Werlinich Asset Management, LLC
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Valhalla, NY 10595
Email: greg
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June 11, 2010

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

Current Market Analysis

It has been a particularly wild ride for the stock market so far this year. First, the Dow Jones Industrial Average hit an intermediate high of 10,725 on January 21. Interestingly, that was the exact midpoint of the move from the low of 7,286 after the tech crash to the high of 14,164 set in October 2007. From there the market plunged over 800 points during fourteen trading days, falling to a low of 9,908 on February 8. Then the market went almost straight up almost 14%, blowing right by 10,725 on its way to hitting 11,258 on April 26. Since then it's been "look out below!" So much for my April proclamation of "all clear ahead." Right now, I think we should expect some consolidation while we wait for some of the exogenous factors to be resolved. At that point, I think the market would turn back up.

I think the market has been crushed almost entirely due to the economic problems in the Euro zone and the economic, political and social ramifications of the disaster in the Gulf. I really believe that all the media outlets should stop showing the video of the oil flowing into the gulf. They are just sensationalizing a terrible situation and making things worse. The good news is that for the most part, the majority of the economic statistics that I talk about below continue to improve. The one important laggard continues to be the lack of any real, sustainable growth in employment. 

So what do the charts tell us now? The Industrial average has fallen off a cliff. It has plunged below both the 50-day and 200-day moving averages. The only good news is that the 50-day average has remained above the 200-day average. Looking at the RSI would suggest a bounce may be forthcoming. Short-term, this is a traders market. Longer term, for patient and brave investors, there may be lots of value out there. 

In the last newsletter I wrote that the Transportation average has was "likely due for a breather." What I didn't foresee was the depth of the selloff. The bad news is that the average fell below its 50-day moving average. The good news is that is remains barely above the 200-day. It will be important to remain above both moving averages and have the 50-day remain above the 200-day.

Since last May, the yield on the 10-year treasury has traded between 3% and 4%. Since December, rates had been trading at the higher end of the range, although each attempt to move above 4% had failed. Then the Euro started to crumble, the dollar soared, and treasuries were bid up in a flight to safety, sending yields down. In any case, the trading range holds.

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, not including dividends. The equity markets enjoyed broad gains in April before plunging in May thanks to the disaster in the Gulf and a strong dollar. In fact, May was the worst month for the Dow Jones Industrial average since 1940. Indeed, the losses in May erased all the gains for the year from the broad averages. Even worse hit, thanks to the declines in the Euro, were the European markets, which lost over 11% in the month. Ouch.

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

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended June 5 was 456,000, a decrease of 3,000 from the prior week. The four-week average was 463,000. The non-seasonally adjusted number of initial jobless claims was less impressive. We're still waiting for these numbers to drop in a meaningful way.
  • Non-farm payroll employment rose by 431,000 jobs in May, with 411,000 temporary workers hired for the census. The number of job losses reported in March and April were both increased after revisions. Average hourly wages for blue collar workers rose a bit to $18.99, while the average work week increased slightly to 33.5 hours. Overall wage growth continues to be stagnant. 
  • In May, the total number of workers counted as unemployed held at 15.0 million, while the unemployment rate remained unchanged at 9.7%. The more comprehensive U-6 rate was 16.6%, down from 16.9%. There were 6.8 million people who have been unemployed longer than 27 weeks. This number keeps increasing. The seasonally adjusted number of people who could only find part-time work fell back to 8.8 million and the number of marginally attached workers slipped to 2.2 million. The number of people holding multiple jobs increased to 7.3 million. Overall, the employment picture remains poor.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $142 billion in May, leaving us with a deficit of $941 billion for the first eight months of fiscal 2010, which is $51 billion less than the record shortfall from 2009.
  • The Census Bureau reported that the U.S. had a trade deficit of $40.3 billion in April, up from $40.0 billion in March. The trade gap has remained relatively stable for a while, and this modest deficit really doesn't worry me very much.
  • The Census Bureau reported that privately owned housing starts increased 5.8% in April after gaining 5.0% in March, and was 13% higher than a year ago, to a seasonally adjusted annual rate of 672,000 units. New building permits were up 11.5% from last month and were up 15.9% from last year. This marks two consecutive months of solid improvement.
  • The National Association of Homebuilders/Wells Fargo Confidence Index increased to 22 from 19 in May, marking the highest level in two years, but still low by historical standards. This correlates well with the increases in housing permits and starts. Hopefully this is presaging a real improvement in the housing market.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in April jumped 14.8% from the prior month, and were almost 48% higher than the same period last year, to 504,000 units. The estimate of homes for sale is 211,000, which represents only 5.0 months at the current rate of sales, down from 12 months just over a year ago. The median sales price fell to $198,400, which is way below the 12-month moving average price of $216,442, thanks to short sales and distressed sales.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in April rose 7.6% from March, and were 22.8% higher than a year ago, to a projected 5.77 million units. The estimate of homes for sale, at 4.04 million represents 8.4 months of supply at the current rate of sales. The median sales price rose to $173,100, which is almost identical to the 12-month average of $173,058. The imminent expiration of the first-time home buyers credit certainly helped to boost the sales figures.
  • The S&P/Case-Shiller Home Price Index, which uses a three-month moving average to track the value of home prices across the US, decreased fractionally in March for the sixth month in a row, to 156.25, following five consecutive months of increases. Given the number of distressed sales nationally, this shouldn't be a surprise.
  • According to RealtyTrac, the number of foreclosures in May dropped 3.3% from April, and were less than 1% higher than a year ago. This followed a 9.1% drop in April. The backlog of foreclosures continues to be worked through.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 59.7 in May. This marked the tenth month in a row in which the manufacturing sector expanded. The ISM index of non-manufacturing activity was 55.4, marking growth in the service sector for five consecutive months.
  • The Federal Reserve reported that capacity utilization in the industrial sector increased for the tenth straight month, to 73.7% in April. Capacity utilization now remains only 6.9% below the average level of the period from 1972 through 2008, but 4.5% higher than a year ago. Like the ISM numbers, this is another good indication that the economy is getting stronger, at least in the industrial sector.
  • The Conference Board reported that it's index of Leading Economic Indicators dropped by 0.1% in April, following a 1.3% increase in March. This is the first decrease in more than a year. "These latest results suggest a recovery that will continue through the summer, although it could lose a little steam."
  • According to the Bureau of Economic Analysis, the "second" estimate of GDP growth in the first quarter was a very modest 3.0%, slightly lower than the first estimate of 3.2%, which is lower than the 5.6% growth recorded in the fourth quarter. The reduction was due to decelerating inventory growth, lower fixed residential investment and reduced state and local government spending.
  • The Federal Reserve reported that in April the amount of outstanding consumer credit increased at an annualized rate of 0.5% from the prior month, to $2.44 trillion. This is the first increase, albeit a very small one, in more than a year and a half. Still, on an absolute basis, it's still at a very low level.
  • According to the Census Bureau, retail trade and food service sales decreased 1.2% in May, but were still 6.9% higher than a year ago. This was very disappointing to the market. Until the employment numbers show some sustained growth, retail sales will continue to lag.
  • The Federal Reserve reported in that in May the supply of M-2 increased slightly from the prior month and was up only 0.9% during the prior six months. The supply of M-1, on the other hand, rose a slightly faster 2.1% over the same six months. This is further evidence that the the Fed is slowing the monetary expansion. Rate increases, though, do not seem to be anywhere on the horizon.
  • The Conference Board Consumer Confidence Index rose in May for the third straight month, although it is still weak by historical standards, to 63.3 from 57.7 in April. Consumers remain concerned about the job market and their near term financial situation but their outlook clearly is improving.
  • According to the BEA, disposable personal rose in April, which caused the personal savings rate to increase from 3.1% to 3.6%.
  • According to the FDIC, 81 banks have failed so far this year, through June 4. 140 banks failed in 2009 and were either closed or merged into healthier banks. By comparison, 26 failed in 2008 and only 3 failed in 2007.

Trends To Watch

Thanks to struggling countries in Europe the dollar index has surged about 20% over the past six months and is now bumping right against resistance at around 89, the high set in March '09. The chart is extremely bullish. Everyone is betting against the Euro. Is is for that very reason I expect the dollar to take a breather sometime soon and confound the herd. 

I don't need to bore you by telling you again how I have been a gold bull for the better part of the last decade. All you need to know is that the price of gold, in current dollars terms, is at its all time high. And as importantly, it shows no hint of slowing down. Last issue I wrote that "I would look for gold prices to eventually rise above $1,200 again and head towards the high of $1,226." Now that this has come to pass I think we could see $1,300/oz before the year is done.

Silver continues to be in a stealth bull market. While gold has risen about 80% since November '08 and receives all the press coverage, silver has surged about 120% in the same period yet earns almost no ink. As much as I believe in gold, on a percentage basis, I expect the price of silver move even faster. I look for silver to move above $20 per ounce before year-end.

Not surprisingly, the economic problems in Europe seems to have taken its toll on the price of copper. The inverted head and shoulders pattern, which suggested further gains, was not prophetic at all. The price of copper is now trading below both moving averages, and those averages are moving dangerously close to each other. This trend bears watching.

I was wrong. I expected the price of West Texas crude to break out above the ascending triangle pattern. That clearly didn't happen as oil traded much lower during the Euro crisis. The price of the black gold is already recovering, due in part to the problems in the Gulf. At $76/barrel, it is trading factionally below both moving averages, and like copper, those averages are in danger of converging. Should that happen, it would be very bearish.

After briefly breaking out above the year-long trading range, the financial sector succumbed to the Euro crisis and plunged back to the bottom of the trading range. The next few months will tell the true tale.

Like the financial sector, the housing sector dropped along with the rest of the market during the market selloff and fell back towards the bottom of its trading range. Again, the next few months will be the key.

Not surprisingly, the index of developed foreign markets plunged from the top of the trading range right through the bottom, thanks to the Euro crisis. Last issue I suggested, correctly, "that the sovereign debt problems in Europe could drag this index lower." The question is how much low will this index go? The next support looks to be around 44.

After trading sideways since last July, the Chinese market has fallen victim to the same meltdown as the rest of the world's markets. The health of the Chinese economy, and by proxy, it's stock market, is very important to the world's economy. The Shanghai Composite to dangerously below both moving averages, and the the 200-day average is now above the 50-day, which is very bearish. Should the Chinese market roll over and head significantly lower, it could have very negative implications for the global economy.

The Baltic Dry Index has held up surprisingly well considering all the market chaos. It has also held up well considering the weakness in the Chinese market. A nimble trader could make some money trading this pattern.

The NYSE Bullish Percent Index represents the percentage of stocks listed on the NYSE that signal a buy. Contrarians would argue that extreme levels of exuberance is a bearish indicator, and vice-versa. Last issue I wrote that "this chart shows an almost extreme amount of bullishness, which suggests trouble ahead. RSI is almost off the charts and bullish sentiment is near a high. This portends a pullback is coming." Well, I got that one right. Now I think the bearishness is so pervasive, and RSI is so oversold, that it's more likely that an upturn is around the corner.

What a difference a month makes. By the middle of April, there was so little fear in the market that complacency had taken over. Not any more. The VIX has moved back into the "crazy" range not seen since this time last year. I expect the VIX to move back into the normal range within a month or so. 

What I'm Thinking and Doing

It has been a very tumultuous and scary time in the stock market over the past month or so. Markets worldwide have plunged thanks to the currency crisis in Europe and the disaster in the Gulf. As a result, the broad market has dropped about 12-13% from its peaks. The most important thing to remember is that this is not unusual. After an almost 75% increase, there had to be a correction for one reason or another. I really do not believe that investors should panic. It is just in that moment that the worst investment decisions are made. Which is not to say that I'm not nervous, because I am. I just believe that this crisis will pass; that the underlying economic picture in the US right now is getting stronger and the the market will likely weather this storm and right itself. What follows are two emails that I sent to my clients. The first I sent on May 7 after the "Flash Crash". Nothing could present my views of the market any better.

"As one of the most turbulent weeks in the history of the stock market draws to a close I wanted to drop you all a quick note to let you know what I’m thinking and what I’m doing. First of all, I really believe that what we’ve witnessed over the past couple of days is almost the definition of panic and hysteria, driven initially by the events in Greece, then exacerbated by an error yesterday that triggered a massive level of program selling which overwhelmed the market. If we are able to step back and look at the bigger picture it’s still troubling, but not quite so dire. We just need to put things into greater perspective.

From the point at which the stock market hit bottom in March of 2009 at 6,547, the Dow Jones Industrial average rose about 71% to a high of 11,205 a week ago. At this moment, the market has now corrected about 7% over the last week. A 7% correction is perfectly reasonable and understandable after such a stunning run-up. Even a 10% correction would be “normal”. That would bring the DJIA back to about 10,000. If the market can hold at or above 10,000, given all the good news on the domestic front, we stand a good chance of beginning another upward move. Should we breach the 10,000 level, we’ll have to re-evaluate.

What we need to focus on is the fact that the US economy is clearly in recovery. This morning was a very optimistic labor report which reported strong job growth in March and upward revisions to February and January. The manufacturing side of the economy has been strong for months; finally labor seems to be catching up. Hopefully you are all reading all or part of my monthly newsletter. You can even follow my daily tweets on Twitter if you want a quick snapshot of what’s going on each day. You can follow me at @waminvest.

So if you are hyperventilating, I suggest you have a glass of wine tonight and relax. Please don’t make any rash decisions. Invariably, rash decisions lead to bad mistakes. If after the weekend you’d still like to talk to me about your portfolio, I’ll be happy to review things. Have a great weekend. And thanks again for your trust and support."

The next email I sent out on May 26.

It has now been almost a month since the market hit a high of 11,205 on April 26. Since then, the Dow Jones Industrial Average has dropped almost 10%. While this is certainly unsettling, it should not cause a panic. As I wrote to you two weeks ago the day after the “Flash Crash”, a 10% correction after a 70% rise is neither surprising nor unexpected. The good news is that the Dow has managed to remain, on a closing basis, above 10,000. This was especially impressive yesterday when the market plunged 250 points in the morning, only to recover almost all those losses by the close, and thereby remain above 10,000. While this is not a magic number, it is psychological important.

Last week I bought almost $490,000 worth of [ABC Co.] and distributed shares to almost every client. This is another example of my interest in buying top-flight, dividend paying, blue chip companies when the stock price is beaten down by events that have nothing to do with the fundamentals of the particular company in question. I expect to hold this stock for many years.

Clearly the global stock markets are in turmoil thanks to the problems in Greece, Spain and Portugal, among other European countries. This has caused a panic in the Euro, which has in turn caused a panic in most equity markets around the world. That being said, I remain firmly convinced that left to its own devices, the US stock market wants to go up thanks to a much improved domestic economy. So I plan to remain steady with our portfolios, and will continue to look for opportunities to buy great companies at great prices.

The market is extremely volatile right now, and trading wildly from day to day, or even intra-day. More bad news from Europe, the Gulf, or maybe Iran, could send the market much lower. But I believe that we'll hold around this level before heading higher later this summer. I have put my money where my mouth is by spending more than $2.5 million in cash over the past three months on new positions. This has reduced my cash from almost 12% to about 4.5% of my holdings. Now we'll sit tight and watch what happens.  

Personal News and Notes

Summer is finally upon us. The school year is almost over as final exams begin next week. In a couple of weeks my kids begin their summer extravaganzas. Nola will be heading off on a six week Teen Tour of Western North America. Lily will be spending seven weeks in Maine for her third summer at Tripp Lake Camp. And Ezra will be starting his first summer at Island Lake in the Poconos. It should be a fantastic summer for all of them, and for me as well.

Two weeks ago I had the great pleasure of attending the wedding of one of my college roommates, Daniel Stromberg. Also in attendance in Big D were most of the rest of my Princeton "family": Larry Miao, Steve Artandi, Roger Wu, Sallie Kim and Kathy (Baird) Darmer. It was a great weekend and we're all thrilled for Danny and his new bride, Ilana Fineberg.

I finally started swimming again after overcoming my lethargy and allowing my feet time to heal. This week I managed to get in about 13,000 yards. Now I just need to get back on my bike a couple of days a week. Anybody out there ready to complete some training rides with me? Unfortunately, my golf game has been mostly terrible. But I hope to improve over the next few weeks.

Don't forget that you can friend me on Facebook, connect with me on LinkedIn, or follow me on Twitter. I try to "tweet" something about the market every day or so, so if you follow me, you'll get a quick update on what's going on almost every day. It's a very easy way for you to receive updates from me in between my newsletters. I've been using these three sites because I'm actively seeking to make new business connections as well as maintain contact with friends old and new. So please look for me out in Cyberspace, and ask your colleagues, friends and family members to do the same.

That's it for this month. I thank you, my readers, and remind you that this newsletter is for you. 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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