Werlinich Asset Management, LLC
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Rye Brook, NY 10573
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September 20, 2011

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 a series of seemingly never ending declines spanning four months, the market seems to have finally stabilized a bit, rebounding 3% from the low set a month ago and revisited a week ago. It's really too early to know if we've seen the worst or if this is just a respite before the turmoil continues. Or maybe the bottom has been made, allowing the market to consolidate for a bit before resuming an upward move. The answer to these questions will depend on decisions made by our political leaders in Europe and the United States. That's cause for concern as the overriding story continues to be global economic weakness.

So what do we see when we look at a chart of the Dow Jones Industrial Average? Last month I wrote that "hopefully the Industrial average will remain above 10,600 because the next big support doesn't come in until below 10,000." So far, so good as that support level has held. A new trading channel has emerged, shown below in blue. We'll see if this upward trend can continue for a while. I also suggested that readers "remember this date: August 8. On that day, there were 77 declining stocks for every 1 that advanced. That was the worst relationship of advances to declines in 80 years. That suggests that it could mark a bottom." Again, it appears that may have been the bottom. Let's hope so.

The chart of the transportation average has a similar shape to the industrial average. It too it building a new trading range as it seeks to bounce off the recent lows. It will be very important for the transports to move to move above 4,800. If this happens, it could indicate a rebound for business in this country. It would be very bullish if this move happened concurrent with the Industrial average heading above 11,750.

All I can say about Treasuries is wow, was I wrong. I really thought rates were headed inevitably higher, based on the simple fact that yields were at historically low levels and had nowhere else to go but up. Then one disaster or crisis after another hit this year, which left investors seeking shelter from equities. This surge of buying helped yields plunge to around 2%, which is the lowest level recorded in its 60 year history. To put this in a visual perspective, I offer the following chart, which shows Treasury yields for the past 20 years. There really isn't much else to say. So where do yields go now? At the risk of being wrong again, I'd guess that yields will remain between 2%-3% through at least the end of 2012 before slowly rising, as market forces dictate they eventually must. It is only the actions of the Federal Reserve which is keeping rates artificially low. But sooner or later, rates will move higher, as they must.

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. As you can see by the results below, the broad market averages, led by the carnage in the developed foreign markets, were down again in August, for the fourth month in a row. Unfortunately, this most recent decline wiped out the remaining gains from earlier in the year, leaving most of the averages flat or down for the year. It has been just a brutal market since the end of April. Large-cap stocks have performed much better than small-caps. One bit of solace that we can grab on to is that the "seasonally bad" time of year is almost over, so maybe we can look forward to better times in the fourth quarter.

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 September 10 was 428,000, a increase of 11,000 from the prior week's revised figure. The four-week average was slightly lower at 419,500, slightly higher than the prior month. The weekly numbers remain choppy, but unfortunately, are trending higher again.
  • Non-farm payroll employment was unchanged in August, as whatever modest increase in private sector jobs wiped out by losses in government jobs and workers temporarily out of work due to the Verizon strike (which as since been settled). The tepid increase in June was revised even lower by 26,000 and July was revised down by 32,000. This was a simply terrible report. On top of that, the average hourly wages for blue collar workers fell to $19.47 while the average work week dropped to 33.6 hours. So fewer people were working fewer hours for less money. It doesn't get much bleaker than that.
  • The total number of workers counted as unemployed rose by about 100,000 back to 14.0 million but the unemployment rate remained at 9.1%. The more comprehensive U-6 rate inched lower to 16.1%. 6.0 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 fell to 2.6 million. The number of people holding multiple jobs fell slightly to 6.65 million, the lowest level this year. Overall, a terrible picture for job creation.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $130 billion in August, leaving us with a deficit of $1.23 billion for the first eleven months of fiscal 2011, which is $28 billion less than the record levels from a year ago. It is anticipated that our full year deficit will be a paltry $10 billion less than last year.
  • The Census Bureau reported that the U.S. had a trade deficit in goods and services of $44.8 billion in July, down from $51.6 billion in the prior month. This reduces the trend of large increases in the trade deficit over the prior two months.
  • The Census Bureau reported that privately owned housing starts fell 5.0% in August, after falling 2.3% in July, and were down 5.8% from a year ago, to a seasonally adjusted annual rate of 571,000 units. The monthly results have been extremely volatile this year, so a reliable trend is not yet in evidence, but the direction is not good. New building permits were up 3.2% from the prior month and up 7.8% from last year. The prolonged weakness in new construction will eventually set the stage for the recovery as the inventory of new homes for sale diminishes to match a smaller number of buyers.
  • The National Association of Homebuilders/Wells Fargo Confidence Index in August ticked down to 14 from 15 in July, marking 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 July fell 0.7%, after decreasing 2.6% in June, but was actually 6.8% higher than the depressed level of a year ago, at 298,000 units. The estimate of homes for sale was only 165,000, which represents 6.6 months at the current rate of sales. The median sales price fell to $222,000, which is just below the 12-month moving average price of $225,475. The paltry number of new homes sold continues to defy the incredibly low mortgage rates, and bad weather will likely negatively impact the August figures.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were fell 3.5% in July to 4.67 million units, but were 21% higher than a year ago. The estimate of homes for sale, at 3.6 million represents 9.4 months of supply at the current rate of sales. The median sales price of $174,000 is slightly higher than the 12-month average of $167,683. With mortgage rates at historically low levels, and prices at very attractive levels, this is a great time to buy a home, if you have the cash and good credit.
  • 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, showed improvement for the third consecutive month in June, increasing slightly while still remaining lower than a year ago. Hopefully this is the beginning of a trend that will demonstrate that the bottom has been made in house prices.
  • According to RealtyTrac, the number of foreclosures in August increased 7.2% from the prior month, but still remained 33% lower than a year ago. The big increase in new foreclosure actions may be a signal that lenders are starting to push through some of the foreclosures delayed by robo-signing and other documentation problems, said James Saccacio, chief executive officer of RealtyTrac. It also foreshadows more bank repossessions in the coming months as these new foreclosures make their way through the process.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 50.6 in August, a small decrease from July. This marked the twenty-fifth consecutive month of expansion in the manufacturing sector, but marked the third straight month of declines. Any number below 50 indicates a contraction. The ISM index of non-manufacturing activity was 53.3, a bit higher than the prior month. This marked growth in the service sector for twenty consecutive months. These numbers demonstrate that while business is still growing, it is barely doing so, and in real danger of contraction.
  • The Conference Board reported that it's index of Leading Economic Indicators increased by 0.5% in July, following a smaller increase of 0.3% in June. Says Ataman Ozyildirim, economist at The Conference Board: The U.S. LEI continued to increase in July. However, with the exception of the money supply and interest rate components, other leading indicators show greater weakness consistent with increasing concerns about the health of the economic expansion. Despite rising volatility, the leading indicators still suggest economic activity should be slowly expanding through the end of the year.
  • According to the Bureau of Economic Analysis, the "second" estimate of GDP growth in Q2 was an even lower 1.0%, worse than the "advance" estimate of 1.3%. This follows the lowered estimate of GDP growth in the first quarter to a putrid 0.4% from a previously announced 1.9%. This compares with 2.3% (down from 3.1%) in Q4, 2.5% (down from 2.6%) in Q3, 3.8% (up from 1.7%) in Q2 and an artificially inflated 3.9% (up from 3.7%) in Q1 of 2010. Our economy has basically stalled and we're awfully close to achieving the dreaded "double-dip recession".
  • The Federal Reserve reported that in July the amount of outstanding consumer credit remained flat from the prior month, at $2.45 trillion. Consumer credit has expanded, albeit slightly, almost every month this year. What is that money being used for? It doesn't seem to be stimulating business.
  • According to the Census Bureau, retail trade and food service sales were up 0.5% in August from the prior month, and was 7.2% higher than a year ago. Sporting goods/music and electronics sales showed the best month-over-month sales gains.
  • The Federal Reserve reported that in August the supply of M-2 (a broader view of money) continued to explode higher, up 2.5% from the prior month and a stunning 14.5% during the prior six months. The supply of M-1 (the most narrow definition of money), on the other hand, rose a whopping 25.3% over the same six months. Where is all this money going, and what good is it doing, other than increasing the price of gold relative to the falling value of our increasingly debased dollar?
  • The Conference Board's Consumer Confidence Index plunged in August, falling to 44.5 from 59.2 in July. This is the lowest number since April 2009. The index is 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. It will be a while before the confidence index reaches those lofty levels.
  • According to the FDIC, 71 banks had failed through September 15, compared with 139 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

After a precipitous drop for the better part of the past year, or really the past decade, the greenback has shown a little life lately. Any rational observer though must realize that any positive movement for the dollar is simply because most other major currencies, like the Euro, are in even worse shape. So while the dollar is in terrible shape, it's better than the Euro, which could be fighting for its very existence.

Just to put things in perspective, this month I'm including a monthly chart, showing the price action of the dollar index for almost 25 years. Now you can clearly see what the easy money policy of the Fed over the past decade has done to the dollar. This is a stunning debasement of the purchasing power of our currency. Wonder no longer why everything seems to cost so much more than ever before; here's why.

Thanks in no small part to the historical weakness in the dollar, the price of gold continues its relentless march ever higher. In the prior couple of months I wrote that "each consolidation was followed by a rise to a new high, and I believe this time will be no different." It looks like we may be in another consolidation right now which could provide a buying opportunity for those who have not yet participated in this tremendous bull market. Don't miss your chance as the next stop on this train may be $2,000.

Like I did with the dollar index, I thought I would help put the bull market in gold in perspective with this chart showing the price action of gold over the past decade. I started buying shares in gold stocks, Newmont Mining specifically, in 2001 when the price of gold was $270/oz. I've never sold a share of NEM, or any other gold stock I subsequently acquired, since then.

Three months ago I told you that the big correction in the price of silver was a good buying opportunity and that you shouldn't be scared out of this trade as silver would again move higher. I hope you listened. After consolidating between $32 and $38 per ounce, the price of silver has moved back into the low $40s. At the current price silver is trading just above the 50-day moving average, which is a bit higher than the 200-day average. I'd like to see the price rise above the recent high of $44 before attempting to make a run at $50 later this year.

The price of copper has remained in an extended trading range for the entire year. But Dr. Copper forecasts trouble ahead as the price has fallen below both moving averages and is dangerously close to a trading floor around 3.60 that's been in place for two years. The price of copper, which is often viewed as a proxy for the health of the global economy suggests concern.

After falling precipitously over the summer, the price of West Texas Crude (WTIC) has recovered a bit over the past month and seems to have established an upward sweeping trading range. Longtime readers know I've been an oil bull for about a decade, and I'm not changing my opinion now. I expect crude prices to remain above the floor around $70/barrel. I would be perfectly happy to see the price consolidate between $80-$90 for a while as the economy regains its footing. It wouldn't take much good news to send the price higher.

I've been bearish on the financial sector since early 2008 and therefore have avoided buying anything in this group since then. While this stance caused me to miss some brief bullish moments, it has helped me avoid tremendous losses when those moments inevitably evaporated. The index is now trading below a very strong floor, and way below the moving averages. This is a very bearish chart and suggests further weakness in the banking sector. Buy at your own risk.

I have been equally bearish on the housing sector since 2007, so I'm not surprised to see the price of the housing index fall slowly but steadily before inevitably breaking below its trading floor. Interestingly, there's been a bit of a rally, raising the index right back to the level of the trading floor, but still well below both moving averages. Given the unrelentingly bad news coming out of the housing sector, I'm not sure what's driven the recent rally, but I would continue to avoid this sector.

The developed international markets have taken a drubbing just like our domestic market. The index is now far below both moving averages, which have bearishly crossed. The only good news, if you can call it that, is that the index has stubbornly remained above the support level around 46.5. Like many other charts, just consolidating for a bit, without weakening further, would be very constructive.

The index of the emerging markets, which should be somewhat uncorrelated with the developed markets, looks remarkably similar to the chart above. That's not good for investors seeking refuge in the supposedly faster growing emerging markets. This is bad news for those seeking to profit from the only areas of the world generating above average economic growth. Like the IEE, this index is now significantly below the moving averages which have also crossed. And like the IEE, the best scenario in the short term is to simply consolidate while catching its breath.

I've been writing for months that the weakness in the Shanghai Index makes me very nervous because of China's importance to the world economy. The index has now dropped below its moving averages and a very significant trading range, and has fallen dangerously close to an important floor just north of 2,300. This is another clear indication of global economic weakness.

Last month I wrote that there was "so little bullishness [in the NYSE Bullish Percent Index] that it's almost a screaming "buy" signal. The index represents the percentage of stocks listed on the NYSE that signal a buy. That turned out to be a good call as a rally ensued almost the next day. The index remains below the "normal" sentiment range, suggesting that the rally could have some legs.

Next is a 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 I said that "you can't get much more bearish than this, which again suggests that a rally should follow." We know that's exactly what happened. And like the bullish sentiment, this index suggests that there is further room for the market to move higher.

Finally we have the "Fear Index". This year we had spikes in the VIX due to the tsunami in Japan and the initial Greek debt crisis. Those jumps in volatility were dwarfed by the recently global debt crisis. That panic is slowly waning, in fits and starts. Indeed, the volatility index has now returned to the normal trading range, albeit on the high side. That dimunition of fear also helped spur the recent rally. If the market fear continues to abate, the rally should continue.

What I'm Thinking and Doing

I'm going to take a break from spewing invectives at our elected officials. Feel free to read what I wrote the prior two months as my sentiments are unchanged. I just don't have anything new to add this month. Suffice it to say I'm reading and listening, with interest and skepticism, to the pronouncements from leaders of both parties as they vie to create plans to boost the economy and create jobs while neither increasing the deficit nor touching any of the entitlement programs. Good luck.

The global economic malaise and political uncertainty makes for a very difficult and unsettled investment landscape. The big question is whether or not we are going to fall back into recession and if there is anything that can be done to prevent it. I don't think we're headed for a full-scale recession. Rather, I believe we're going to slog through a period of below-average growth, but growth nonetheless. GDP growth for most of the year will probably be between 1% and 2% which is nothing to write home about, but better than a retraction. The Fed should ignore the ever louder calls to announce another round of Quantitative Easing (QE3), and allow the economy to follow its inevitable path. Every period of recession or stagnation is followed by a period of growth. We will have that growth sooner or later, whenever the economy has fully wrung out the excesses wrought by the failed policies of our past and present leaders.

During periods of low inflation, low interest rates and low growth, investing in companies that pay meaningful dividends is more important than ever. Historically, dividends have made up at least 50% of the annual returns for equities. During the 1980s and 1990s, investors forgot about dividends. More than 95% of all WAM investments pay a dividend, and the majority of those have a yield in excess of 2%.

Unfortunately, I put some cash to work right before the crash in October; that was bad timing on my part. But I'm very confident that every one of those acquisitions will be profitable in the not-too-distant future. I have continued to make small purchases over the past few weeks. In most cases, the companies I invested in pay more than 3% in dividends and are market leaders in their industries. They will survive any economic cycle and thrive in the eventual recovery. It's virtually impossible to call a market top or bottom. The best you can do is buy great companies at reasonable prices and hold them for as long as your original thesis for buying them remains in force. It's crucial that investors have 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, and given where interest rates are, there are few alternatives to equities right now. 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.

Professional News and Notes

On September 14, I was interviewed by Emma Trincal in "The Prospect News: Structured Products Daily" about an interesting new structured product based on Bank of America stock. The full article can be viewed in the "WAM in the Media" section of my website, or just by clicking here.

As I've mentioned earlier, my fan page is up and running and a few more people are "liking" it each month. I would appreciate it very much if some of you would do the same so as to increase its visibility. Just go to Facebook, type in "Werlinich Asset Management" in your search bar, visit my fan page, then click the "like" button. Currently all of my tweets are stored there. I plan to continue to add more 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've recently passed 200 followers, up from about 50 or so at the beginning 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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