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

June 22, 2004 Comments   |   Refer A Friend   |   Sign Me Up   

Market Analysis...Waiting for the Fed
What I'm Doing Now...Looking For Opportunities
Current Trend...Explosion in the Money Supply
Statistics...Mostly Positive
Monthly Tip...Update Your LifePlan
Personal News and Notes

Current Market Analysis...Waiting for the Fed

The results for May were generally pretty good as the market seemed to benefit from the positive economic results and discount all the troubles in Iraq. Among the major equity indices, only the Dow Jones Industrial Average was down (albeit very slightly) for the month. Bond prices continued to decline as the bond market priced in the likelihood that the Fed will begin to raise the short-term rates next week after their June meeting.

Right now, the whole world is awaiting the official word from the Fed as to the direction of interest rates. It is all but assured that they will raise the Fed Funds rate 25 basis points. It is also possible, but not too likely, that they will increase the rate by 50 basis points. I don't think that the Fed wants to raise rates, but they are being forced into this move by the bond market. I believe the Fed would like to see the overall economy, especially the job market, improve even more before they begin to tap on the brakes. I had been forecasting that the Fed would leave rates unchanged through the election. It looks like that prediction will be off by a few months. I also thought that the yield on the 10-year Treasury would remain below 4.5% for the first half of the year. Unfortunately for bondholders, I was off by two months on that estimate. It now appears that 10-year rates are headed to 5% in the not too distant future.

Fortunately, I have been correct so far with my prediction that the Dow would trade between 10,000 and 11,000 for the most of this year. As I write this on a rainy day in Upstate New York, the Dow finished today's trading at 10,395, which is quite a bit better than the couple of days we traded below 10,000 as I was writting this letter last month. In fact, the Dow managed to rally more than 600 points from that low. I've warned my readers for almost a year that Dow 10,000 is an important barrier. Take a look at the chart below. What jumps out at me are the two declining double-top formations followed by what appears to be a third declining double-top formation. The first was in February when the Dow reached its peak at 10,753. It then dropped sharply the following month to 10,007. The second double-top was made in April when the Dow peaked at 10,570. The subsequent decline reached a low of 9,852. This recent top was 10,440. The chart would suggest that the next support level would be around 9,600. A temporary bullish factor is that the Dow remains above both the 50-day and 200-day moving averages, although it wouldn't take much to pierce both of those levels.

The bond market had a tough month in May as the benchmark 10-year treasury bond rose to almost 4.9%. Since then, the yield hasn't changed very much, trading between 4.7% and 4.9%. As I write this, the yield is 4.70%, the low end of the recent range. It appears that the bond market is sanguine about the recent economic news and about the likelihood that the Fed will begin boosting rates next week. As I've said before, it is often the case with Wall Street analysis that the majority opinion is often wrong. So I'll reserve judgement until the actual announcement of the rate hike hits the newswires.






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...Looking for Opportunities

I haven't changed my general investment stance at all since last month except that I'm sitting on more cash than usual as I look for new opportunities. In my key sectors, I'm maintaining my positions in precious metals, commodities, oil and gas and drugs. While the precious metals and commodities sectors continue to be weak right now, I'm very confident in their long term prospects. The precious metals sector I view as "investment insurance". As such, I'm willing to just sit with it until I no longer need the insurance, or until that insurance pays off. My oil and gas and drug positions are "core" holdings and I therefore expect to hold them for the foreseeable future. My "special situations" holdings also remain unchanged, although I have substantially increased my holdings in one stock. I'm now looking at a couple of new stocks in which I may purchase an initial stake. The key is to identify a sector that will benefit from the current events or economic environment, then either buy that sector or buy one or more of the leading companies in that sector. That is what I do every day.

Trend...Explosion in the Money Supply

This month I'm going to talk a little about something that is little talked about, and even less understood - the national money supply. Please remember that the supply of money in this country, such that the paper you and I pay for our goods and services can be considered "money", is currently controlled by the Federal Reserve. First, a couple of simple definitions:

  • M1 - the most liquid forms of money; basically cash and checking accounts;
  • M2 - M1 plus savings and money market accounts;
  • M3 - M2 plus institutional money market accounts, time deposits and Euro dollars held in the US.

For the purposes of this discussion I will be using M3 statistics.

Right now, the Fed is creating new money at a very alarming rate. From June '03 through June '04, the Fed created $316 billion in new money. Yet in the first five months of this year alone, the Fed has printed $366 billion in new funds. Even more astonishing, in the last three months, the Fed has created $253 billion, which works out to an annual run rate of $1 trillion in new funds. This makes you wonder what crisis the Fed sees in our future. As Robert McHugh of Safe Haven asked recently (click here for the entire article),

"There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event."

While I don't think things are as bleak as that (at least I sure hope not), I am concerned by what's going on. If there is no dire event in our future, then this money creation is horribly inflationary and is destroying the value of our currency. This could have a dire impact on our stock and bond markets as foreign investors slow or withdraw their investments due to mounting losses from negative currency translations. If this massive money creation continues unabated and with no explanation for a few more months, I will grow even more concerned about our future.

Statistics to Watch...Mostly Positive

  • The labor department recently announced that 248,000 non-farm payroll jobs were added in May, which was more than expected. They also revised the April and March numbers upward to 346,000 from 288,000 and to 353,000 from 337,000, respectively. There was job growth in almost all sectors. Hourly wages increased by 0.3% from April and 2.2% from last May.

  • Roughly 8.2 million people remain unemployed in May, the same as April. The number of part-time workers rose slightly to 4.665 million from 4.52 million. The number of "marginally attached" workers remained constant at 1.5 million. That means with a labor force of 138.8 million, my "underemployment" rate rose slightly to 10.35%, while the unemployment rate reported by the government held fast at 5.6%.

  • The four week average for initial jobless claims is holding fairly steady at around 335,000, although there has been a slight uptick over the past few weeks.

  • Personal income rose 0.6% in April after a 0.4% rise in March.

  • The Consumer Confidence Index inched up in May to 93.2 from a revised 93.0 in April. This survey indicates that people remain upbeat about the economy.

  • Eight months into the fiscal year, the Congressional Budget Office (CBO) estimates the federal budget deficit to be $347 billion. Their full year estimate is for a $477 billion deficit.

  • According to the Census Bureau, the federal trade deficit set a second consecutive record high of $48.3 billion in April, up from $46.6 billion in March.

  • The Labor Department reported that the Consumer Price Index, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, rose 0.6% in March, while the "core" CPI, which excludes food and energy, rose 0.2%. These numbers continued to fuel fears of inflation.

  • The Labor Department also reported that the Producer Price Index (PPI), which measures the average change over time in the selling prices received by domestic producers for their output, rose 0.8% in April, due mostly to increase in the prices of food and energy. The "core" PPI rose 0.3%.

  • According to an article in the June 7 issue of Business Week, gasoline prices, adjusted for inflation, are still 36% cheaper today than in 1980. Gas would have to cost $3.50 per gallon to cost as much today as it did back then.

  • The American Association of Individual Investors' (AAII) bullish sentiment fell from 39% for the week ended May 8 to 33.3% for the week ended June 5.

  • The University of Michigan consumer confidence index fell to 90.2 in May from 94.2 in April.

  • Same store retail sales grew a robust 5.7% in May, continuing the strong results posted by retailers this year.

  • According to the Census Bureau, sales of new single family homes in April fell 11.8% to a seasonally adjusted annual rate of 1.093 million units. This was the largest one month drop in 10 years. The increase in mortgage rates is having a clear impact on the housing market as mortgage applications continue to fall.

  • The Institute for Supply Management (ISM) index of manufacturing activity stayed essentially flat again in May as it rose to 62.8 from 62.4 in April. That figure still suggests an expanding economy.

  • The first quarter GDP was revised upward to 4.4% from the initial estimate of 4.2%.

So what does all this mean to you? It seems to indicate that the economy is firing on all cylindars right now, thanks to historically low interest rates and the Fed's easy money policy. I have to admit that I was wrong with my somewhat gloomy forecast for the economy this year. While I'm still somewhat concerned about the staying power of this economy, it's hard to argue with the current numbers. As long as the Fed retains it's highly accomodative stance, there's no reason to believe that the good times can't continue. The only things that may slow things down are rapidly rising interest rates (which I don't think will happen) and the fear of an escalation of the war in Iraq or another terrorist attack on our soil. Barring such an event, it would appear the economy should continue to power ahead for at least the next few months.

Monthly Tip - Update your Financial LifePlan

Rather than have a guest author this month, I've decided to write a short column reminding you to update the many facets of your financial LifePlan. What is a LifePlan you ask? Very simply, a LifePlan encompasses all of the components of your financial well-being. When each of these items are up to date, then you and your family will be financially taken care of. I'm now going to review each of the major elements of your LifePlan. Not every item will be applicable to each individual or family. For everything that is applicable, if it hasn't been written or updated within the past two years, it is probably out of date.

  • Investments: make sure that you have an overall strategy that guides all of your investments, including taxable, retirement, pension and college savings accounts.

  • Tax preparation: as your finances become more complex, it's a good idea to work with a CPA who will not only prepare your taxes each year, but also help implement proactive strategies to minimize your taxes each year.

  • Life Insurance: it's a good idea to consult an independent insurance agent to determine what type of policy best fits your needs. If you have a term policy that is more than two years old, you can probably save a lot of money by writing a new policy as rates have dropped dramatically.

  • Property and casualty insurance: I wrote about this in October. I suggest that if you haven't already done so, you should make the deductible $1,000 for both your home and auto policies. Then use some of that savings to buy additional excess liability (or umbrella) coverage. This insurance is inexpensive and important. Also, if you haven't adjusted your homeowners policy in the past two or three years, chances are you are substantially underinsured.

  • Disability insurance: I wrote about this last month. Talk to you insurance agent about this.

  • Long term care insurance: I wrote about this in January. If you are over 60, or have parents over 60, it is worth considering this coverage.

  • Will: it is very important that everyone have a will, although it is imperative for anyone with children. Except for those with complex estates and significant assets, it is relatively simple to draw up a will that will allow you to clearly stipulate how you want your assets disbursed in the event of your death. Don't leave it up to the courts. Find a good attorney to help you through this process.

  • Living will: the same attorney who drafts your will should also draft your living will. This legal document states your wishes regarding heroic healthcare measures should you be in a vegitative state or have a terminal or incurable illness.

  • Health care proxy: the same attorney who drafts your will and living will should also draft your health care proxy. This document authorizes someone to make health care decisions for you should you be unable to make those decisions for yourself. This is different from a power of attorney, which entitles the designated person to also make financial decisions for you.

  • Trusts/estate plan: for those of you with children, second (or third) marriages, or assets in excess of $1,000,000, I suggest working with an attorney to help create an overall estate plan that will likely include one or more trusts. This is the best way to ensure when and how your assets will be distributed to the correct beneficiaries. It will also help to minimize the taxes paid by your estate during your lifetime and after your death.

  • Mortgage refinance: as I've said many times, if you haven't already refinanced, or if you currently have an adjustable rate mortgage, it's not too late to lock in a pretty cheap fixed rate mortgage. But don't wait too much longer.

I know that sounds like a lot of work to do, but chances are you have already taken care of some of these things. I believe strongly that you must address each of these issues to have a complete and comprehensive LifePlan. Be prepared to spend a little money on good advice and counsel. The money spent now will more than pay for itself down the road.

If you would like more information on any of these items, or would like help finding an expert in one of these fields, you can email me at or call me directly at 800-PHON-WAM.

Personal News and Notes

I am pleased to announce that after months of work, my brand new website is finished and available for your viewing pleasure. Please go to / and take a look. I would greatly appreciate hearing any of your comments and suggestions. I'm always looking for ways to improve your experience on my site.

Earlier this month I appeared again on "Your World with Neil Cavuto". We managed to make it through the entire segment without having to discuss the war, Martha Stewart, or any other breaking story. What a pleasure! If you missed the show, I have that video, as well as my nine previous appearances, available for viewing on the "WAM on TV" section of my site.

After a month-long hiatus, I plan to complete the chapter that I'm writing for The Black Book on Personal Finance by the end of July. I should have excerpts from that chapter, titled "Dynamic Sector Rotation Investing: How To Make Money In Good Times and Bad", available on my website shortly thereafter. With the publishers help and permission, I hope to have e-books of the chapter available for sale by the end of the summer.

For those of you who live or work in the Westchester/Fairfield County area, I would like to introduce you to a business networking organization called Contact Advocate, and more specifically, their Westchester County Exchange chapter. I recently agreed to be one of the organizers for this Chapter. Our next meeting is scheduled for 7:45 a.m. on Tuesday, June 29. This is a great opportunity to meet and network with other local business professionals. Please click here for more information about this event. If you would like to attend, or would just like additional information about the group, please let me know as soon as possible.

As always, I thank you for your interest and consideration, and invite you to write or call me if you have any questions, or if I can be of service to you in any way.

Best regards,

Greg Werlinich

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