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July 16, 2009
Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
Fearless Forecast Mid-Year Review
What I'm Thinking and Doing
Personal News and Notes

Current Market Analysis

It's now been four months since the stock market hit the March bottom. Since then we had a powerful and widespread rally that had many observers calling an end to the recession and the Bear Market and  proclaiming this to be a new Bull Market. This was followed logically by a significant pullback, during which the naysayers proudly declared "we told you so; this was just a bull rally in a Bear Market." Then yesterday, we had a huge rally. So what do I think? I believe the jury is still out on whether we've escaped the Bear Market. The longer we hold above the March low the better I'll feel. I do believe we are still in a recession, although one that is less bad than it was a few months ago. I'm convinced we are not out of the woods yet, and the dual problems of rising unemployment and federal deficits will likely derail any economic and stock market recovery. So I think the best we can hope for is for the markets to move sideways in a "traders market" for a while until the economy truly begins to improve.

According to Dow Theory, current rally notwithstanding, we are still in the midst of a Bear Market. This call was confirmed on March 9 when both the Industrial and Transportation averages broke to new lows at the same time. It is not, though, incongruous to have multiple strong rallies while the Bear is still in charge. The Industrial average made a series of new highs in early June, none of which were confirmed by the Transportation average also reaching a new high, although it was close as the Transports surpassed the high on an intra-day basis, but closed lower. Then everything fell apart. Therefore, according to Dow Theory, the Bear Market retails control. As I write this, the Industrials and Transports are again within shouting distance of those highs of 8,799 for the Industrials and 3,404 for the Transports. So we wait and watch.

Looked at casually, the daily chart of the Industrials looks positive. We have a nice V-shaped recovery and the 50-day moving average crossing above the 200-day average. The recent pullback was normal and not too painful. What is needed is for the average to move above 8,800 then find a way above 9,000.

The movement of the Transportation average is mirroring the action of the Industrial average. For the market to move forward to higher highs, the transports must close higher than 3,404 and break out of the trading range shown below. Interestingly, the moving averages have converged; it would be positive if the 50-day average can move above the 200-day.

After a frightening six-month bond selloff that increased the yield on the 10-year treasury from 2% to 4%, money poured back into bonds during the stock market correction, lowering yields back to around 3.25%. I'll never understand people who talk about the safety of investing in bonds. I fully expected yields to remain below 3% this year (see my Fearless Forecast later in this newsletter), but I do believe that the long-term trend for interest rates is higher, which is bad for bond investors.

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 broad averages took a breather in June, although that really doesn't tell the whole story. The market continued to rise in early June before dropping sharply in the middle of the month, then rising toward the end, to finish the month flat. So if you were on vacation for the month, you would have thought nothing happened in the market during your absence. So far in July, we've experienced the same intra-month volatility, but we're basically flat since the beginning of the month.

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 most recent figure for seasonally-adjusted initial jobless claims for the week ended July 11 was 522,000. The four-week average has declined to 584,500. The seasonally adjusted number of continuing claims for unemployment is 6.27 million. That's a lot of people collecting unemployment insurance. And the average time on unemployment is at an all-time high of 22 months.
  • Non-farm payroll employment worsened in June, falling by 467,000 versus a revised 322,000 in May. Average hourly wages were unchanged at $18.54, while the average workweek fell to 33.0 hours, so real wages actually fell at bit.
  • The number of workers reported in June as unemployed rose to 14.7 million, bringing the unemployment rate to 9.5%, its highest level since 1983. The seasonally adjusted number of people who could only find part-time work fell to 9.0 million and the number of marginally attached workers held at 2.2 million. The number of people holding multiple jobs fell to 7.07 million. My Comprehensive Labor Index™, which is much more representative of the real unemployment situation, rose to 19.67%. I've been saying for months that I expected to see my CLI™ at around 20% later this year. This could happen before the kids go back to school.
  • The Congressional Budget Office (CBO) estimates that on a net present value basis, the Treasury will report a federal budget deficit of $1.1 trillion for the first nine months of fiscal year 2009 as the June deficit of $97 billion was $130 billion worse than last year. TARP payments, as well as support for Fannie Mae and Freddie Mac were partly responsible for the increased deficit. We are now well into uncharted and very dangerous territory now my friends.
  • The Census Bureau reported that the U.S. trade deficit in May was $26.0 billion, down from $28.8 billion (revised lower) in April. I think it's a slightly positive sign the the trade deficit is growing again as it demonstrates a general strengthening of the economy. About 61% of this deficit is with China. And we think we can tell China what to do with their currency? Or with anything?
  • The Census Bureau reported that privately owned housing starts jumped 17.2% in May following an 12.9% drop in April, and was still down 45.2% from a year ago, to a seasonally adjusted annual rate of 532,000 units. New building permits were up 4.0% from last month but were still down 47% from last year. While this isn't good news for homebuilders, it is good news for the overall housing market as the lack of new construction will ultimately help clear out the inventory of homes for sale.
  • The National Association of Homebuilders/Wells Fargo Confidence Index dipped "unexpectedly" in June from 16 back to 15. To me, this was no shocker. Only the "experts" were surprised.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in May were roughly the same as the prior month but were still down 32.8% from the same period last year, to 342,000 units. The estimate of homes for sale is down to 292,000, which represents 10.2 months at the current rate of sales. The median sales price increased to $221,600, which was slightly above the 12-month moving average price of $219,533. Home prices increased two months in a row, possibly indicating that the number of foreclosure sales is decreasing.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in May rose 2.4% for the second straight month, and were down 3.6% from the same period last year, to a projected 4.77 million units. The estimate of homes for sale, at 3.8 million, represents 9.6 months of supply at the current rate of sales. The median sales price rose to $173,000, but remained below the steadily falling 12-month average of $183,717.
  • 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, fell to 150.34 in April, the lowest level since June 2003. The only good news is that the rate of decline appears to be slowing.
  • According to RealtyTrac, foreclosures increased by 4.6% in June to 336,173, and remained 11% higher than the last quarter and 20% higher in the quarter than a year ago. Nevada, Arizona and Florida, reported the highest foreclosure rates in the country while California, Florida and Arizona had the highest actual number of foreclosures.
  • The Institute for Supply Management (ISM) index of manufacturing activity increased to 44.8 in June, continuing the general uptrend in place so far this year. This was the eighteenth straight month in which the manufacturing sector failed to grow. The good news is that New Orders are growing and the trend is moving in the right direction; a number over 40 suggests the recession may be weakening. The ISM index of non-manufacturing activity was a slightly higher 47.0.
  • The Federal Reserve reported that industrial production decreased 0.4% in June after having fallen 1.2% in May. For the second quarter as a whole, output fell at an annual rate of 11.6%, a more moderate contraction than in the first quarter, when output fell 19.1%. Manufacturing output moved down 0.6% in June, with declines at both durable and nondurable goods producers. Outside of manufacturing, the output of mines fell 0.5% in June, and the output of utilities increased 0.8%. The rate of capacity utilization for total industry declined in June to 68.0%, a level 12.9 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9% in December 1982.
  • The Conference Board reported that it's index of Leading Economic Indicators rose a strong 1.2% in May, the second increase in a row. Most of the components of the index gained sharply.
  • According to the Bureau of Economic Analysis, the "final" estimate of GDP growth in the fist quarter was -5.5%, better than the "preliminary" estimate of -5.7% and the "advance" estimate of -6.1%. This follows a horrible -6.3% in Q4 '08. The hope is that worst of the recession is now behind us. We'll see.
  • The Federal Reserve reported that in May the amount of outstanding consumer credit fell by 0.1% from the prior month, to $2,520 billion. That means that consumer credit has declined in eight of the last ten months. That's good for consumers, bad for the economy.
  • According to the BEA, even though disposable personal income continues to fall, the personal savings rate, which for years had been negative, was 6.9% in May, up from 5.6% in April. This is the highest savings rate since 1993.
  • According to the Census Bureau, retail trade and food service sales increased 0.6% in June. This improvement in retail sales dovetails with other coincident indicators that the economy is improving, albeit slowly.
  • The Federal Reserve reported in that in May the increase in the supply of M-2 was only 3.9% in the prior three months, while the supply of M-1 rose by 9.6% in the same period. In the prior six months, the rates of increase were 9.6% and 9.7%, respectively. The rate of monetary expansion may be slowing a bit. We'll see if this trend continues.
  • After surging to 54.9 in May, the Conference Board Consumer Confidence Index surprisingly fell in June to 49.36. A rapidly falling stock market will do that.

Trends To Watch

This is an interesting time for the financial sector. The index moved sideways for about three months now. So has the rally petered out, or is it simply taking a breather? I believe the fate of the financials is tied to the unemployment rate. If unemployment moves too much higher, housing foreclosures, credit card defaults and loan losses all rise, forcing already sick banks to raise even more capital. Watch this situation very closely.

Not surprisingly, the housing index has again turned down over the past couple of months as investors recognize that the sector remains in terrible shape. I believe it will be 2010 before there is any meaningful recovery in this sector.

The price of West Texas Crude fell with the rest of the market last month. As I write this, the current futures contract calls for a price of $61.12 per barrel, down from $72.48 one month ago. The sharp selloff doesn't really bother me too much. Regardless of any short-term movements, I'm convinced that the price of oil is headed inevitably higher. And the rising triangle pattern is bullish also.

After a fourth attack on $1,000 last month, the price of gold once again fell victim to profit taking and tumbled back towards $900. I'm confident that gold will take another run at $1,000 before the year is over.

The rising price of copper continues to be a good indicator of growing economic strength. And while I believe much of this increase is due to economic activity in China, it's still a positive. On a purely technical basis, the fact that the 50-day moving average has crossed above the 200-day average, that the metal is making higher highs and higher lows, is very bullish. I would expect prices to continue to rise.

The action on the Baltic Dry Index, while still highly volatile, is also in a general upward trend. This too is bullish.

The price action of the dollar index looks very bad. The index has fallen below both the 50- and 200-day moving averages and the 200-day average has moved will above the 50-day. As the budget deficit grows to unprecedented levels and the economy remains weak, I expect the dollar to fall further. The dollar is in big trouble. It's weakness is clearly a factor in the rising price of hard assets like oil, gold, copper, etc. If the trend follows the head and shoulders pattern that I outlined, the index could drop back to the low 70's.

Foreign markets, as represented by the MSCI EAFE index, continue in their basic uptrend also and the moving averages have crossed to the positive side, which suggests further gains could be ahead.

The NYSE Bullish Percent Index represents the percentage of stocks listed on the NYSE that signal a buy. The good news is some some of the frothy exuberance has sold off, bringing the index down to a more reasonable level of 50, with RSI in a very oversold position, suggesting upside ahead. This is good.

The volatility index, also known as the "investor fear gauge", continues to move lower as the panic has subsided. At these levels, one would expect the market to be a bit less volatile. It also suggests a certain amount of optimism for the near-term future of the market.

Mid-Year Review of Fearless Forecasts

As I do each year, I use the July newsletter to review the accuracy, or lack thereof, of my annual Fearless Forecasts. I hedged this years predictions a bit by saying it was going to be a particularly challenging economic environment. I think you'll agree that so far, my predictions were pretty accurate.

  1. I'm going to go out on a limb and predict the Dow will be marginally higher by the end of the year, but not until we get through a very difficult first half. I'm going to call for a 5% rise, bringing the Dow to around 9,200. So far, so good. The Dow Jones Industrial Average is down about 2.75% as of this writing and it has certainly be a rough road. I still think the 2nd half will be better than the 1st.

  2. The Federal Reserve target rate will remain between 0% and 0.25% for most of the year, possibly rising no higher than 0.5% by the end of the year. The recession will last the entire year, but will the economy will be "better" in the second half. Again, on target so far. The Fed has not budged rates yet, and is unlikely to do so all year. We are still in the recession, and it looks like things will be incrementally better in the 2nd half.

  3. I think 10-year Treasury yields will remain between 2.0% and 3.0% for most of the year as the Fed works to keep rates low. It is possible that they could fall briefly below 2% in the first quarter during the worst of the economic news before rallying higher. I'll give myself a B for this one. Well, yields remained between 2% and 3% until May. Since then they have remained between 3% and 4%. So I got the trend correct, but I was a little off on the scale.

  4. The dollar is a bit of a mystery because, left to its own devices, it should drop like a stone. It is being held aloft by being "relatively" better than other currencies. And that relative strength could prop it even higher, moving the dollar index above 90 and bringing it closer to parity with the Euro. Sooner or later though, but maybe not in 2009, the dollar will fall, and fall hard. This call looks right on target. I was right about the plunge; I just didn't think it would happen so quickly. After the dollar index hit a high of 89.62 in early March, it fell to 78.33 in early June. It's recovered a bit to around 80 but it looks very precarious.

  5. The price of oil will go no lower than $30 per barrel early this year during the worst of the economic news. Then I expect it to strengthen and again trade over $75, perhaps even getting close to $100 per barrel as demand soars and supplies remain tight. Bingo. The price of West Texas crude fell to $37 per barrel in February before rising quickly to a high of $73.90 in June. It's now backed off again to about $60. The next significant move should be higher.

  6. The price of gold will likely rise above $1,000 per ounce. As the federal deficit soars to $2 trillion or more, it's possible to see the price spike as high as $1,500. Prices will average better than $950 per ounce for the year. There will be the inevitable profit-taking and consolidations, but the general trend will remain upward. Bingo again. Gold topped out at $1,007 in Feb then $989 in June. The average price so far has probably been around $940 or so. The trend looks up to me.

  7. I still don't think we've reached the bottom of the housing mess. Prices will have to fall at least another 10%, the inventory of homes for sale must decline and mortgage rates will have to remain around 5% to bring buyers back into the marketplace. We are simply not there yet. The market isn't likely to improve before 2010. I'll take a B for this one. The housing market still stinks. Prices continue to fall. Inventory remains high. New construction remains weak. Rates remains relatively low. Yet for some reason, the housing index has improved considerably.

  8. Finally, GDP will likely be negative for all of 2009, although it will improve in the second half. The trade gap will shrink even further as imports evaporate. The federal deficit (cash basis) will exceed $2 trillion for fiscal 2009 (ended September 30). The unemployment rate will rise to 9%, with my Comprehensive Labor Index™ rising above 20%. The story of the year will be the hundreds of billions squandered by ill-conceived bailouts and failed stimulus plans. I've nailed these. GDP was horrible in the first half. The trade gap shrunk. The federal deficit has surpassed $1 trillion so far. Unemployment is closing in on 10% with my CLI a shade under 20%. And I don't think anyone can argue that the bailouts and stimulus programs have been a complete failure to this point.

What I'm Thinking and Doing

The economy continues to make small, but measurable improvements, if only by doing less badly. Things are clearly better than they were a few months ago. The numbers for initial jobless claims are improving. Manufacturing activity is recovering. The trade gap continues to narrow .Consumer confidence is improving and retail sales are showing signs of life. The lousy housing market and the massive federal deficit still leave me very concerned about the long-term health of the economy and the country. But I believe the most immediate problem though is unemployment. If the unemployment number reported by the government grows beyond 10%, which means a real unemployment above 20%, it could have a cascading effect on the entire economy - crippling the housing market, the banks, retail sales and by extension, corporate profits. That would all be very bad. And I haven't yet talked about what the trillion dollar deficits could do to the dollar, which would likely increase interest rates, which would hurt the economy . . . . Well, you get the idea. That's why my clients pay me to do the worrying for them.

Speaking of my clients, where does all of this leave us? While I cannot talk about specific results, we are having a good year. We remain highly cautious and are sitting on a reasonable amount of cash while we enjoy the gains in our core equity allocations. I haven't added any new positions since February. I'm being VERY selective about deploying cash at this point, preferring instead to see if that market picks a clear direction. In the meantime, I'll continue to monitor our core holdings, and make any tweaks to the portfolios that I deem necessary.

Over the past month I manged to meet, either face-to-face or via GoToMeeting, with the majority of my clients to do a semi-annual review. By doing so, I'm able to review how we're doing, go over the investment thesis, and check in to make sure that everyone's needs are being met. If you are managing your own money, or working with an advisor, this is a good time to have your own review process. If you need help with this, please don't hesitate to contact me.

Personal News and Notes

After what had to be the wettest June on record for the New York area, the weather in July has been magnificent. We've had warm, sunny days with low humidity surrounded by cool, comfortable mornings and nights. I've managed to move my swimming outdoors, I've put in a few miles on my bike and even managed a few rounds of golf. Now if we can just keep this up through Labor Day.

The kids have been away at camp for three weeks already. I am amazed at how quickly it has gone. It seems like they just left, yet camp is almost half way done. Shaena and I get to speak with all three kids tonight for the first time. Then next weekend is visiting day. Then, three weeks later, they return. Yikes!

Speaking of Shaena, she just returned from Boston last night. It has been a crazy time for her the past month or so. Now she gets to breathe and hopefully relax a little. I may even be able to pry the Blackberry out of her hand for a while. If all goes according to plan, we're going to hit the road for a couple of weeks in early August and drive around the Eastern third of the U.S, from New York to South Carolina to Tennessee to Ohio then back home. It should be an incredible journey. If you think you may be along our route, give a shout and say hello. I'll probably be posting updates on our trip via Facebook and Twitter.

For those of you so inclined, you can now connect with me on Linkedin, friend me on Facebook or follow me on Twitter. I've just begun to use 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 connect with 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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