Werlinich Asset Management, LLC
14 Birch Lane
Rye Brook, NY 10573
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June 19, 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

After surviving the nightmare that was May, the market has been a wonderful dream so far in June. On May 1, the DJIA was 13,297. It subsequently fell 8.9% to a low of 12,101 on June 4. In the two weeks since then, it has surged 6.5% to 12,892 as I write this two hours before the close. That's quite a roller coaster ride in less than two months. No wonder so many investors have thrown in the towel and pulled their money out of the market. Unfortunately, there are few alternatives that offer a return of at least the 3-4% that you need to earn to beat taxes and inflation. Money has poured into Treasuries earning about 1.5%, which means that you are earning a negative real return. You can't retire on that.

The $64 trillion question (that's inflation for you!) is: Why has the market gone up so much recently? What's the good news driving the bullishness? Honestly, there really isn't any. My clients and I are basically fully invested, so I'm pleased with the gains, but given all the problems in the global and domestic economies, it's hard to justify such strong gains. The only explanation I can come up with is that the news has been bad enough recently that investors are now anticipating another round of quantitative easing (QE). As fears build that we may be slipping back towards a recession the drumbeat for more intervention by the Federal Reserve will get louder and louder. So we now have a counterintuitive situation where bad is good and good is bad. It's just crazy. But it's the market we have so we've got to deal with it the best we can.

As you can see below, the DJIA did not decline past support and has recovered to meet resistance just above 12,800. Should the gains continue, the next key level would be the psychological barrier of 13,000. The fact that the current price is above both moving averages is very bullish.

To me, gains in the transportation average might be even more important than the industrial average as it is such an important barometer for the health of the global economy. The index has formed, and fluctuated within, a clear trading range for the past nine months. Three times the index attempted to piece resistance at 5,400 and three times it failed. Currently the index is trading above both moving averages which is bullish. Last month I wrote that "according to Dow Theory, it is bearish that both averages had made concurrent intermediate lows." I also wrote that "falling oil prices should eventually help transportation companies like truckers and airlines. A bounce is needed." So here's the bounce. Let's see if it can rise above 5,400 and create a bullish Dow Theory signal.

Utilities continue to be, with almost no fanfare, one of the best performing sectors in the market. Yes, utilities are kicking butt; they're not just for widows and orphans anymore. For the past year and a half the DJUI 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 has made another new high. Many times I've suggested that people establish, or add to, positions in this sector; I hope you listened as utilities will continue to benefit from a low interest rate environment and should continue to outperform the overall market.

After trading between 1.7% and 2.4% for ten months, Treasury yields plummeted to an almost unfathomably low 1.4% before moving up slightly to a current yield of 1.6%. I keep asking if yields can possibly go lower and the market keeps answering with a resounding "yes". Fears of a domestic and global economic slowdown, and concerns that the troubles in Greece could be the beginning of the end for the Euro, have sent investors flocking to the perceived safety of Treasuries. I said earlier in this newsletter that with yields so low you're actually losing money on the "real" aftertax, after inflation returns. Yet that isn't dissuading investors from moving tens of billions of new money into Treasuries. For now, fear is trumping greed. When that trade eventually turns, watch out!

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. The best thing I can say is that May is over and June has been a tremendous improvement. Things were bad all around for equities, and growth led the way down. The EAFE was by far the worst performing index, losing almost 11.5% in one month. If the June rally continues for the rest of the month, I'd expect the EAFE to be the best performing index as investors breathe a sign of relief that Greece, at least temporarily, voted to keep the current leadership in power.

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 June 9 was 386,000, an increase of 6,000 from the prior week's revised figure. The four-week average of 382,000, about 7,000 higher than the prior month's tally. It appears that initial claims are beginning to increase again as more people are re-entering the labor force. About 3.28 million people continue to collect unemployment insurance, a small drop from he prior month.
  • Non-farm payroll employment in May was much worse than expected, posting a very disappointing increase of only 69,000 jobs as the economy continued to slow. Modest gains were reported in healthcare, transportation, wholesale trade and manufacturing, while construction suffered the biggest losses. Revisions subtracted 11,000 jobs in March and an additional 38,000 in April, making a bad report even worse. The total number of workers counted as unemployed increased to 12.7 million, which helped move the unemployment rate to 8.2%. The more comprehensive U-6 rate, jumped from 14.5% to 14.8%.
  • Adding to the woes, 5.4 million people were unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work rose to 8.1 million and the number of marginally attached workers held at 2.4 million. The number of people holding multiple jobs inched up to 7.17 million. The average hourly wages for blue collar workers actually fell to $19.71 and the average work week fell to 33.7 hours. On balance, this was a surprisingly bleak picture. There simply was nothing good about this report; no silver linings.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $129 billion for May and $845 billion for the first eight months of fiscal 2012, which was about $80 billion less than the same period a year ago, thanks primarily to higher tax receipts.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $50.1 billion in April, down a bit from an upwardly revised March figure. I still expect the deficit to shrink a bit over time 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 a point in June to 29. This marks two months in a row of gains in builder confidence and marked the index's strongest reading since May 2007. While the June HMI is in keeping with our forecast for gradually improving single-family home sales this year, recent economic reports that have shown some weakening in the pace of recovery likely factored into the marginal gain, 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.
  • The bad news continues as 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 seventh straight month in March. The index is at its lowest level since the housing crisis began in mid-2006. The only silver lining is that the month over month change was relatively small. It's possible that we are approaching the bottom in existing home prices.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 53.5 in May, down from April. This marks 34 consecutive months of expansion in the manufacturing sector. New orders, production and employment all grew in May. The ISM index of non-manufacturing activity was 53.7, up a bit from April, which marked growth in the service sector for 29 consecutive months. These numbers continue to demonstrate that while slowing a bit, the business sector continues to expand.
  • 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 LEIs 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 "second" estimate of GDP growth for Q1 2012 was 1.9%, which is down from the "advance" estimate of 2.2%. This further demonstrates the growing weakness in our economy, which is already 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 $2.55 trillion, up 0.3% from the prior month. This is the slowest month over month rate of growth so far this year. Low interest rates leave Americans with no reason to save, creating more incentives to borrow and spend. But increasing concerns about employment will naturally inhibit consumers from taking on additional debt. This could hurt the retail business.
  • Not surprisingly, according to the Census Bureau, retail trade and food service sales were down 0.2% in May, the first negative figure for the year, but still 5.3% higher than a year ago. While auto-related, clothing and electronics enjoyed the biggest gains, gas stations, building materials and general merchandise retailers reported the greatest losses. If consumers retrench in any meaningful way, it will have a very deleterious effect on the economy.
  • The Federal Reserve reported that in May the six month rate of growth in the supply of M-2 (a broader view of money) was 6.3% after 6.7% in April. The supply of M-1 (the most narrow definition of money), on the other hand, rose "only" 7.7%. The rate of increase in the money supply has slowed the past two months. Is it any wonder that the stock market has fallen over the same period of time?
  • It is no surprise that the Conference Board's Consumer Confidence Index fell again in May to 64.9 from 68.7 in April, given the terrible performance in the stock market in May, coupled with a slowdown in job growth and uncertainty throughout Europe. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumers were less positive about current business and labor market conditions, and they were more pessimistic about the short-term outlook. However, consumers were more upbeat about their income prospects, which should help sustain spending."
  • According to the FDIC, only 2 banks failed in May, bringing the total number of bank failures in the first five months of 2012 to 24, which is a big improvement over 2011. It's clear that there will be far fewer bank failures this year than the 90 banks that failed in 2011, which was 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 negligible 3 in 2007.

Trends To Watch

It's no surprise that the dollar is so strong. Fears of the possible dissolution of the Euro is driving investors into the safety of the dollar. The temporary reprieve in Greece should temporarily halt the gains, but the situation in Europe will only get worse before it gets better. The question is can we have a strong dollar and gains in the energy and commodity space, and equities in general? The answer to this question will likely determine the direction of the market for the rest of the year.

The next three charts all show a similar declining wedge pattern with strong support. As the wedge tightens it creates pressure which hopefully will result in strong upward movement. First up is gold, which has been mired in a downward trend for about 10 months now. Note the the recent low of $1,526 is slightly higher the the prior low of $1,523. That could be important. I'd want to see action that not only takes the price of gold above the falling wedge, but also eventually above the last high of $1,792. Then the pattern will be broken. In the meantime, it would be very constructive if the price could move higher than both moving averages, and if the 50-day could move higher than the 200-day. Eye-balling the chart, the next resistance looks to come in right around $1,700.

The chart for silver is an even better example of the falling wedge as it has formed over the past fourteen months. Three times support has held just above $26 and the wedge has become very narrow, suggesting that the price move in silver could come sooner than for gold. Taking a position right now is very contrarian, and not for the faint of heart, yet it could pay off handsomely if/when the price again heads higher.

The action in copper isn't very dynamic right now, and the wedge hasn't tightened sufficiently to create much pressure. There is very strong support around $3.00 and resistance just below $4.00. To move the price much higher, we'll need to see some positive news out of China and a stronger GDP number domestically.

In May the price of West Texas Crude plunged $25 per barrel, or almost 23%, in a harrowing month of trading during which it blew right through support around $90 before halting the decline at $81. The question one must ask is whether the decline is over or will it fall further to seek support around $76. This is a horrible looking chart. The current price is well below both moving averages. RSI is just now working off a very oversold position. In the short run, a lot will depend on the dollar and global economic stability. Longer term, I think the price of oil is headed inevitably higher from here and therefore investors with some gumption can make some money by investing in the oil sector.

After a frightening two month decline, the financial sector has recovered somewhat in June, along with the rest of the market. Resistance around $16.50 survived one attack, can another be coming up? In the short run, I think that would require general bullishness in the market to continue. Longer term, the housing market must demonstrate a real recovery and jobs growth must again be north of 125,000 per month. For now, I remain wary of this sector. 

After making impressive gains from October through February, the housing sector has moved sideways over the past five months while carving out a clear trading channel between 110 and 135. I'm worried that the gains are precarious, dependent too much on wishes and hopes to prop up expectations, which I think are too far ahead of reality. To me, while the news is certainly better today than it was a year ago, it's only "less bad", rather than truly good. So I'll continue to sit things out.

Support at 46 barely held firm in the face of the recent selloff of the EAFE index. The current price is approaching both moving averages and RSI has recovered from a very oversold position. While there could be a short term bounce from the Greek elections, it's hard to see the bullish case for investing in Europe any time soon as the rest of the EU lines up in front of Germany seeking a handout. 

Although it shouldn't be, the chart of the emerging markets is almost identical to that of the developed markets. This makes no sense. The countries that make up the emerging markets are growing much faster than the stagnant developed world, yet they are treated with equal disdain. This disconnect creates an investment opportunity for the brave. Eventually, rational investors will dedicate a greater percentage of their international exposure to those markets with growth at the expense of those with none. At that point, the relative performance of these two sectors should begin to diverge.

China is beginning to carve out its own trading range between 2,200 and 2,500. As you can see below, since bottoming at the end of last year, the Shanghai Index moved up a bit, with slightly higher lows. I've noted many times how important a growing China is to the rest of the world. If the index can someone pierce resistance at 2,500, it would be bullish all the stock markets around the globe.

According to the NYSE Bullish sentiment index, the market is mildly bearish right now. RSI is recovering from a hugely oversold position (see the red circle). Last month I wrote that "if sentiment goes much lower we'll be set up for a nice rally." That's exactly what has come to pass. Given this picture, I'd say the current rally has room to continue.

This chart shows that less that about 40% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. This is just at the bottom edge of the productive trading area. As with the sentiment index, I'd say the current rally can extend further before too much exuberance will again knock the market back down.

The May selloff saw the volatility index surge from around 15 to almost 28, which almost landed it in the "fear" range. That can be a good time to buy for those with some cash and fortitude. Almost on cue, the market rallied, causing the VIX to fall back to around 17. These last three charts are often very good indicators of short-term market moves.

What I'm Thinking and Doing

I'm going to keep things short this month because honestly, I don't have any new thoughts to expound on. I remain worried about the economy, the housing market, the global debt crisis, the situation in Europe, the dithering in Washington, etc, etc, etc. All of these problems and twenty more are making for a very erratic and volatile stock market. It's hard to shut out the "noise" and try to focus on the fundamentals of why we're investing in the first place, and what we're trying to accomplish. At times like this, it's best to sit tight and do very little, which is what I'm doing. I'm just following the plan I've laid out for my clients.

I've made only modest changes to our portfolios in the past month. I've taken advantage of the recent rally to raise a little cash, and if the rally continues, I'll continue to be a seller of some small, underperforming holdings in order to have some money available for the next downturn. The stock I mentioned last month still has not retreated to my buy price, so I'm waiting to pull the trigger on that one.

Professional News and Notes

Last weekend I hosted WAM's 1st ever Summer Slam, a backyard party for WAM's clients, colleagues and friends. Over sixty people enjoyed great food and drinks under the sun and stars. It was a perfect evening of classic tunes and renewed friendships. I've posted a bunch of pictures on WAM's Facebook page if you'd like to check them out. I think the next party, WAM's Fall Fest will likely be in late October. It should be another special evening.

I'm putting the final touches on a one-page promotional "Fact Sheet" on me and the business. It will be available via my website or email for anyone interested in having a condensed bio on me that can be shared with friend or colleagues. Let me know if you'd like a copy.

As a reminder, there are now three resources on the web through which I hope to expand my practice: the Paladin Registry (, Brightscope ( and WiserAdvisor ( I hope that through these three sites I'll be able to reach more individual investors who need honest, intelligent and reasonably priced professional investment management services.

Don't forget. 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. Following me is an easy way for you to receive stock market updates in between my newsletters. I'm up to about 350 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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