%. The Fed continues to prime the monetary pump.
  • The Conference Board's Consumer Confidence Index slipped a bit in April to 69.2 from 69.5 in March. Given the weakness in the stock market, a slowdown in job growth and uncertainty throughout Europe, 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: "As was the case last month, the slight dip was prompted by a moderation in consumers’ short-term outlook, while their assessment of current conditions continued to improve. Overall, consumers are more upbeat about the state of the economy, but they remain cautiously optimistic."
  • According to the FDIC, 6 banks failed in April, bringing the total number of bank failures in the first four months of 2012 to 22, 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

Once again, the dollar is on a tear. Fears of another European implosion are again driving investors out of the Euro and into the dollar. This is the resulting effect of driving down the value of risky assets, like stocks, and hard assets, like gold and oil. The inverse relationship between the dollar and the market must be watched very closely.

The next three charts all show a similar declining wedge pattern with (hopefully) strong support. The action on the price of gold has been generally bearish for almost nine months now. As the wedge tightens, the pressure builds. Eventually the thinking is that the price will pop to the upside. But now the spot price is now below both moving averages and the 50-day is under the 200-day. All of this is bearish. After falling below $1,600/oz, the next key resistance is $1,500. It might take another month or two for this pattern to complete; then we'll see if we get the anticipated breakout to the upside.

The price of silver has formed a massive declining wedge over the past thirteen months. At the same time, there has been an intermediate trading range of $26 - $37. This wedge in narrower than the gold wedge, suggesting that the price move in silver could come sooner than the move in gold. Right now, it's not a pretty chart. That being said, silver is very oversold and ready for a reversal.

Finally, let's look at how the price of copper has formed the third wedge. Given the headlines of the past two months suggesting a global economic slowdown, especially in China, it's no surprise the Dr. Copper is indicating weakness ahead. We'll see what happens as we head to the seasonal doldrums of summer.

The price of West Texas Crude has plunged in May, dropping almost $15 per barrel in just three weeks. This ended the year-long reverse head and shoulders pattern while dropping the price below both moving averages and towards support at $90. RSI is extremely oversold, which suggests a bounce may be coming up. If supports fails, the price could fall all the way back to the mid-70's.

Look out below?? After failing to pierce resistance around $16.50, the financial sector has moved violently lower, losing almost 15% in seven weeks. And the carnage may not be over. I'd been warning that I expected a pullback as the index was overbought. Until the Euro crisis is resolved, and until the housing market shows solid improvement, I'd still avoid the banks.

Is the housing sector breaking down or just pausing? It isn't clear yet. The news in housing is mixed, but generally better than it was a year ago. I've been wrong for remaining bearish for so long because I couldn't see any reason for optimism with the numbers being so bad. Now that they're "less bad" is that reason enough to invest? Maybe for some people, but not for me.

Support at around 46 held in the face of the recent selloff in the developed international sector. Technically, things look bearish as the current price has fallen well below both moving averages and RSI a very oversold. Greece and Spain are pulling the EAFE down. The situation doesn't look very good right now. Who will come to the rescue?

The reverse head and shoulders pattern for the emerging markets index has completely broken down and the price is now well below both moving averages. The good news is that, so far, support has held around 34 and the index looks to be very oversold and ready for a bump. This is an important sector for asset allocation because of the inherent growth in the developing markets so investors must hope that this trading range holds during this period of fear and instability.  

Interestingly, China is doing relatively better than the rest of the developing world, and this is VERY good news. As you can see below, the SSEC remains well above the January low, which is good news. Also, the current price is roughly equal to the 50-day moving average and just below the 200-day average. Should the index move above both moving averages, 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 mildly bearish right now and RSI is hugely oversold (see the red circle). If sentiment goes much lower we'll be set up for a nice rally.

This chart shows that less than 20% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. Also, RSI is very oversold. Taken with a generally bearish sentiment, it looks like we're setting up for the next rally.

Two months ago I wrote that the "Fear Index" was "disturbingly complacent . . . and that [made] me nervous." Since then, as the market dropped, the VIX spiked from 13.66 to 25.14 before falling back to around 22. A little fear and nervousness is generally a good thing for the market.

What I'm Thinking and Doing

It's at times like these that good, professional investment advisors earn their keep. When the market declines 6-7% in such a short time, individual investors invariably begin to panic. Add to that all the problems emanating from Europe, the inexplicable trading loss from JP Morgan and most recently the botched Facebook IPO. All of this just adds to the environment of distrust and fear that permeates the "little guy". It just seems that the deck is stacked against him. It is exactly at that moment when you need a strong hand on the wheel to guide you through the choppy waters.

I'm not suggesting that there are no problems and that it's all clear ahead, because that's simply not true. We have some tough times ahead. But when we get through it all, perhaps in a few years, we could be set up for another tremendous bull market, much like we were in the early 1980s. But to get there we will likely have to suffer more pain. The question is how to invest for the next few years as we deal with the debt problems that haunt much of the developed world. While I don't have all the answers, I do have a plan, and I'm implementing that plan on behalf of my family and my clients.

I haven't made any large changes to our portfolios in the past month. Indeed, I've remained pretty still in the face of the downturn, waiting for the opportunity to put some cash to work. I've identified our next stock and my entry price. I expect to place this trade sometime soon. It will be a great addition to our portfolios.

Two of our large holdings (ConocoPhillips and MeadWestvaco) spun off new companies to shareholders earlier this month (Phillips 66 and ACCO Brands, respectively). Later this year, another large holding (Kraft) will also split in two pieces and bestow a new company upon shareholders.

Professional News and Notes

Three weeks ago I competed in the United States Masters National Swim Championships in Greensboro, NC. I swam in five individual events and three relays. I finished 5th, 7th, 13th, 15th and 18th in my age group in my five individual races. My times were, by and large, at or better than I had hoped. All in all, I was very pleased with my times, and very happy to return home and take a break from training.

Last month I mentioned that I'd be adding a third resource to reach me on the web, in addition to the Paladin Registry ( and Brightscope ( I'm pleased to announce that now I can also be found at WiserAdvisor ( I hope that through these three sites I'll be able to potentially reach more individual investors that need honest, intelligent professional assistance.

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 345 followers now. I'm hoping to surpass 500 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 over 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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