Werlinich Asset Management, LLC
400 Columbus Ave.
Valhalla, NY 10595

October 17, 2005 Comments   |   Refer A Friend   |   Sign Me Up   

The Black Book on Personal Finance, for which I contributed a chapter entitled "Sector Rotation Investing", is finally available for sale! If you would like buy it at a 32% discount off the publisher's list price, you can do so on by clicking here. The book should also be in bookstores over the next few weeks. I hope you will consider buying a copy. Thank you.
Market Analysis...Scary
Last Month's Results - Weak
What I'm Doing Now...Raising Cash
Statistics...Mixed Messages
Trends To Watch
Monthly Tip...Update Your LifePlan
Personal News and Notes

Market Analysis...Scary

As far as the markets were concerned, not much happened in September. Most of the major averages were flat for the month, which is clearly shown in the Last Month's Results section. But rather than focus on what's happened already, I'd like to talk about what might occur during the final 2 1/2 months of the year. Unfortunately, October has been miserable so far, the nice rally on Friday notwithstanding, with all of the major indices plunging and a lot of technical levels being breached. For months I've been writing about my concerns that the market has been operating on borrowed time. Well, I think the market may be at a tipping point right now and could sink to new lows. I'll review some of my specific reasoning later in this letter.

The Dow closed last week at 10,287, or down about 270 points since my September newsletter. This brings us close to the lows of 10,175 set in July. While the Dow did trade below that number intra-day a few days ago, it managed to close higher. The next price of note below that is the "magical" barrier of Dow 10,000. Right now the Dow is trading well below its 50- and 200-day moving averages. And while there certainly could be a short technical rally (which may have begun on Friday) thanks to the somewhat oversold levels of both RSI and MACD (see the top and bottom sections of the chart), I'm sticking with my prediction that the Dow will be down for the year.

Since hitting a high of just over $70 right after Hurricane Katrina, the price of West Texas crude dropped to about $60 per barrel before rallying recently to just over $64 per barrel. It appears that part of this price drop can be attributed to a reduction in US consumer demand. I find that explanation to be way too simplistic, and it could provide a good investment opportunity if this decline extends a bit further. I don't think that the global demand for oil has changed a bit. More to the point, I believe we are in a bull market in energy and natural resources, and have been for over three years. This is just one of many "rest stops". For those investors who have not established positions in this sector, this momentary pullback could provide an entry point.

The "Katrina rally" in Treasuries appears to be over. After surging prices dropped yields briefly below 4.00%, the strengthening dollar and the actions of the Fed have conspired to knock down Treasury prices to the point where yields are again above 4.5%. In fact, we appear ready to approach the year-high yield of 4.7% set in March. That will not help an already weakening housing market. The spread between the 10-year Treasury and the TIPS is now above 2.50%, which is the highest level since May, fueling the growing fear of inflation.

Mea culpa. I admit that I was totally wrong about the Fed and my belief that they would end their program of rate hikes. It is now clear that not only haven't they stopped yet, but that they intend to continue raising short-term rates until they reach at least 4.50%. While they do this, they must balance the risk of a growing inflation on one hand with the equally dangerous risk of stalling the economy, or worse, driving it straight into a recession, on the other hand.

Last Month's Results...Weak

As always, I provide the following chart to show the raw results for the month, the quarter-to-date and the year-to-date. The broad averages managed to squeak into positive territory by the end of an up and down month in September. Interesting, only foreign stocks, as represented by the MSCI EAFE index, showed any demonstrable gains. Barring a very strong end-of-the-year rally (like last year), it's looking more and more likely that the major averages will be down for the year. The very bad showing so far this month is an ominous harbinger of things to come.

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

What I'm Doing Now...Raising Cash

While WAM's clients have been very well rewarded so far this year as our core sector investments continue to shine, we are not resting on our laurels. While I continue to look for the "Big Trends" that offer the greatest potential for investment gains, I am also guided by my #1 investment principal, which is to preserve my clients' capital. Towards that end, I have been selling some of our underperforming, non-core holdings and some securities that have the greatest risk to underperform in a rising rate, inflationary environment. I'd rather give up some of the upside if I'm wrong than risk losing money if I'm right. When I don't think the risk-reward scale is tilted in my favor, I get out. There is nothing wrong with holding some cash while waiting for a better opportunity.

Statistics To Watch...Mixed Messages

  • Thanks to the dual effects of Hurricanes Katrina and Rita, there was a net loss of 35,000 non-farm jobs in September. I don't assign any special importance to this number, nor will I place any additional weight on the number of jobs added or lost for the rest of the year as the post-hurricanes employment picture gets sorted out. Average hourly wages rose ticked up from $16.16 to $16.18. The average workweek remained flat at 33.7 hours.

  • Not surprisingly, the number of unemployed workers jumped from 7.4 million to 7.7 million and the number of part-time workers rose from 4.5 to 4.6. Interestingly, the number of marginally attached workers (those individuals who had looked for work sometime in the past year, but not in the past four weeks, and are therefore not counted as unemployed) fell from 1.6 to 1.4 million. One can surmise that part of this drop was caused by previously unemployed workers taking new jobs in the Gulf Coast. In any case, these numbers caused my Comprehensive Labor Index™ (formerly the "underemployment rate") to increase to 9.6% from 9.5%. The official unemployment rate reported by the government rose to 5.1%.
  • The number of people holding more than one job in September surged to 7.71 from 7.22 million people in August.
  • The most recent four-week average for initial jobless claims jumped in September to 391,750 from 319,000 in August. Again, this can be greatly attributed to Katrina and Rita.
  • The University of Michigan Consumer Confidence Index plunged in September to 76.9 from 89.1 in August. We'll see if this rebounds as the Gulf Coast gets cleaned up, or if it portends a greater problem for the retail climate at we head towards the holiday shopping season.
  • According to CBO estimates, the federal deficit for fiscal 2005 was about $317 billion, or about $96 billion less than 2004. This year's deficit represents about 2.6% of the GDP, whereas last year's deficit was about 3.6% of GDP. The full year deficit is smaller than the White House forecast of $350 billion. The hurricanes had virtually no impact on the deficit because they happened so late in the fiscal year.
  • According to the Census Bureau, the U.S. trade deficit grew to $59.0 billion in August from $57.9 billion in July.
  • The Labor Department reported that the CPI, which measures changes in the prices paid by urban consumers for a representative basket of goods and services, jumped 1.25% in September. The CPI is 4.7% higher than a year ago. Most of that increase can be attributed to the rising cost of energy. The "core" CPI, which excludes food and energy, rose only 0.1%.
  • The Federal Reserve reported that total outstanding consumer credit increased by an annualized rate of 2 3/4% in August to $2.15 billion.
  • The American Association of Individual Investors' (AAII) bullish sentiment, which ebbs and flows with the fortunes of the market, dropped slightly to 39%.
  • According to the Census Bureau, retail trade and food service sales edged up 0.2% in September from August. Gasoline station sales were up about 35% from a year ago.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in August dropped about 10% to a projected 1.237 million units. The estimate of 479,000 new homes for sale represents about 4.7 months at the current rate of sales.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes rose 2.0% in August to a projected 7.29 million units. The estimate of 2.856 million existing homes for sale represents about 4.7 months at the current rate of sales.
  • The Institute for Supply Management (ISM) index of manufacturing activity measured 59.4 in September, up from 53.6 in August. This marks the 28th month in which economic activity in the manufacturing sector is reported to have grown. Anything above 50.0 is considered to be an indication of growth.
  • According to the Federal Reserve's "Flow of Funds" report from June, in the second quarter the US owed the rest of the world $5.2 trillion, an increase of more than $600 billion from the prior year. Yikes.
  • In 2004, foreigners bought 98.7% of all Treasury issuance, 89.2% of all agency debt and 42.8% of all corporate debt. We should all blow thank you kisses to the world for financing our profligate spending.
  • The NYSE reported that on October 7th, a seat on the Exchange sold for $2.8 million, down from the record price of $3 million set in August, but up from $2.6 million in September.

I'm still amazed by the resiliency of our domestic economy as it continues to confound the naysayers (like me). In the face of natural disasters, war, rising interest rates, falling savings rates, the twin deficits, investor bearishness, growing inflation and a downward trending stock market, the economy just keeps on chugging along. I just can't don't believe that the good times (if that's what our times are) will continue for much longer. I truly believe that we're headed for trouble. I think we should all be buckling down right now for some tough times ahead.

Trends To Watch

The trading range of 11,000 to 10,000 for the Dow continues to hold, but the current downward trend is worrisome.

The price of gold broke out of it's trading range last month and has risen steadily since then. With gold priced over $470, we've reached the highest levels in almost 20 years. For almost three years I've been advocating that everyone should have a position in gold. $500 gold is not so far away.

As interest rates have risen, the dollar has strengthened, rising to 1.209 versus the Euro. This makes the rise in gold even more impressive, because a strong dollar usually means weak gold.

I believe the price of oil is in a long-term bull market. There could be consolidation in the low- to mid-$60's before it continues its rise.

The real estate market may be cooling off. Watch the action on lending companies and home builders. It doesn't look good.

The Fed is pumping up the money supply again. In September, it added almost $10 trillion! That's a 6.6% increase from the same time last year and a 9.4% increase in the last three months. Is there any wonder that inflation is returning?

It is almost assured that the Fed will increase rates at their November 1 meeting to 4%.

The latest major bankruptcy filing was Delphi, a major automotive parts supplier that used to be part of GM. This has very serious implications for GM which is now scrambling to avoid its own bankruptcy filing. The auto and airline industries are in desperate condition thanks to their legacy union costs and staggering pension and health care costs. At the same time, watch for a jump in personal bankruptcy filings as rising rates hurt borrowers with adjustable rate loans.

Monthly Tip - Updating Your Financial LifePlan

Long-time readers may recognize this column, and if so, please bear with me. I felt that as my readership has passed 1,000, it was worth reviewing these important items that comprise your financial LifePlan. What is a LifePlan you ask? Very simply, a LifePlan encompasses all of the components of your financial well-being. When each of these items are up to date, you and your family will be financially taken care of. I'm going to review the major elements of your LifePlan. Not every item will be applicable to each individual or family. For everything that is applicable, if it hasn't been written or updated within the past year or two, it is probably out of date.

  • Investments: Ensure that you have an appropriate overall investment strategy that guides all of your accounts, including taxable, retirement, pension and college savings. If you aren't happy with the results from your current advisor, or from doing it yourself, it may be time to hire a new advisor.
  • Tax preparation: as your finances become more complex, it's a good idea to work with a CPA who will not only prepare your taxes each year, but also help implement proactive strategies to minimize your ongoing tax burden.
  • Life Insurance: it's a good idea to consult an independent insurance agent to determine what type of policy best fits your needs. If you have a term policy that is more than two years old, you can probably save a lot of money by writing a new policy as rates have dropped dramatically.
  • Property and casualty insurance: review your deductibles. If you haven't already done so, I suggest that you raise the deductible to $1,000 for both your home and auto policies. I would also look into buying additional excess liability (or umbrella) coverage. This insurance is inexpensive and important. If you haven't adjusted your homeowners policy in the past two or three years, chances are you are substantially underinsured.
  • Disability insurance: see my May '04 newsletter for a detailed description of disability insurance then talk to you insurance agent.
  • Long term care insurance: see my Jan '04 newsletter. It's never too early to start thinking about this.
  • Will: it is very important that everyone have a will, although it is imperative for anyone with children. Except for those with complex estates and significant assets, it is relatively simple to draw up a will that will allow you to clearly stipulate how you want your assets disbursed in the event of your death. Don't leave it up to the courts. Find a good estate attorney to help you through this process.
  • Living will: the same attorney who drafts your will should also draft your living will. This legal document states your wishes regarding heroic healthcare measures should you be in a vegetative state or have a terminal or incurable illness.
  • Health care proxy: the same attorney who drafts your will and living will should also draft your health care proxy. This document authorizes someone to make health care decisions for you should you be unable to make those decisions for yourself. This is different from a power of attorney, which entitles the designated person to also make financial decisions for you.
  • Trusts/estate plan: for those of you with children, second (or third) marriages, or assets in excess of $1,000,000, I suggest working with an attorney to help create an overall estate plan that will likely include one or more trusts. This is the best way to ensure when and how your assets will be distributed to the correct beneficiaries. It will also help to minimize the taxes paid by your estate during your lifetime and after your death.
  • Lower your debt service costs: everyone should do whatever they can to reduce their monthly debts. That means paying off high interest credit card debt. It may mean consolidating multiple debts into one loan, like a home equity loan. I suggest avoiding adjustable rate debt, especially in mortgages, because rising rates will increase your expenses every month. I would also cut up most of the extra credit cards, especially the store cards. They typically charge the highest interest rates. In general, try to live more frugally. It's going to be a cold winter this year, literally and figuratively.

I know that sounds like a lot of work, but chances are you've already done some of these things. I believe strongly that you must address each of these issues to have a complete and comprehensive LifePlan. Be prepared to spend a little money on good advice and counsel. The money spent now will more than pay for itself down the road.

If you would like more information on any of these items, or would like help finding an expert in one of these fields, you can email me at or call me directly at 800-746-6926.

Personal News and Notes

As I mentioned at the beginning of the newsletter, The Black Book on Personal Finance is now available for sale on, and copies should be in bookstores over the next few weeks. I urge you to go out an buy a copy. Let's see if we can make it a bestseller.

I will be in Las Vegas on November 6 - 8 attending Hotel Interactive's inaugural Buyer Interactive Trade Alliance & Conference (BITAC) at the Wynn Resort. It should be a fantastic event for professionals in the hotel and lodging industry. If you would like more information about this unique opportunity, please give me a call.

As always, I thank you for your interest and consideration, and invite you to contact me if you have any questions or if I can be of service to you in any way.

Best regards,

Greg Werlinich

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