Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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July 12, 2011

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

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 continues.

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.

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. 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 markets.

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

Statistics To Watch

  • 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 last year.
  • 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 gains.
  • 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 used for?
  • 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 2007.

Trends To Watch

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 higher.

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 holding.

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 own peril.

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 run.

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 another rally.

What I'm Thinking and Doing

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 recovery.

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 Notes

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.

Best regards,

Greg Werlinich

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