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

June 25, 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

While we still have not experienced a correction in the market (although we were close in February), it does appear that we may currently be in a period of consolidation. After closing today at 13,352, the Dow is about 350 points below the high set a few weeks ago, but only about 30 points below where it was when I wrote to you last five weeks ago. And barring a big rally in the next four trading days, June is likely to break the streak of gains in nine of the past ten months. There is nothing wrote with taking a breather. While for the past two months the Dow has traded between 13,700 and 13,250, it is still above its moving averages and continues to be in a substantial uptrend. Most of the technical indicators appear favorable for the market to rise even higher even though there are some storm clouds in the economy and the world. But we'll leave that conversation for another day. 

Over the past few weeks, new all-time highs were made by the Dow Jones Industrial, Transportation and Utility averages as well as the S&P 400, 500 and 600 averages, the NYSE Composite, the Wilshire 5000 and the Russell 1000, 2000 and 3000 averages, to name a few. This does not happen in a vacuum and it suggests that further gains are likely. 

As you can see, while the Transportation index has been more volatile than the Industrials, it too remains above its moving averages and in a solid uptrend.

The action on the Utility average is more worrisome, although understandable. It is a common belief that utility stocks do badly in a rising interest rate environment (although I could argue that this belief is outdated). Rates have rising dramatically over the past two months, coinciding neatly with the drop in the utility index. Still, the long-term trend is positive (if barely). If the utility average were to fall below both moving averages, that would be red flag.

The daily chart of the S&P 500 looks very much like the chart of the Industrials. The overall trend is solidly bullish.

The picture is VERY different in the bond market. This may be one of the most important charts in the market right now. Bond yields have exploded over the past month or so as falling bond prices have driven yields on the 10-year Treasury from 4.6% to 5.3%, before falling back to about 5.1% today. The trading range of 4.4% to 4.9% is history. Historically, higher bond yields results in lower stock prices, and so far, this correlation has held. One thing to keep in mind is that if yields continue to rise, the housing market is likely to suffer even more pain.

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. May proved to be another very good month, with large gains across the board in all indices. Thanks to those gains, year-to-date results through May left most of the major averages up between 7.5% and 10.0%. And so far, the action in June has been very erratic, with many of the key averages now trading a bit below their newly established all-time highs.

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 June 16, was 324,000, a sizable increase from the 305,500 five weeks ago. 
  • According to the Department of Labor, non-farm payroll employment rose by a healthy 157,000 in May, up from a very weak number in April, with the service sector again generating most of the gains. Manufacturing employment continues to decline. Average hourly wages rose to $17.30 from $17.25 as wages continue to rise slowly but steadily. The average workweek rose slightly to 33.9 hours. The number of people holding multiple jobs fell slightly to 7.69 million.
  • The number of unemployed workers remained steady at 6.8 million. The seasonally adjusted number of people, who for economic or business reasons, could only find part-time work, rose to 4.5 million and the number of marginally attached workers held at 1.4 million. My Comprehensive Labor Index™ rose to 8.70%, the highest level in four months, while the unemployment rate reported by the government stayed at 4.5%.
  • The Conference Board reported that it's index of Leading Economic Indicators increased 0.3% in May, reversing the decline in April. The Leading Index has grown by 0.3% over the past six months, suggesting moderate economic growth in the near future.
  • The University of Michigan Consumer Confidence Index rose to 88.3 in May from 87.1 in April. The damaging impacts of rising gasoline prices and falling home values continue to be offset somewhat by rising wages and stock prices.
  • According to the CBO, the government posted a budget deficit of $71 billion in May. That resulted in a deficit of $152 billion for the first eight months of the fiscal year, which was $75 billion less than a year ago.
  • According to the Census Bureau, the U.S. trade deficit in April was $58.5 billion, down from a revised $62.4 billion in March. About 30% of that deficit is with China.
  • The Labor Department reported that on a seasonally adjusted basis, the CPI for urban consumers rose 0.7% in May while the "core" CPI, which excludes food and energy, rose only 0.1%. I wouldn't even bother reporting these phony numbers if the government and the media didn't make such a big deal about them. But I find them to be just about meaningless.
  • The Federal Reserve reported that the amount of outstanding consumer credit increased by a modest 1.2% (annualized) in April, to move up to $2.429 billion. It remains to be seen if this is the beginning of slower credit growth or if this was just a blip in this long-term growth trend.
  • According to the Census Bureau, retail trade and food service sales rose 1.4% in May from the prior month and 5.0% from a year ago, reversing the poor month in April. Gas stations enjoyed the biggest percentage increase in sales from the prior month.
  • The Census Bureau reported that privately owned housing starts fell 2.1% in May from a revised lower April figure, and was down 24.2% from a year ago, to a seasonally adjusted annual rate of 1.47 million units. New building permits were up about 3% from last month and down 22% from last year, so the outlook for future housing starts remains poor.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in May fell 1.6% from revised lower April levels, and down 15.8% from the same period last year, to a projected 915 million units. New home sales have been down five of the last six months, with the one up month seemingly due to builders slashing prices to move inventory. The estimate of homes for sale is now 536,000, which represents 7.1 months of supply at the current rate of sales. The median sale price is only $236,100, below the 12-month average of $243,433. 
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in May slid 0.3%, and were 10.3% lower than the same period last year, to a projected 5.99 million units. This marked the third straight month in which fewer homes were sold than the prior month. The estimate of homes for sale, at 4.43 million, represents a whopping 8.9 months of supply at the current rate of sales. The median price of homes sold increased to $223,700, the fourth straight monthly increase. 
  • According to RealtyTrac, foreclosure filings surged by 19% in May and were up a staggering 90% from a year ago. Nevada, Colorado and California had the highest foreclosure rates, while California, Florida and Ohio had the highest absolute number of foreclosures. The high foreclosure rates in the typically strong spring period foreshadows difficult times ahead.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 55.0 in May, up from 54.7 in April. This marks the fourth month in a row in which the index has increased.It appears that manufacturing activity is picking up a bit.
  • The Bureau of Economic Analysis announced that the "preliminary estimate" of the growth in GDP for the first quarter of 2007 was a meager 0.6%, even worse than the "advance estimate" of 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 a negative $132.8 billion in April, or 1.3% of personal disposable income. This marked a huge increase from the prior month and stopped a short period of shrinking negative savings rate.
  • The Fed increased M-2 by 0.3% in May after a 0.7% increase in April. The supply of M-2 has increased by a huge 7.1% in the last three months and 6.6% in the last twelve months. Their stated concerns about inflation are laughable as they, and other central bankers around the world, are inflating the money supply at a staggering rate. This "sea of liquidity" is a major factor in propping up asset values around the world.

Trends To Watch

To give you some perspective as to the magnitude of the rally in the Dow Industrials, I'm showing you a chart of the past four years, during which the Industrials have increased by over 6,000 points, or 80%. The index is currently mildly oversold, yet well above its trendline and moving averages. A drop to about 12,500 would have to happen for the bullish trend to be violated.

The "Big Picture" of the market, represented by the Wilshire 5000, like most of the rest of the market, looks very bullish. It exceeded the high of 14,828 from the last rally and blew right past 15,000 to set a new all time high. Unlike the Industrials though, this index is currently below its 50-day moving average, but safely above the 200-day and the trendline. We'll have to watch and see what develops.

I find it very interesting that as the price of crude oil again approaches $70 per barrel, there is very little of the public outcry that accompanied the last such move. If you remember, the Dow was around 10,700 last time. Now, with the Dow at 13,350, I guess there just isn't as much to complain about. (I guess Congress is too busy whining about other matters over which they have little control.) The inverted "head and shoulders" pattern that has been forming for almost a year is now more clear than ever. It is clear to me that the price of West Texas Crude will rise past $70 per barrel and possibly test the old high sometime later this year.

Let's now take a look at gold. The chart below shows gold consolidating in an upward trend after breaking out of a declining triangle pattern. The key to me is that gold is setting increasingly higher highs and higher lows since last October. This suggests that the next upward move will take the price over $700. In fact, on a technical basis, gold looks like a buy right now.

Like gold, the chart of the Dow Jones Commodity Index (which represents 19 physical commodities) broke upward out of a declining triangle pattern then started to move up. The difference here is that it could not maintain that upward trend and has consolidated for three months. The index is mildly oversold right now, so like gold, I'd expect it to resume its upward path shortly.

What about the dollar? Long-term, the chart suggests that the dollar is on very shaky ground. Short-term, it's possible for the dollar index to rise out of the declining triangle pattern, strengthening along with rising interest rates. For the past two months I suggested that the dollar could rally off of an oversold position, and it appears to have done 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.

So what's going on with housing? The "head and shoulders" pattern that I've been talking about for the past few months is become more evident. The fact that the housing index closed yesterday below the April low is very bearish. And I clearly believe that the worst in the housing market is ahead of us, I believe that the index will continue lower and test the bottom set last July.

Now let's take a broad look at the world market, as represented by the MSCI EAFE index (Europe, Asia and Far East). What this chart shows you is the importance of having some international investments in your portfolio as the rest of the world is also enjoying a bull market. There is nothing in this picture that suggests an imminent danger.

Finally, let's look at the yield curve. What do you notice right away? The curve is basically no longer inverted. The long end of the curve now yields more than the short end. And what does this mean? Historically, it has meant a stronger economic outlook, a little more risk of inflation and a stronger dollar. The Fed Funds lending rate is holding at 5.25%. 6-month t-bills now yield 5.01%, 2-year Treasury yields are up to 4.88%, 10-year Treasury yields are now 5.08% while 30-year Treasury yields are up to 5.20%. The spread between the 10-year Treasury and the 10-year TIPS has risen slightly to 2.41%. That still suggests very little fear of inflation in the bond market. We'll see if this spread begins to widen.

Monthly Tip - Phishing

I'm sure that every one of my readers, at one point or another, has received one or more fraudulent emails that appeared to be from Citibank, Bank of America, or any number of other well-recognized banks. I hope you recognized the scheme, called "phishing", and immediately deleted the email.

Phishing is a very well-designed and dangerous scam that uses social engineering to fool its victims - meaning phishers try to resemble a message or inquiry that you would expect from your real bank. That makes it very difficult to tell the difference between a true bank message and a phishing message. In fact, a really good phishing site can fool nine out of ten people, including people who are experts with computers. So, don't be afraid to use all the help available to you when it comes to protecting yourself against phishing attacks. Here are a few suggestions for how to protect yourself.

      Do not give information - such as user names, passwords, credit card numbers, social security or bank account numbers, etc. - in an email.

      Be suspicious of an email with urgent requests for personal financial financial information because your account is being closed, or being verified, etc.

      Before typing in any financial information, ensure that you did not get to the website using a link from an email or a spoofed website. Get into the habit of tying in the website address of your financial institution in the address bar.

      Look for the "s" after http (e.g. in the address bar on top to check that the website is secure

      Depending on the browser you use, look for the padlock or the key at the bottom of the browser.

If you were unaware that the email was a fake and entered information into the website, please contact your business security expert or information technology department.

For more information about phishing, visit the anti-phishing website. Also makes sure that you are using a reputable anti-virus program like McAfee or Norton, and that the software is up to date.

What I'm Thinking and Doing

It has been an interesting month. The equity market seems to have sold off a bit in sympathy with the bond market. As yields have increased that to bond losses (yes, you can lose money investing in bonds), some money has moved out of equities seeking that higher yield. Yet, as I've shown above, equities in this country and around the world are in the midst of a terrific bull market that doesn't appear to have run its course. I believe there are still more gains ahead, and I'm using daily or weekly weakness in my core sectors to add to favorite positions.

I've said before that I believe this rally is being caused in part by blatant manipulations of the money supply by the Fed and by stock being taken "off the table" by corporate buybacks and private equity takeovers. I don't think this is going to subside any time soon. Add to that the growing appetite for equity by the Chinese as they diversity out of our Treasury bonds (which will only add to the selling pressure in the bond market), and the demand side of the equation will likely continue to outpace supply.

I bought a new stock this month that satisfies three of my criteria - it's in a core sector (energy), it's an international company and it generates a reasonable income stream (2.4%). In addition, I've continued to nibble a bit at a few high yielding securities in select accounts. Otherwise, I'm basically just sitting tight, looking for some new ideas, and enjoying the ride.

Personal News and Notes

I'm sorry that the newsletter is a bit late, but it has been a very busy month. The end of school meant lots of activities for each of my three children. After all the tests, performances and picnics, my two daughters left Sunday morning for sleep away camp, leaving my son home this summer attending day camp and ruling the roost in absence absense of his older siblings.

Please make note of the fact that I will be appearing as the guest analyst on Bill Bailey's radio program, "It's Your Money" between 12:00 and 1:00 on Sunday, July 15. I believe the broadcast can be heard on National Radio Just look for the link to Bill Bailey.

I hope you have been listening to my pod casts with Bobby Ilich for his program "Ahead of the Curve", on If you've missed any of these lively and informative broadcasts, I urge you to click on the link, and add it to your Favorite Places. These shows typically run about 20 minutes and are a lot of fun. I hope you will listen in each week.

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

Copyright? 2007, Werlinich Asset Management, LLC and All Rights Reserved.