What I'm Thinking and
Last month I spoke a bit too soon
when I opened the letter by saying that it seemed as though the
market had stabilized a bit, although I did go on to say that "it's
really too early to know if we've seen the worst or if this is just
a respite before the turmoil continues." In fact, the turmoil
continued as the market got pounded through the end of September and
into the first trading day of October. Then, like a switch being
turned on, the market swiftly moved higher. So, has the bottom has
been made, allowing the market to resume its march toward the summer
highs, or is this just a fake to lure investors back into the
clutches of the bear? The answer to these questions will depend on
decisions made by our political leaders in Europe and the United
States, our economy and by corporate earnings. Most immediately, the
European leaders have a summit coming up, the results from which
they expect to announce by next Wednesday. The market will be on
edge until then to learn what their leaders plan to do about Greece
and the rest of the PIIGS countries. Q3 earnings seem to be coming
in as, or better than, expected. And the economy seems to be holding
steady, if not improving ever so slightly. So, on the whole, there
is reason for a bit of guarded optimism.
So what do we see when we look at a chart of the
Dow Jones Industrial Average? Two months ago 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." Well, the Dow briefly
violated that initial support, falling to about 10,400. But
fortunately, that's as low as it went, for a 19% loss from peak to
trough. In the three weeks since the low, the Dow as rallied about
11% going into today. In fact, the rally has brought the index right
up to resistance at 11,750. Should it successfully pierce that
resistance, it could rise all the way back to 12,000. We'll know
more in the next few weeks as the European debt crisis plays
While the chart of the
transportation average has a similar shape to the industrial
average, the percentage movements were more dramatic. The loss, peak
to trough was almost 30%, while the recent rally is almost 20%.
These are truly insane price movements, reflecting panic trading
rather than reasoned investing. It will be very important for the
transports to move to move above resistance at around 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 moving above 11,750.
I'm including a chart of the Dow
Jones Utility average to demonstrate something that is being almost
completely ignored in the press; that utility stocks are currently
in a major bull market! Very quietly, utilities are trading at
multi-year high levels not seen since before the failure of Lehman
Brothers. Utilities love a low interest rate environment, so I would
expect the good times to continue in this
Now that the Federal Reserve as
declared war on high interest rates, and investors have shown a
willingness to accept zero or near zero yields to escape equities,
everything I believed about the inevitability of higher rates can,
for now, be thrown out the window. After the Fed announced "The
Twist" as a way to drive long term rates down even further, the
yield on the 10-year treasury plunged to a ridiculously low 1.7%.
Concurrent with the rise in the stock market, investors have sold
bonds, helping the yield rise back to about 2.2%. So much for the
power of the Fed to affect interest rates over an extended period of
time. Last month I wrote that "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." I'll stick with that.
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 and small-cap
markets, were down big in September, marking five straight monthly
losses for the market. Making matters worse, this decline wiped out
the remaining gains from earlier in the year, leaving all of the
averages down for the year, some double-digit. It has been just a
brutal market since the end of April. Large-cap value stocks have
performed much better than small-caps and growth. The only solace is
that the "seasonally bad" time of year is over, and the fourth
quarter as already begun with a bang.
Name of Index
Dow Jones Industrial
Europe, Australia, Far
* Return numbers include the reinvestment of dividends
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended
October 15 was 403,000, a decrease of 6,000 from the prior week's
revised figure. The four-week average of 403,000 continued a four
week trend of moving lower. About 3.7 million people continue to
collect unemployment insurance.
- Non-farm payroll employment increased by 103,000 in September.
This increase partly reflected about 45,000 striking Verizon
employees that returned to work. Job gains occurred in
construction, health care and the service sector, while the
government continued to pare jobs. Almost 100,000 jobs were added
in the prior two months thanks to upward revisions to the July and
August figures. The total number of workers counted as unemployed
remained at 14.0 million helping to keep the unemployment
rate at 9.1%. The more comprehensive U-6 rate moved down to 15.7%.
- 6.2 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 9.3 million and the number of
marginally attached workers fell to 2.5 million. The number of
people holding multiple jobs rose to 6.95 million. The average
hourly wages for blue collar workers inched up to $19.52 while the
average work week remained at 33.6 hours. So while this report was
an improvement, much more progress needs to be made to improve a
dreary employment picture.
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $64 billion in September, leaving us with a deficit of
$1.3 trillion for the full fiscal year of 2011, which is roughly
the same as the record levels from a year ago. Interestingly, tax
receipts from individuals rose 21.6% from the prior year, but that
was partly offset by greater payments to Medicare and Medicaid and
by higher interest payments on the public debt.
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $45.6 billion in August, virtually
unchanged from the prior month. Our poor economy is likely holding
- The Census Bureau reported that privately owned housing
starts surged 15.0% in September, after falling 7.0% in
August, and was up 10.2% from a year ago, to a seasonally adjusted
annual rate of 658,000 units. While this is the higher level of
the year, the monthly results have been extremely volatile this
year, so a reliable trend is not yet in evidence. New building
permits were down 5.0% from the prior month but up 5.7% from
last year. I can't explain the surge in housing starts. We'll see
if it continues for the next few months.
- The National Association of Homebuilders/Wells Fargo
Confidence Index in September jumped up to 18 from 14 in
August, marking the highest level since May 2010. The best market
was out West, with the East trailing the rest of the country.
Again, I'm not sure what caused the good feelings last month.
We'll have to see if this is the start of a trend or simply an
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in August fell 2.3%,
which marked the 4th straight decline. But at 295,000 units, sales
were actually 6.1% higher than the depressed level of a year ago.
The estimate of homes for sale was only 162,000, which represents
6.5 months at the current rate of sales. The median sales price of
$209,100, was the lowest level since last October, and well below
the 12-month moving average price of $224,733. Last month I wrote
that "bad weather will likely negatively impact the August
figures". That certainly proved true.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes were fell 3.0% in September to 4.91 million units, but
were 11.3% higher than a year ago. The estimate of homes for sale,
at 3.5 million represents 8.5 months of supply at the current rate
of sales. The median sales price of $165,400 is slightly lower
than the 12-month average of $166,417. 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 cash, good credit
and can find someone willing to sell.
- 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 fourth
consecutive month in July, increasing slightly while still
remaining lower than a year ago. This is now officially an upward
trend, although they do conflict a bit with the falling home
prices reported by the Census Bureau and the National Association
of Realtors. I'm not sure what to make of that.
- According to RealtyTrac, the number of foreclosures in
September decreased 5.82% from the prior month, and remained 38%
lower than a year ago. According to James Saccacio, CEO of Realty
Trac, while foreclosure activity in September and the third
quarter continued to register well below levels from a year ago,
there is evidence that this temporary downward trend is about to
change direction, with foreclosure activity slowly beginning to
ramp back up."
- The Institute for Supply Management (ISM) index of
manufacturing activity was 51.6 in September, a small increase
over the prior month. This marked the twenty-sixth consecutive
month of expansion in the manufacturing sector, and broke the
streak of three consecutive monthly declines. Any number below 50
indicates a contraction. The ISM index of non-manufacturing
activity was 53.0, a bit lower than the prior month. This marked
growth in the service sector for twenty-one consecutive months.
These numbers demonstrate that while business is still growing, it
is barely doing so, and remains in danger of contraction.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.2% in September, following
larger increases in the prior two months. Says Ataman Ozyildirim,
economist at The Conference Board: September data shows moderating
growth in both the LEI and the CEI. The weaknesses among the
leading indicator components have become slightly more widespread
in September. Moreover, the CEI suggests current economic
conditions have been slow, with weak gains in all four components
over the past six months. The slow pace in the LEI suggests a
growing chance that this sluggish economy is going to be here for
- According to the Bureau of Economic Analysis, the "third"
estimate of GDP growth in Q2 was 1.3%, which was equal to the
"advance" estimate. This is an improvement on putrid Q1 GDP growth
of 0.4%, down 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 August the amount of
outstanding consumer credit remained flat from the prior month, at
$2.45 trillion. Consumer credit has expanded slightly since the
beginning of the year. Unfortunately, it doesn't seem to be
- According to the Census Bureau, retail trade and food service
sales were up 1.1% in September, the best showing of the year, and
was 7.9% higher than a year ago. After the bad weather abated, it
seems that people finally went shopping. Auto-related sales really
led the way.
- The Federal Reserve reported that in September the supply of
M-2 (a broader view of money) continued to explode higher, up a
stunning 14.6% over the prior six months. The supply of M-1 (the
most narrow definition of money), on the other hand, rose a
whopping 25.7% over the same six months. Where is all this money
going, other than to the reserves at your local bank?
- After plunging in August, The Conference Board's Consumer
Confidence Index remained relatively unchanged in September,
rising to 45.4 from 45.2. 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 could be years before the confidence index again
reaches those lofty levels.
- According to the FDIC, 80 banks had failed through October 14,
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.
After a precipitous drop for the
better part of the past year, or really the past decade, the
greenback is now trading like a tech stock, making big short-term
moves as news about the fate of Greece and the rest of the ECU
filters through to the equity markets around the world. So while the
dollar is in terrible shape, it's relatively better than the Euro,
which could be fighting for its very existence. So all things
considered, it's better to own dollars now.
To put things in greater
perspective, I'm updating the monthly chart, which shows the
price action of the dollar index for almost 25 years. Now you can
clearly see what the easy money policies of the Fed since the Tech
Bubble burst, including QE1, QE2 and The Twist most recently, have
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.
The crisis in September, like the
crisis in October '08, caused a major selloff in gold as traders
sold anything and everything as global markets tanked. And yet, even
a sudden 20% reduction in the price of the yellow metal didn't break
its long-term upward trend. While the price has fallen below its
50-day moving average, it remains safely above the 200-day average
and right on the trendline. I've written before that "each
consolidation was followed by a rise to a new high" and I'm
confident that this time will be no different; it just might take a
little while. For those who have not yet participated in this
tremendous bull market, this could be a great buying opportunity.
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. I don't think we're anywhere near the end of
this bull market.
Four 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 was absolutely right....for a
couple of months. Then silver got crushed again in another wave of
panic selling. At around $30 silver looks to be an excellent buy. If
this were a stock, or even a sector, this chart might scare you off,
and rightfully so. But I believe the underlying fundamentals of the
precious metal trade in this economic and political environment
justifies going long silver.
Unlike the price of gold and
silver, the price of copper greatly concerns me. After remaining in
an extended trading range for the first eight months of the year,
Dr. Copper is forecasting trouble ahead as the price has fallen
below a year-long trading range and well below both moving averages,
and is dangerously close to major support around $2.70. The price of
copper, which is often viewed as a proxy for the health of the
global economy suggests deep concern.
After falling precipitously
between May and August, the price of West Texas Crude (WTIC) has
traded wildly over the past three months, as marked in green below.
So whereas the old trading range was between $90 - $105, the new
range is $70 - $90. 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 world economy regains its footing. I don't think the
next big move will happen until sometime next year, but oil
companies will still earn excellent profits will prices at this
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 gains inevitably evaporated. The index is trading below very
strong support and seeking some stability. It's hard to imagine any
substantial gains in the banking sector until the ECU comes up with
a palatable solution for the massive debt crisis engulfing some of
their weaker members without either tearing apart the European Union
or bankrupting the European banking sector. Good luck with that.
I have been equally bearish on the
housing sector since 2007, so I'm not surprised that the price of
the housing index fell steadily before inevitably breaking below
major support around 86. What I don't understand is why the index
has rallied so much recently in spite of the lack of any really good
news. Is this simply a "dead cat bounce" or does the market see a
better housing market in the near future?
The developed international
markets have taken a drubbing just like our domestic market, but it
has also enjoyed the recent rally, bringing the index right in line
with the 50-day moving average. More importantly, support held right
above $46. Like many other charts, just consolidating for a bit,
without weakening further, would be very constructive. A rally above
$54, which looks to be the next level of resistance, would be
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. Thank goodness the index has rallied furiously in the past
three weeks with the rest of the equity markets, but there are a lot
of losses still to recover. Results like this confound the
historical benefits of global diversification. Let's hope the bottom
has been made.
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
well below its moving averages and a two-year old support level, and
has brushed against major support just north of 2,300. This is what
Dr. Copper sees and is a clear indication of global trouble as China
succeeds in slowing their economy.
Two months ago I wrote that
there was "so little bullishness [in the NYSE Bullish Percent Index]
that it's almost a screaming buy signal." That turned out to be a
good call as a rally ensued almost the next day. Last month I said
that "the index remains below the "normal" sentiment range,
suggesting that the rally could have some legs." That didn't work
out so well as the bullishness vanished in the wave of panic
selling. Fortunately, the bullishness snapped back almost quickly as
it disappeared, so we're again in a more normal range. I'm hesitant
to make a call this month, but if my back is to the wall, I'd admit
to being cautiously bullish.
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. Two months ago 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 similar to the bullish index above, I was wrong last
month when I suggested that this index indicates that there is
further room for the market to move higher. But now with about 62%
of the stock above their 50-day moving average, that is clearly
bullish and suggests that the rally can continue for a while.
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 seems to have
finally waned, bringing the VIX back to the high end of the normal
volatility range. If the fear continues to abate, the rally should
What I'm Thinking
The global economic malaise and
political uncertainty makes for a very difficult and unsettled
investment landscape. The big questions are whether the European
Currency Union is going to blow up and whether the United States is
going to fall back into the dreaded double-dip recession. As to the
latter, 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
this year, and into next, will probably be in the 1% and 2% range
which is nothing to write home about, but better than a contraction.
As to the former, I think Germany will be forced, kicking and
screaming, to save the ECU, at least in the short run. But I do
believe that Greece, and possibly some of the other PIIGS nations
will inevitably default on their debts. And I think that is becoming
more and more priced into the market, so when it happens, it won't
be a surprise.
Unfortunately, I put some cash to
work right before the crash in September, which was bad timing on my
part. But I think most, if not all, of those purchases have already
returned to profitability. The best time to buy is when there is
blood in the streets. Being able to buy, then sit tight, when
everyone else is selling, is one of the most difficult things to do,
but it separates the best investors from everyone else.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. Remember, markets always go up and down. The key
is to remain in the market so you don't miss the gains.
I have made very few trades this
year, preferring instead to wait out the tremendous volatility with
the securities that I already own and enjoy the steady flow of
dividends. For the remainder of the year I plan to pare my weaker
positions, add to some of my core sectors (like precious metals) and
match up gains with losses where possible to minimize taxes. If you
have any questions, please feel free to give me a call and we can
discuss your personal financial situation.
Professional News and
There isn't much new to report
this month. The best news was that we put the horrible third quarter
behind us and moved on to what will hopefully be a much better
fourth quarter. I've also made a greater effort towards my
professional networking, through which I've met some very talented
new professionals with whom I hope to share some business in the
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 250 followers, up from about 200 just last
month. My goal is to surpass 400 by 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