Werlinich Asset Management, LLC
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Valhalla, NY 10595
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November 20, 2009
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

Notwithstanding the decline in the market yesterday, it's been a very positive time again in the market. On November 17 we had another Dow Theory confirmation as the Industrial and Transportation averages both achieved intermediate highs on the same day. As I write this, the Industrial average is trading at 10,325, or 3% higher than it was when I wrote to you last month and about 58% higher than the March low. That's quite a rally! And I don't see anything in the short-run that I think will seriously derail this rally.

I wish I could tell you that the Bear Market is over, the recession is over, that we are headed for a "V" shaped recovery and that we're headed back to Dow 14,000 again. The problem is that I simply don't believe it. The recession is almost two years old right now. Unemployment is still rising. The federal deficit is still growing. Our trading partners are growing increasingly disenchanted with the losses their taking on their dollar holdings. And while the economy appears to be improving, as I'll talk about below, we still have a long way to go before any intelligent person can declare that we are in anything resembling a robust recovery. I also believe that there are some very dark storm clouds on the longer-term horizon. But that's a story for another day; for now, I believe it's blue skies ahead.

Before we get to the charts, please remember not to confuse a short-term, or "cyclical" trend with a long-term, or "secular" trend. I believe, until proven otherwise, that this is a cyclical bull market, and will stay that way until it doesn't. At that point, we'll have to re-evaluate everything.

So what do the charts tell us now, after the latest Dow Theory confirmation? Well, it shows good times. As I wrote last month, which remains true, other than natural mild corrections along the way, there is little here to suggest anything other than further short-term gains. I'm still a little concerned that the market has risen in the face of dwindling volume. But that isn't enough to scare me out of this rally. 

After almost exactly a month since the last confirmation, the Transportation average again confirmed the bull rally by hitting new highs on the 16th and 17th. The one thing that concerns me in this picture is the declining trend of RSI. But as long as the price remains above the rising blue trend line, we should be ok. I'm not sure where the next resistance level will come in; perhaps around 4,200 or so.

Since May, the yield on the 10-year treasury has traded between 3% and 4%. For the past three months we've remained at about the midpoint. I still expect yields to remain in the 3% - 4% range for the remainder of the year before heading inevitably higher sometime beginning in 2010.

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. If you followed the old adage of "sell in May and go away" you would have missed a massive summer and early fall rally as the market surged over 58% since the March lows. We had a bit of a dip in October, led by technology, as the market suffered its first loss in a while. But things already look better again in November. So at least for now, there's no need for concern. 

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

Statistics To Watch

  • According to the Department of Labor, the most recent figure for seasonally-adjusted initial jobless claims for the week ended November 13 was 505,000. The four-week average has declined to 514,000. The seasonally adjusted number of continuing claims for unemployment is just under 6.0 million. That's a lot of people collecting unemployment insurance. Since the start of the recession, 8.2 million people have lost their jobs.
  • Non-farm payroll employment was encouraging in October, falling by 190,000 versus a revised 219,000 in September. Average hourly wages inched up to $18.72, while the average work week held at 33.0 hours, so real wages continue to stagnate.
  • The number of workers reported in September as unemployed rose to 15.7 million, increasing the unemployment rate to 10.2%. 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 crept up to 2.4 million. The number of people holding multiple jobs rose to 7.2 million. My Comprehensive Labor Index™, which is much more representative of the real unemployment situation, increased to 20.95%. Unfortunately, my prediction that my CLI™ would exceed 20% before the end of the year has come true. The question now is just how high this will get.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $1.4 trillion for fiscal 2009. This was $950 billion more than 2008 and represented 9.9% of GDP, as opposed to 3.2% in 2008. The CBO estimated that the deficit in October was $175 billion, which was $19 billion more than the prior year.
  • The Census Bureau reported that the U.S. trade deficit of $36.5 billion in September was up from $30.8 billion in August. About 61% of this deficit is with China.
  • The Census Bureau reported that privately owned housing starts dropped 10.6% in October after rising 1.9% in September, and remained 30.7% lower than a year ago, to a seasonally adjusted annual rate of 529,000 units. New building permits were down 4.0% from last month and were still down 24.3% from last year. The housing market still has a long way to go before recovering. 
  • The National Association of Homebuilders/Wells Fargo Confidence Index held steady in November at 17, It's been two months since the 16-month high of 19 was set in September.
  • The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in September fell 3.6 from the prior month, and remained 12% lower than the same period last year, to 402,000 units. The number of sales in both August and July were revised lower. The estimate of homes for sale is down to 251,000, which represents a smaller 7.5 months at the current rate of sales. The median sales price rose to $204,800, which is below the 12-month moving average price of $213,500. These are mixed signals, but in general, they demonstrate that the housing market remains weak.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes in September rose 9.4%, meaning that sales have increased five out of the last six months. Sales are also up 9.2% from a year ago, to a projected 5.57 million units. The estimate of homes for sale, at 3.63 million, is the smallest figure since January and represents 7.8 months of supply at the current rate of sales. The median sales price fell to $174,900, which still slightly lower than the 12-month average of $175,175.
  • The S&P/Case-Shiller Home Price Index, which uses a three-month moving average to track the value of home prices across the US, increased for the fourth straight month, to 157.93 in August.
  • According to RealtyTrac, the number of foreclosures in October decreased 3.3% from September, marking the third month in a row in which foreclosures decreased, but remained 19% higher than a year ago. Nevada, California and Florida reported the highest foreclosure rates in the country while California, Florida, Illinois and Michigan represented 52% of all the foreclosures in the country.
  • The Institute for Supply Management (ISM) index of manufacturing activity was 55.7 in October, continuing the general uptrend in place so far this year. This marked the third month in a row in which the manufacturing sector showed signs of growth. The ISM index of non-manufacturing activity was a lower 50.6, but was over 50 for the second time in a row.
  • The Federal Reserve reported that capacity utilization in the industrial sector increased for the fourth straight month to 70.7% in October. Capacity utilization still remains 10.2% below the average level of the period from 1972 through 2008.
  • The Conference Board reported that it's index of Leading Economic Indicators rose by 0.3% in October, following 1.0% and 0.4% in September and August, respectively. After peaking in July 2007, the LEI fell for 20 months in a row. This is now the seventh monthly increase in a row. Most indicators suggest that the recession may have bottomed out.
  • According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth in the third quarter was 3.5%, far better than the "final" estimate of -0.7% GDP growth in the second quarter. Please keep in mind that these gains are thanks to gimmicks like "cash for clunkers" (which added more than 1.5% to GDP), credits for first time homeowners and massive government spending. You can be sure that the 4th quarter GDP numbers will go back down again.
  • The Federal Reserve reported that in September the amount of outstanding consumer credit fell by an annualized rate of 7.2% from the prior month, to $2,456 billion. That means that consumer credit has declined in twelve of the last thirteen months, and is at it's lowest level since April 2008.
  • According to the Census Bureau, retail trade and food service sales increased 1.4% in October, but remained 1.7% below the levels from the year before. Cash for Clunkers certainly played a big part in the overall growth of retail sales. We'll see if this growth can hold now the program is over.
  • The Federal Reserve reported in that in October the supply of M-2 was essentially flat from the prior month and up only 2.1% during the prior six months. The supply of M-1, on the other hand, rose a relatively modest 4.9% during the last three months and 10.2% over six months. The overall rate of monetary expansion appears to be slowing somewhat. The Fed is using other tools, like purchasing bonds and mortgages, to create a stimulative monetary policy.
  • The Conference Board Consumer Confidence Index fell in October, after also dropping in September, to 47.7 from 53.4. The decrease was largely due to a very pessimistic view of the labor market and general business conditions.
  • According to the BEA, disposable personal income continues to fall, which caused the personal savings rate to fall from a high of 6.4% in May to 3.3% in September. It's hard to save money if you don't have a job.
  • According to the FDIC, 123 banks have failed so far this year, through November 13, and have either been closed or merged into healthier banks. By comparison, 26 failed in 2008 and only 3 failed in 2007. You would have to have gone back to 2004 for any failures before that. 

Trends To Watch

The price action of the dollar index remains bad and in fact, is getting worse. The index has fallen well below both the 50- and 200-day moving averages and the 50-day average has moved way below the 200-day. In addition, the index has fallen below the second support level and is heading towards the next support at around 72. After that, we'll be headed towards all-time low levels at 70. I said last time that "as the budget deficit grows to unprecedented levels and the economy remains weak, I expect the dollar to fall further. The dollar is in big trouble." In the short-term, I wouldn't be surprised to see the dollar rally a bit, but longer term, the dollar is headed lower.

To put the action of the dollar index into some context, I'm showing you a chart of the past 22 years. You can clearly see that the dollar is at the second lowest level ever, and isn't that fall off its historical low of 70.70. It's been quite a drop from a high of 121 only seven years ago. We can all put those European vacation plans on indefinite hold. 

Where are the gold naysayers now? It remains awfully quiet out there in "gold is a barbaric relic" land. It's pretty hard to argue with the reality that gold is now firmly over $1,100 per ounce. That being said, there will certainly be a correction and some profit-taking, but this is not the top; this is just a point along the way in an upward trend to a much higher level.

Would you like to know about a stealth bull market that nobody is talking about? How about silver? Since last November, the price of gold has rallied about 69%. That's not too bad. Over the same period, the price of silver has gone up about 124%. It hasn't been a smooth ride, but there it is. Investors who put some money in silver earlier this year are doing very well, and will likely continue to do well going forward.

After breaking above $80 per barrel, the price of West Texas Crude is consolidating a bit right now. This is totally normal. I won't get concerned unless the price falls below $75, or below the 50-day moving average. I still believe that the price of oil will be back above $100 per barrel before we see $60 again.

The rising price of copper continues to be a good indicator of growing worldwide economic strength. And while I believe much of this increase is due to activity in China, it's still positive. As with any commodity, there will be a period of consolidation or correction ahead, but the current trend is very bullish. 

We are still at an interesting juncture for the financial sector. After moving sideways for about three months from May to July, there was a nice rally in August. Since then, there has been almost four months of consolidation. So now what? Will the index break resistance and move above 16? Or will the banks notice rising unemployment, rising foreclosures and consumer pessimism and turn south? My guess is that things will continue to improve for the banks in the short-run, because if they can't make money in this interest rate environment, then they should be flipping burgers. But longer term, I think the banking industry is heading toward very rough waters again.

What's going on with the housing index? Are we seeing signs of trouble here, or is it just a consolidation? I wrote last month that like the financial sector, housing is clearly linked to the labor markets, interest rates and the overall economy. It wouldn't take much to knock housing back down. Maybe that's what we're looking at: the first signs of danger in the housing sector. The first danger sign would be if the index falls below the 50-day moving average, which is where it is right now. Next would be if it falls below the rising trend line around 95 or so.

Foreign markets, as represented by the MSCI EAFE index, continue in their basic uptrend. There is nothing in this chart that would suggest any meaningful concerns, although the index is basically sitting on the 50-day moving average.

The Chinese market has resumed its upward movement and has recovered almost all of the losses since the summer correction. I wrote earlier than the summer selloff could either be a good buying opportunity or a flashing danger sign. It looks like it was a buying opportunity, and one that I didn't take advantage of.

After a dismal few months, the Baltic Dry Index as exploded over the past month, which happens to coincide nicely with the recent rally in China. These markets have become highly correlated.

The NYSE Bullish Percent Index represents the percentage of stocks listed on the NYSE that signal a buy. Contrarians would argue that the extreme levels of exuberance noted in the chart suggest a bearish indicator because there is little room left to the upside. If that's true, the slide over the past two months is actually bullish.

Finally, we can take a quick look at the volatility index, also known as the "investor fear gauge". The fear seems to have left the market back in May. Indeed, the VIX has been trading comfortably in the middle of the normal range for the past few months. This is very good and suggests a basic optimism for the near-term future of the market.

What I'm Thinking and Doing

Parts of the economy, like housing, banking and manufacturing, continue to make incremental, but measurable improvements. Other areas, like unemployment, the federal deficit and consumer sentiment, remain stubbornly weak. I believe the most immediate problem is unemployment, which has moved over 10% and shows no sign of slowing down. A "real" unemployment rate above 20% could cripple the retail sector and the housing market, which would in turn damage the fragile banking recovery and corporate profits. I believe the entire economic recovery is very tenuous and could easily be reversed. Looking forward, the massive federal deficit and the unsustainable entitlement programs leave me very concerned about the long-term health of the economy and the country. A multi-trillion dollar deficit will likely destroy the dollar, which would force interest rates higher, which would crush the economy . . . . Well, you get the idea. But those are longer-term problems. I believe that short-term, meaning the rest of this year and probably half way through next year, things will likely be pretty good.

More immediately, I continue to very selectively add shares of great companies to my clients' portfolios. Last month I added to a position in a defense company that I've owned for years. In addition, our third largest position, Burlington Northern Railroad was purchased by Berkshire Hathaway, Warren's Buffet's company. While I'll be happy to realize the large gains on this acquisition, I'll be sorry to say goodbye to a long-time holding.

Personal News and Notes

There isn't much to talk about this month. I've been sick for the past week and a half. I still can't shake the last bit of a cough. After missing a couple of practices, I jumped back in the pool this week and was happy to be there. I'm hoping to get myself into top shape by the spring so that I can head down to Georgia and compete, and place, at the Masters National Championships.

The one bit of good news is that on Tuesday I'm getting on a plane and heading to Aruba for a much needed vacation. The kids will be with their mother for Thanksgiving, so I thought I would celebrate my own thanksgiving on the beach with my iPod in one hand and a cool drink in the other. I will be very thankful for 90 and sunny for six days.

I almost forgot. I will be speaking on a panel about leveraged ETF's at the 3rd Annual Inside ETFs conference in Boca Raton in Florida this coming January 10-12, 2010. The conference will be at the Boca Raton Resort & Club. If you would like more information about the conference, or would like to attend, simply click here. My particular panel is on Monday. If you'd like to get together for drinks, I'll be there from Saturday afternoon through Tuesday night. Let's get together.

For those of you so inclined, you can now connect with me on LinkedIn, friend me on Facebook or follow me on Twitter. I've been using these three sites because I'm actively seeking to make new business connections as well as maintain contact with friends old and new. So please connect with me out in Cyberspace, and ask your colleagues, friends and family members to do the same.

That's it for this month. I thank you, my readers, and remind you that this newsletter is for you. 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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