What I'm Thinking and
Personal News and
When I last wrote to you in early
June, the Dow Jones Industrial Average was in the midst of a swoon
that would ultimately last almost seven weeks and see the index fall
7.8%. Then like a rubber band, it snapped back to challenge the May
high. As of this writing, the Dow has failed to surpass that high,
but there is reason for optimism, even in the face of unrelenting
bad news in the economy, here and abroad. And by the way, QE2 has
ceased, yet the world hasn't come to an end.
Last month, in the midst of the
panic, I wrote the following; 'Rather than simply succumb to the
fear and blather shouted in the media, let's take a rational look at
things. First of all, I believe that we are in the midst of a very
normal correction in a large bull market. If you look at the chart
below, you'll see that since last July, we've had four decent sized
corrections. We dropped 10.2% last July, 7.8% last August, 7.2% this
past March and 6% so far in our current pullback. Therefore, it
stands to reason that we could drop a bit more before it's done, but
then we can expect the market to turn around and head up to even
bigger gains. The overall upward trend remains intact. My guess is
that the bottom isn't too far off." If you took that advice, you've
done quite well.
So, what does that chart tell us now? It tells me
that things really aren't all that bad. The current price puts it
right on its trend line. The market is discounting all of the debt
problems in the U.S. and the Euro zone and it's telling us that
corporate profits should be excellent, which should propel the
market higher through the second half of the year.
The transportation average fell
9.4% during the last correction, but has surged forward 11.6% to set
a new high before falling back a bit. The bad news is that this new
high was not confirmed by a concurrent high in the Industrial
Average. Still, the strength in the Transports again suggest
strength in the economy. In any case, the bull market
Just when many observers,
including myself, were suggesting that it was time to abandon bonds,
another disaster struck, pushing investors back to the relative
safety of Treasuries. Then the equity markets sunk, providing
further impetus for bond-buying. Now we're back to a 3.0% yield on
the 10-year note. I expect the price to remain relatively
stable until the debt crisis is settled, one way or another. If our
elected leaders can negotiate a reasonable debt reduction deal,
rates will likely fall. On the other hand, if the date for the
expiration of the debt ceiling passes without a deal, and the
government defaults on its obligations, rates will likely soar.
We'll know by this time next month.
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. As
you can see by the results below, the broad market averages were
down a bit again in June after an equally tepid May. A strong month
end rally eased the pain of what otherwise would have been a pretty
miserable month. At the mid-year point, all of the broad averages
remain solidly in the black. While I expect at least one more bump
in the road before the end of the year, I think we're likely to
finish the year with double-digit gains for the broad equity
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended July
2 was 418,000, a decrease of 14,000 from the prior week's revised
figure. The four-week average was stable at 424,750, roughly the
same as the prior month, but still too high. The weekly numbers
remain choppy, and there is no discernable trend.
- Non-farm payroll employment increased by a tepid, and hugely
disappointing 18,000 in June, after only 25,000 in May (revised
down). Modest job creation in the private sector barely outpaced
losses in the public sector as government employment continues to
trend lower. The average hourly wages for blue collar workers
actually fell $0.02 to $19.41 while the average work week remained
at 33.6 hours.
- The total number of workers counted as unemployed rose by
about 200,000 to 14.1 million. Therefore the unemployment rate
increased to 9.2%. But the more comprehensive U-6 rate ballooned
to 16.7% from 15.4% in May. 6.3 million people continued to be
unemployed longer than 27 weeks. The seasonally adjusted number of
people who could only find part-time work rose to 8.6 million and
the number of marginally attached workers jumped to 2.7 million.
The number of people holding multiple jobs fell to 8.86 million.
Now matter how you look at it, this was a miserable report.
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $45 billion in June, leaving us with a deficit of $973
billion for the first nine months of fiscal 2011, which is $31
billion less than the record levels from a year ago. The good news
is that tax receipts were about 8.5% higher than the same point
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $43.7 billion in April, down from $46.8
billion in the prior month. The growth in exports outpaced the
growth of imports.
- The Census Bureau reported that privately owned housing
starts rose 3.5% in May, after falling 8.8% in April, but down
3.4% from a year ago, to a seasonally adjusted annual rate of
560,000 units. The monthly results have been extremely volatile
this year, so a reliable trend is not yet in evidence. New
building permits were up 8.7% from the prior month and 5.2%
from last year. It is possible that the prolonged weakness in new
construction may be setting the stage for the recovery as the
inventory of hew homes for sale diminishes to match a smaller
number of buyers. We'll see later this year.
- After holding at 16 for six of the last seven months, the
National Association of Homebuilders/Wells Fargo Confidence Index
in June fell to 13, the lowest level since September 2010. Again,
this demonstrates a simple lack of interest in new housing at this
point. Builders are being squeezed by falling existing home prices
and rising material costs.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in May fell 2.7%,
after increasing 6.5% in April, but was actually 13.5% higher than
the depressed level of a year ago, at 319,000 units. The estimate
of homes for sale was only 166,000, which represents 6.2 months at
the current rate of sales. The median sales price was a slightly
higher $222,600, which is dead on the 12-month moving average
price of $222,542. It's no surprise that the spring numbers are
better than the harsh winter months. The June numbers should be
higher still as the weather dries out from the spring rain.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes were fell 3.8% to 4.81 million units, and remained 15.3%
lower than a year ago. The estimate of homes for sale, at 3.7
million represents 9.3 months of supply at the current rate of
sales. The median sales price inched higher to $166,500, which is
slightly lower than the 12-month average of $168,742. The market
for existing homes continues to lag (I sound like a broken record
here), and is still dominated by repossessions and foreclosures,
which forces prices lower.
- The S&P/Case-Shiller Home Price Index (10-city index),
which uses a three-month moving average to track the value of home
prices across the US, finally moved a bit higher in April,
although it remained weaker than a year ago, doing nothing to
disprove the trend of falling home prices across the county. I
would need to see at least two more monthly increases before I
begin to believe that the bottom in the housing market is in as
prices have declined to 2002 levels, erasing almost a decade of
- According to RealtyTrac, the number of foreclosures in May
decreased 2.0% from the prior month, are were down 33% from a year
ago. While the market seems to be slowly clearing out foreclosed
properties, more homes go into foreclosure each month than are
sold, suggesting there is really no end in sight. Interestingly,
five states (California, Florida, Michigan, Arizona and Nevada)
represent 51% of all foreclosure filings.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 55.3 in June, an increase from May.
This marked the twenty-third consecutive month of expansion in the
manufacturing sector, and broke a two month streak of declines.
The ISM index of non-manufacturing activity was 53.3. This marked
growth in the service sector for eighteen consecutive months. This
demonstrates that while business is still growing, it is doing so
relatively slowly right now.
- The Federal Reserve reported that capacity utilization in the
industrial sector in May was 76.7%, the same as April, which
leaves it 3.7% below the average level of the period from 1972
through 2010. After improving for much of last year, capacity
utilization seems to be stagnant this year.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.8% in May, following a decline
in April. Says Ataman Ozyildirim, economist at The Conference
Board: “The U.S. LEI rebounded in May and resumed its upward trend
with a majority of the components supporting this gain. The
Coincident Economic Index, a monthly measure of current economic
conditions, continued to increase slowly but steadily. Overall,
despite short-term volatility, the composite indexes still point
to expanding economic activity in the coming months.”
- According to the Bureau of Economic Analysis, the "final"
estimate of GDP growth in the first quarter of 2011 was a tepid
1.9%. This compares with 3.1% in Q4, 2.6% in Q3, 1.7% in Q2 and an
artificially inflated 3.7% in Q1 of 2010. The increase in real GDP
in the first quarter primarily reflected positive contributions
from personal spending, inventory growth and exports, which offset
decreased government spending and increased imports.
- The Federal Reserve reported that in May the amount of
outstanding consumer credit ticked up fractionally from the prior
month, to $2.432 trillion. Consumer credit has now expanded,
albeit slightly, each month this year. What is that money being
- According to the Census Bureau, retail trade and food service
sales were down 0.2% higher in May, but still 7.7% higher than a
year ago. Electronics and appliance sales were among the only
areas to show month-over-month sales gains.
- The Federal Reserve reported that in May the supply of M-2
increased slightly from the prior month and was up 4.9% during the
prior six months, which is consistent with the past few months.
The supply of M-1, on the other hand, rose a whopping 12.6% over
the same six months. Unfortunately, there appears to be no
concrete economic benefit resulting from this monetary expansion.
But what's a few trillion dollars among friends?
- The Conference Board's Consumer Confidence Index continued to
drop in June, falling to 58.5, down considerably from 72.0 in
February, which was a three-year high. The index remains well
below a healthy reading as the economy stagnates while home prices
and incomes decline. A reading above 90 indicates the economy is
solid, and 100 or above indicates strong growth.
- According to the FDIC, 51 banks had failed through July 8,
compared with 90 at roughly the same point last year. A record 160
banks were either closed or merged into healthier banks in 2010,
versus 140 in 2009. By comparison, 26 failed in 2008 and only 3 in
While the financial media parses
every little move in the dollar, minute by minute, when you step
back and look at the big picture, you can clearly see that the
dollar is in terrible shape. And any positive movement for the
greenback is usually just because other currencies, like the Euro,
are in even worse shape. For the next few months, expect the dollar
index to be very news driven as more and more countries attempt to
put their fiscal and monetary houses in order.
Rather than bore you with the same
bullish sentiments I've been writing about for the past eight years,
just look at the chart below. That's really all you need to know
about the bull market in the price of gold. Each consolidation was
followed by a rise to a new high, and I believe this time will be no
different. Don't be deterred by any of the so-called experts who
proclaim the end of the gold trade; they're just wrong.
Last month I told you that the big
correction in the price of silver was a good buying opportunity. I
still believe that. The price of silver is now consolidating between
$32 and $38 per ounce. It isn't at all surprising that silver would
need a "cooling off" period after its parabolic rise, and subsequent
pullback. Don't be scared out of this trade; silver will again move
The price of copper has bounced
off the bottom of its nine month old trading range and looks
like it may attempt to make a new high above $4.63/oz. Like all
commodities, copper benefits from a generally weak dollar and strong
international demand (read: China), but suffers during times of
economic malaise. Remember, Dr. Copper is often thought of as a
proxy for economic growth. So this chart is now telling us that the
prospects for future growth have brightened a bit. What does copper
know that the experts don't?
The price of West Texas Crude
(WTIC) has violated a very lengthy trading pattern, falling 20% from
its peak. Part of this is due to global economic malaise, partly to
the possibility of lower Chinese demand, and partly due to President
Obama releasing some oil from our strategic petroleum reserves. I
believe all of these factors are temporary and that the price of oil
will eventually move higher. As such, I remain solidly bullish on
the future of oil as a major investment theme, and it remains a core
The financial sector is once again
trading near the top end of its trading range. But its decline has
dropped its price below both the 50- and 200-day moving averages.
More ominously, the 200-day average has moved above the 50-day
average, which is very bearish for the sector. Buy the banks at your
I'm not surprised to see the price
of the housing index falling slowly but steadily. As was made clear
by the figures listed above, there are simply too many problems in
the housing market to believe that this sector can be a good
investment. I believe there are more losses to come, and as a
result, I remain entirely uninvested in this sector.
Last month I showed you a reverse
"head and shoulders" pattern" to demonstrate the upward potential of
the developed international markets. This month, I'm keeping it
simply by just showing a basic upward tilting trend line. This is a
tough index to chart though because of all the anomalous one-day
moves. But if you just ignore those trades, you can see an erratic,
yet discernable upward move. The immediate future of the index is
predicated on what happens as Greece, Portugal and Spain, among
others, struggle with their debt burdens.
The index of the emerging markets
attempted a second breakout above the trading range, but that
failed, as did the April rally. It's worrisome that the current
price and the 50-day and 200-day moving averages have converged.
Should the 200-day move above the 50-day, watch out.
Because of China's importance to
the world economy, the chart makes me a little nervous. After rising
from the lower blue band (floor) to the upper blue band (resistance)
last year, the Shanghai Composite has fallen back twice to test the
floor this year. That's not good. I don't think anyone wants to see
what might happen should the Chinese stock market move lower and
test the lower floor (in red).
The NYSE Bullish Percent Index
represents the percentage of stocks listed on the NYSE that signal a
buy. Contrarians suggest that extreme levels of exuberance is a
bearish indicator, and vice-versa. Clearly the lack of bullishness
in May and June helped set the stage for the big rally that ensued.
After a little pause, I think there may be further room to
With thanks to
Richard Russell of the Dow Theory Letters, last month I added this
chart, which shows the percentage of stocks traded on the New York
Stock Exchange that are trading above their 50-day moving average.
Last month, the paucity of stocks trading above their 50-day
averages demonstrated excessive bearishness. Sure enough, stocks
rallied. Right now, the chart shows neither extreme bearishness or
bullishness. So maybe we'll go sideways for a bit.
As you can see below, the fear
after the disaster in Japan subsided so quickly it's almost as if it
never happened. Then came a similar, if smaller, snap of fear
because of the Euro crisis. That too quickly abated and the VIX fell
right back to the floor at 15. We now see evidence of another spasm
of volatility. I imagine this too shall pass, setting the stage for
What I'm Thinking
Like last month, I'm thinking a
lot about the consequences of having too much debt, and the effects
on Greece, Portugal, Spain and most importantly, the United States.
I'm also thinking about what might happen if the idiots in
Washington actually allow our federal government to default on its
debt. Listening to Republicans and Democrats take turns blathering
in front of the microphones every day makes me sick to my stomach. A
pox on all of them!! It brings to mind the image of Nero fiddling
while Rome burned. We MUST begin to lower our debt levels, get
spending under control, shrink the size of our federal government,
and provide real stimulus to business in this country. That's how
we'll pull ourselves out of this economic morass, create private
sector jobs and reinvigorate the housing market. No more "Cash for
Clunkers" or Quantitative Easing. Allow entrepreneurs and business
owners to create jobs, just as they always have, by simplifying and
rationalizing tax code. Then we'll see a real economic
Now that I've gotten that off my
chest, let me tell you that I think the economy will be better in
the second half of the year than the first. Hopefully Mother Nature
will take pity on us and provide a respite from the many natural
disasters and severe weather patterns that have plagued us so far
this year. Corporate profits, taken in total, continue to be very
strong. Companies are sitting on hundreds of billions of dollars in
cash, just waiting to be deployed. Interest rates remain at
historically low levels, which is good for business as well as
investors and homeowners. And we still have very a accommodative
Federal Reserve doing whatever it can to prop up the economy.
I continue to selectively put new
cash to work in my core sectors during times of weakness. Indeed, I
was a buyer Friday morning, when the market cratered after the lousy
jobs report. That's the advantage of having a longer term
perspective. Unless you need the money in the next year or two,
there is really no reason to be out of this market. Remember,
markets always go up and down; it's the normal cycle. The key is to
remain in the market so you don't miss the gains. If you have any
questions, please feel free to give me a call and we can discuss
your personal financial situation.
Personal News and
Well, summer is in full swing and
all three kids, at least for a while, are gone. Ezra is having a
blast at sleep-away camp in the Poconos. After that, he heads to
Florida for tennis camp. Lily is currently in Washington State
hiking, mountain climbing and camping. She called a few days ago and
told me she's having the best time of her life. After she returns,
my mother is taking her to Greece and Paris. Not too shabby. And
Nola is currently in Spain, touring the country while speaking
mostly Spanish. After that, she's off to Paris for a photography
course. It's good to be these kids, that's for sure.
I've been taking it easy so far
this summer. I'm finally done with six months of physical therapy on
my shoulder and back. I started riding my bike a couple of weeks ago
and I went to my first swim practice yesterday. It was my first time
in the water since April. Boy am I out of shape, but it feels good
to exercise again. In two weeks I leave for Europe where I'll pick
up Nola in Barcelona and spend a week driving her through the wine
country to Paris. We'll be driving through Burgundy and the Rhone
Valley meeting with a bunch of wine makers whose wines are available
through a wonderful wine club that I'm involved with. If there are
any French wine lovers out there, this club is for you. If you're
interested, let me know and I'll put you in touch with the owners.
As I've mentioned earlier, my fan
page on Facebook is up and running. So for those of you with
Facebook accounts, please type in "Werlinich Asset Management" in
your search bar, visit my fan page, then please "like" it. I plan to
continue to add content over time. And don't forget that you can
connect with me on LinkedIn or follow me on
Twitter. I tweet the latest
market and economic news every day. Following me is a very easy way
for you to receive stock market updates in between my newsletters.
I'm closing in on 200 followers, up from about 50 or so at the end
of the year. I'd like to double that before year-end, so help a guy
out by 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 to you now for over seven years. 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.
"News and Views", Copyright, Werlinich Asset Management,
LLC and www.waminvest.com. All