NEWS AND VIEWS

Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595
914-741-6839
800-746-6926
Email: greg@waminvest.com
URL: www.waminvest.com

August 27, 2008

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

Current Market Analysis

Whereas in past years I sometimes skipped writing an August newsletter owing to the fact that many of my readers are on vacation, I decided to pen a shorter than usual letter this month due to heightened anxiety in the stock market. I'm not quite sure what I can add to the cacophony of opinions out there. Some analysts are saying that everything will be fine while others claim the apocalypse is near. I suppose I'm somewhere between these widely divergent opinions. I don't believe by a long shot that everything is, or will be, just fine, yet I also believe that we'll get through this, as we have gotten through every other financial crisis in the past 200 plus years. So let's take a look at the market and what it's telling us.

The stock market continues to gyrate wildly from day to day and week to week. Yet for all of that volatility, the Dow Jones Industrial Average is only down about 150 points, to about 11, 545 as I write this, from where it was when I wrote to you last month. The initial euphoria felt by investors from the plunge in oil prices seems to have leveled off a bit. Indeed, oil prices are rising a bit again as Hurricane Gustav threatens the oil producing Gulf Coast of Florida. We'll know over the next few days whether this is a real cause for concern or not. The other major factors affecting the market are the housing and banking crises, which continue to plague almost every aspect of the broader economy. There will be no broad economic recovery until each of these issues have moved more closely to resolution. My guess is that won't happen until sometime next year.

One of the big questions in the market continues to be: "Has the low been made?" And the answer is: "I don't know." Sorry about that. I wish I knew. I would be able to make a lot of money with that knowledge. Two important numbers to keep your eye on: 10,962 and 10,750. The former is the recent low set by the Dow Jones Industrial Average on July 15. The latter is roughly the midpoint of the low set in July 2006 and the high set in October 2007. Should the Dow break below both of these support levels, the resulting crash could get very ugly. It is actually pretty remarkable how well the overall stock market has held up in the face of so many daunting problems. That actually gives investors some hope.

So let's take a look at the charts to see what the market is telling us. Below is a daily chart of the Industrial Average so far this year. We clearly see the plunge below the March low, taking the Industrials to a low of 10,962 on July 15. That is now our first line of defense. As long as the Industrials remain above that level, things will be ok.  



The action of the Transportation average remains remarkably strong and could be the one indication that the market is more likely headed higher than lower in the coming months. The Transports are about 1,000 points higher than the January low and are actually closer to the May high. Again, according to Dow Theory, the Transports and the Industrials must make new lows (or highs) at the same time to confirm the trend. Therefore, this lack of confirmation suggests that the market may have seen its worst days. We will continue to monitor this action closely. I expect to see the Transports consolidate a bit before making its next decisive move.



After falling with the Industrials to a new low in July, the S&P 500 has rallied a bit and has returned to the lower edge of its old trading range. In any downtrend, we'd like to see it remain above 1,200. If that's breached, the next important level to me would be 1,165, which is the midpoint of its low in 2002 to its high in 2007. That's a number worth keeping an eye on.



Bond yields remain right in the middle of their year-long trading range of between 3.3% and 4.3%. Either the bond market is telling us that it just doesn't see any meaningful inflation in the future or it is saying it would rather be in "safe" securities that have a "real" (inflation adjusted) return of next to nothing rather than take a chance of losing money in almost any other security. Or maybe the bond market is telling us that we have a deflationary environment ahead. Honestly, I'm not sure what to make of these low yields. So we'll just watch and wait for more information.



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. After a bad May and a horrible June, the market leveled off a bit in July. While it was nothing to write home about, it did bring investors back in off the ledge. And August will likely have a similar look at the end of the week. The only thing that really jumps out at me is the relative performance of small caps, which are significantly outperforming their larger brethren. This better performance has gone largely unnoticed by most of the press. We'll see if it continues. On to September.

Name of Index

Jul

QTD

YTD

Description

S&P 500

-1.0

-1.0

-13.7

Large-cap stocks

Dow Jones Industrial Average

0.3

0.3

-14.2

Large-cap stocks

NASDAQ Composite

1.5

1.5

-12.3

Large-cap tech stocks

Russell 1000 Growth

-1.9

-1.9

-10.8

Large-cap growth stocks

Russell 1000 Value

-0.4

-0.4

-13.9

Large-cap value stocks

Russell 2000 Growth

2.3

2.3

-6.8

Small-cap growth stocks

Russell 2000 Value

5.1

5.1

-5.2

Small-cap value stocks

MSCI EAFE

-3.2

-3.2

-13.4

Europe, Australia, Far East

Lehman Aggregate

-0.1

-0.1

1.0

US government bonds

Lehman High Yield

-1.3

-1.3

-2.6

High-yield corporate bonds


Statistics To Watch

    I'm going to skip this section this month. All of the statistics you know and love to read about will return in September.

Trends To Watch

The Bulls are desperate to call The Bottom in the decline of the financials. Personally, I don't think we've seen the worst yet. I think we're going to have a number of banks fail, and more merge out of existence, before the credit crisis runs its course. Last month I said that I believe that the financials are an important indicator of the health of the stock market and the economy - the canary in the coal mine if you will. That canary is still breathing right now, but I expect it will keel over before too long. 


Like the financial sector, housing has turned up recently. But we've seen this picture many times before, as you can see below. It will take a rise above at least 155 to convince me that the housing sector has turned the corner. I think this is another in a long line of "false bottoms" for housing. I do though believe that housing could recover before the rest of the financial sector.


While the long term trend for the price of oil remains upward, the recent correction that knocked over $35 off the price of West Texas Crude did take some steam off the rally. It also ended the series of of higher highs and higher lows. So where is the price headed now? In the short run (read: next few months), I don't know. It could go lower still I suppose. In the long run though, I firmly believe that the price of oil is headed inevitably higher.


In the interest of brevity, I'm going to show the Dow Jones Commodity Index, which I'll use as a proxy for the major commodities like gold, silver, copper and others, rather than show each individual chart. Suffice it to say, they all look the same right now, with major corrections in the past month or so. Interestingly, as severe as the price correction has been, the index did not violate its January low before rebounding a bit. Like oil, I'm not sure about the short-term movement in commodities, but I'm confident in the long-term bull market in this sector.


Amazingly, the dollar has surged over the past month, helping to send lower the relative price of all commodities. I believe much of the recent strength in the greenback is simply relative to the weakness in many other currencies, like the Euro. Given the terrible state of the US economy, the massive unfunded liabilities of the government, the cost of the continuing conflicts in Afghanistan and Iraq, the twin peaks of budget and trade deficits and the inevitable bailouts of Fannie, Freddie and FDIC, just to name a few problems, it's hard to make a case for the continued rise in the dollar. I think it's just a matter of time before it rolls over again.


If you think our stock market looks bad, allow me to present the rest of the world, as expressed by the MSCI EAFE index, which is down about 27% over the past twelve months. Do you feel any better? Not if you have overweighted international holdings in your IRA or 401k.


Things are even worse in China, notwithstanding the gold medals they accumulated during the recently concluded Olympics. The Shanghai Index, which I use as a proxy for China, broke below the support level from early 2007. Their stock market has now fallen more than 60% from the peak. Oy. Do you feel better yet? The next support level is around 1,500, or about 75% below the peak. For the sake of that country, I hope that doesn't happen.


Monthly Tip

Again, in the interest of brevity, I'm not going to include a tip this month. I hope to have something interesting and informative for you next month.

What I'm Thinking and Doing

This continues to be a very tough market, and not one for the faint of heart. Nor is it for anyone who needs their money now, or in the next year or so. I've had to revise my opinion of when I think things will start to get better. I no longer see a second half rally for this year as I believe the recession (yes, we are in a recession, regardless of what the government tells you) is going to last longer than I originally expected. I think the best case scenario is the for the market to begin to recover sometime in the first half of next year, after the housing and credit markets begin to improve a bit. I would avoid investing in much of the broad market right now, preferring instead to focus on areas with the best long-term growth potential. It is imperative to have a well-thought out investment strategy, a lot of patience, and the fortitude to stick with your plan. If not, find an advisor to help you. In addition, you should also minimize or eliminate your debt, cut back on discretionary spending and save as much as you can. That is the best advice I can give you.

I haven't really bought anything in the past month. In fact, I haven't really done much of anything with my portfolios recently. I'm just sitting tight with what I have. I've already sold most of the under-performing and non-core assets. I'm going to stick with the rest of what I own because I believe in the long-term story of my core sectors. I don't mind holding cash while I wait for the best opportunities to put that money to work. I hope I have something more interesting to report next month.

Personal News and Notes

It's hard to believe that summer is almost over. The kids have returned from their summer adventures at camp in Maine. They all had a great time and are looking forward to returning next summer. Labor Day is literally around the corner, which means that the beginning of school is close behind. I don't know about you, but I am finding that time seems to move faster and faster every year. Before I know it, the kids will be leaving for college, not camp.

Last month I wrote that "the Mets are in a tight pennant race and broke a lot of hearts, including mine, by blowing a big lead in the 9th inning last night against the Phillies." Amazingly, the exact thing happened last night as the Mets lost another gut-wrencher to the Phillies after taking a large early lead. What a miserable end. Hopefully they can rebound tonight and regain first place.

By the way, the Bruce Springsteen concert at the Meadowlands a few weeks ago was ABSOLUTELY INCREDIBLE!! He and the band rocked the house for over three hours. It was an amazing display by one of the great music acts of our, or any, generation. It was truly a night I'll never forget.

Shaena and I had an amazing Western adventure on our recent vacation. I can't say enough about the Yellowstone and Grand Teton National Forests in Wyoming. Our four days there exceeded every possible expectation. The weather was perfect, the scenery was breathtaking, the wildlife impressive and the experience was priceless. If you've never been there, I suggest you book your trip now for next summer. We also had a great time in Colorado, where we started in Aspen then worked our way through some ghost towns, mining towns, ski resorts and other beautiful vistas over our final four days. This trip was so great we're already planning next summer's adventure.

Finally, the big announcement that I alluded to last month. Shaena and I have finally agreed on a wedding date. We'll be tying the knot on Friday night, October 3. Yup, that's only five weeks away. Not surprisingly, we've been working feverishly to plan our special night and it's all starting to come together. I am very lucky and blessed to have met such an extraordinary woman and can't wait to have her become my wife. We share a special dream of 50 years together; I look forward living the next 47 years (at least) with her by my side.

That's it for this month. Remember, this newsletter is for you, my readers. If you have any thoughts or suggestions on how to make it even better, please let me know. If you have some ideas for future "Monthly Tips", or even better, if you'd like to be write a Tip, let me know that too. 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. As always, I thank you very much for your continued interest and support and I look forward to writing to you again next month.

Best regards,


Greg Werlinich
President


"News and Views", Copyright©, Werlinich Asset Management, LLC and www.waminvest.com. All Rights Reserved.