Last Month's Results
Statistics 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,
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
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.
Dow Jones Industrial
Europe, Australia, Far
* Return numbers include the reinvestment of dividends
- 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
- 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
- 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
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
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
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
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
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
Last month I mentioned that
I'd be adding a third resource to reach me on the web, in addition
to the Paladin Registry (www.paladinregistry.com) and Brightscope (www.brightscope.com). I'm pleased to
announce that now I can also be found at WiserAdvisor (www.wiseradvisor.com). 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.
"News and Views", Copyright, Werlinich Asset Management,
LLC and www.waminvest.com. All