What I'm Thinking
The tremendous rally that began in
September continued in October. There is a saying: "Don't fight the
Fed". Investors should heed that advice right now. Anyone trying to
short this market right now is getting crushed. The Federal Reserve has decided to do anything and
everything in it's power to help increase asset prices in an attempt
to stimulate the US economy. As a result, the Dow Jones Industrial
Average has elevated by about 1,450 points, or about 15%, from the
August 26th low.
We've broken above significant
resistance levels (see below) and there is a little bit of optimism
about the economy. Personally, I believe a lot of the better
feelings in the country that have translated into the market are due
to the spill in the Gulf being capped. That was such a disaster, and
coverage of it was so gloomy and so all-encompassing, that now that
the well has been "killed" people can focus on the slightly better,
and improving (albeit slowly) economy. I wrote in July that "it
would be very constructive if the market could rise above 10,600
without falling to a new low. If so, a floor may have been set. If
not, 9,400 could be the next support level." Well, the market has
indeed broken above both 10,600 and 10,700.
The midterm elections are over and
the voters have returned the House of Representatives to Republican
control while allowing the Democrats to retain a razor's edge
control of the Senate. Now we get to witness (at least) two years of
gridlock and posturing in Washington as each party tries to block
the other from getting anything done. Yeah for America.
I have been writing for months
that more than anything else we need the employment picture to
improve and until that happens, there can't be any meaningful,
broad-based, economic recovery. With job growth would come
improvements in housing, retail and banking. Well, recently, as I'll
describe below, there have been subtle indications that the
employment picture may indeed be improving. If so, it is hugely
bullish for the overall market going forward.
So what do the charts tell us now?
It tells me to be long stocks!! The Industrial average has broken
above the May high and has returned to the level set before the
collapse of Lehman Brothers in October '08. In the last newsletter I
wrote that "the next big resistance level is around 11,258. If that
level can be surpassed, then we could be in for a really huge
rally." Well, so far so good. Also bullish is that the Industrial
index is now trading above both moving averages and the 50-day
average is back above the 200-day average. I'm sure there will a
pullback sometime soon, but the big picture looks pretty good right
Like the Industrial average, the
Transportation average has broken to new highs, confirming an
interim bull signal according to Dow Theory. The index is also
trading above both moving averages and the 50-day is higher than the
200-day average. All of this is bullish.
From May '09 to June '10 the yield
on the 10-year treasury traded between 3% and 4%. Each attempt to
break above or below the range failed. Then as the market
turned negative in the second quarter, and investors fled stocks for
Treasuries, the yield started to fall, culminating with an
unbelievably low yield of around 2.4% for most of the third quarter.
As the market has rallied strongly, treasuries have sold off
a bit, nudging rates back up. I would expect yields to
continue rising back towards 3%.
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. As
you can see by the results below, October enjoyed solid gains
following the huge run up in September. Not surprisingly, growth and
technology led the way up, as they often lead the way down during a
correction. Interestingly, bonds still are among the best performing
asset classes on a year-to-date basis. I wrote in the July
newsletter that I believed stocks would outperform bonds in the 3rd
quarter. That came to pass. Similarly, I expect stocks to again
outperform bonds during the fourth quarter.
Name of Index
Dow Jones Industrial
Europe, Australia, Far
- According to the Department of Labor, the figure for
seasonally-adjusted initial jobless claims for the week ended
October 30 was 457,000, an increase of 20,000 from the prior
week's revised figure. The four-week average was 456,000, which is
holding relatively steady right now. The actual, unadjusted,
initial claims were lower at 419,351. There is really no
improvement in the job market right now, but at least it isn't
getting any worse.
- Non-farm payroll employment increased by a better than
expected 151,000 in October, and another 110,000 were reported as
added through upward revisions to August and September. 159,000
private sector jobs were actually added in October. Average hourly
wages for blue collar workers were up to $19.17, and the average
work week inched up to 33.6 hours. This picture is improving.
- In October, the total number of workers counted as unemployed
remained at 14.8 million. The unemployment rate held steady at
9.6%. The more comprehensive U-6 rate dipped to 15.9%, down from
16.2% last month. 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 jumped to 9.2 million and the
number of marginally attached workers increased to 2.6 million.
The number of people holding multiple jobs rose to 6.8 million.
Overall, the employment picture remains poor and but seems to be
improving just a bit; there is a glimmer of hope.
- The Congressional Budget Office (CBO)
estimated that on a net present value basis, the Treasury reported
a federal budget deficit of $32 billion in September, leaving us
with a deficit of just under $1.3 trillion for fiscal 2010, which
is $125 billion less than the record shortfall from 2009. An
increase in corporate tax revenues were the main reason for the
- The Census Bureau reported that the U.S. had a trade deficit
of $46.3 billion in August. After remaining stable for most of the
year, the trade gap seems to be widening again. And the deficit
with China is now a staggering 60.5%.
- The Census Bureau reported that privately owned housing
starts were flat in September after a robust 10.5% increase in
August, and were up a modest 4.1% from a year ago, to a seasonally
adjusted annual rate of 610,000 units. New building permits
were down 3.6% from last month and 10.9% from last year. Housing
remains very weak.
- The National Association of Homebuilders/Wells Fargo
Confidence Index rose 3 point in October to 16, its highest level
since June. While this is nothing to write home about, there
appears to be "flickers of interest" among home buyers.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in September increased
6.6% from the prior month, but remained down 21.5% from the same
period last year, to 307,000 units. The estimate of homes for sale
was 204,000, which represents 8.0 months at the current rate of
sales. The median sales price was a higher $223,800, which is
above the 12-month moving average price of $219,258.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes increased 10.0% in September, following a 7.3% increase
in August, but remained 19.1% lower than a year ago, to a
projected 4.53 million units. The estimate of homes for sale, at
4.04 million represents a whopping 10.7 months of supply at the
current rate of sales. The median sales price fell to $171,700,
which is slightly lower than the 12-month average of $172,775. The
lower prices certainly reflect the amount of short and distressed
- 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, fell slightly in August, ending a five month
streak of increases. It's likely that prices were negatively
impacted by the expiration of the first time home buyer tax credit
and the huge inventory of distressed and foreclosed properties.
- According to RealtyTrac, the number of foreclosures in
September increased 2.5% from the prior month, but were up only
1.0% from a year ago. “Lenders foreclosed on a record number of
properties in September and in the third quarter, taking a bite
out of the backlog of distressed properties where the foreclosure
process was delayed by foreclosure prevention efforts over the
past 20 months,” said James J. Saccacio, chief executive officer
of RealtyTrac. “We expect to see a dip in those bank repossessions
— and possibly earlier stages of the foreclosure process — in the
fourth quarter as several major lenders have halted foreclosure
sales in some states while they review irregularities in
foreclosure-processing documentation that has been called into
question in recent weeks."
- The Institute for Supply Management (ISM) index of
manufacturing activity was 56.9 in October, up from 54.4 in
September. This marked the fifteenth month in a row in which the
manufacturing sector expanded. The ISM index of non-manufacturing
activity was 54.3, up from September. This marked growth in the
service sector for ten consecutive months.
- The Federal Reserve reported that after 14 consecutive months
of increases, capacity utilization in the industrial sector fell
marginally in September, to 74.7%. Capacity utilization is now
4.2% higher than a year ago and only 5.9% below the average level
of the period from 1972 through 2008. We'll see if this number is
revised higher in future months.
- The Conference Board reported that it's index of Leading
Economic Indicators increased by 0.3% in September, following
increases of 0.2% in July and 0.1% in August. “The LEI remains on
a general upward trend, but it is growing at its slowest pace
since the middle of 2009. There isn’t any indication of a relapse
into another downturn through the end of the year.” Says Ken
Goldstein, economist at The Conference Board: “More than a year
after the recession officially ended, the economy is slow and has
no forward momentum. The LEI suggests little change in economic
conditions through the holidays or the early months of 2011.”
- According to the Bureau of Economic Analysis, the "advance"
estimate of GDP growth in the third quarter was a lethargic 2.0%,
slightly higher than the disappointing 1.7% rate of growth in Q2
and 3.7% in Q1. The slight increase this quarter is due in part to
increased government spending and a reduction in foreign imports.
- The Federal Reserve reported that in August the amount of
outstanding consumer credit decreased at an annualized rate of
1.75% from the prior month, to $2.414 trillion. This continues the
trend of decreases in the use of consumer credit that has been in
place for more than a year and a half.
- According to the Census Bureau, retail trade and food service
sales increased 0.6% in September, and were 7.3% higher than a
year ago. While the past few months have shown some modest
improvements in retail sales, I continue to believe that until the
employment numbers show some sustained growth, retail sales will
continue to lag.
- The Federal Reserve reported in that in August the supply of
M-2 increased slightly from the prior month and was up only 4.4%
during the prior six months. The supply of M-1, on the other hand,
rose a slightly faster 6.1% over the same six months. It appears
that the rate of monetary expansion is again increasing. Now the
country needs to demonstrate that this money will begin to
circulate through the economy more quickly in order to stimulate
- The Conference Board Consumer Confidence Index increased
slightly in October to 50.2. The bad news is that this remains at
historically low levels. It's all about the labor market.
- According to the BEA, the personal savings rate in September
fell to 5.3% from 5.6% in August. As I expected, the savings rate
is trending lower thanks to a rising stock market and historically
low interest rates on savings.
- According to the FDIC, 139 banks have failed so far this year,
through October 30. It's virtually assured that the number of
failures in 2010 will eclipse the mark of 140 banks that were
either closed or merged into healthier banks in 2009. By
comparison, 26 failed in 2008 and only 3 failed in 2007. I
would expect this trend to continue into 2011 thanks to the
In July I wrote that since
"everyone is betting against the Euro...I expect the dollar to take
a breather sometime soon and confound the herd." And that's exactly
what happened. After a 19.5% increase over six months, the dollar
has now dropped hard and fast, breaking through numerous resistance
levels, and over three months has given back almost all of the prior
gains. Given the stimulus plans of the Fed, it's possible that the
dollar could retrace all the way back to the historic lows of around
72. And if that happens, look for an even bigger rise in
After a brief summer respite, the
bull market in gold has resumed with a vengeance. The price of the
yellow metal has blasted through all resistance levels to hit a new
all time high price (unadjusted for inflation) of about $1,400 per
ounce. I wrote in July that "any price under $1,200/oz is an
opportunity as I believe the next target for gold will be $1,300." I
hope you took advantage of that advice. Again, I suggest investors
take advantage of any brief pullback as a buying
While gold gets most of the
headlines, silver continues to do equally well, if not better.
Indeed, after consolidating for most of 2010, the price of silver
has exploded to a new high of about $26/oz. In July I wrote that "I
look for silver to move above $20 per ounce before year-end." Well
that didn't take too long. In September I then asked if "silver
[would] rise to $25/oz?" Now I think that silver is headed north
of $30/oz and, like with gold, I suggest investors
use dips to build a position.
The price is copper has broken
above a year-long trading range. Like all commodities, copper is
benefiting from a weak dollar and strong international demand.
Remember, copper is often thought of as a proxy for economic growth.
So this chart is telling us that the prospects for future growth
For more than year, the price of
West Texas Crude built a rising triangle pattern. Then in May the
price of "black gold" collapsed, thanks in large part to BP. Now,
after consolidating in a clear trading range for five months, the
price of crude has broken above resistance and looks like
it will test the April high of about $87 per
barrel. It's bullish that the price is higher than
both moving averages and that the 50-day has just crossed above
the 200-day. Look for the price of crude to go higher between
now and the end of the year.
For the most part, the financial
sector has remained in a tight trading range for more than
a year and a half. The current price is roughly in line with both of
its moving averages. I have been negative on the financial sector
since the Lehman failure in '08, and given the ongoing problems in
the housing sector and the foreclosure mess, there is little going
on now to dissuade me from that stance.
While the housing sector continues
to trade near the bottom of it's trading range, it has ticked up
slightly in the past few days, thanks to some mildly encouraging
news in home sales from September. Should there be any follow
through with better than expected number for October, this index
could move up and try to break above the resistance around 117. I
would not trade ahead of that news as I think the housing market
will struggle well into next year.
Like the Dow Jones Industrial
average, the European stock market has broken above resistance and
made a new high. The crisis in the Euro already seems like a distant
memory, even though the problems that caused it in the first place
all still exist. I don't believe the crisis is over by any means,
but for now, things look more sanguine. That's the market for
The health of the Chinese economy,
and by proxy, it's stock market, is very important to the world's
economy as they buy much of the world's output of raw materials and
produce most of the goods sold to the world. Given the robust
results from the US and Europe, you might think the Shanghai
Composite would also be hitting new highs, but that's clearly not
the case. The good news is that the index has turned decidedly
bullish and the 50-day average is about to cross above the 200-day
average, which would suggest further gains ahead. The next
resistance level would come in at about 3,181.
The NYSE Bullish Percent Index
represents the percentage of stocks listed on the NYSE that signal a
buy. Contrarians would argue that extreme levels of exuberance is a
bearish indicator, and vice-versa. After the very strong rally
over the last two months, RSI is now at VERY oversold
levels, indicating way too much optimism. This would suggest a sell
off, or at the very least, a period of consolidation to allow some
of the exuberance to wear off. This would not be a bad thing as it
would allow investors to put some money to work at better
Finally we have the VIX, or the
"Fear Index". As you can see, there is little fear in the market
right now. The election is over; the majority of Q3 earnings have
been reported and the Fed has detailed their plans for QE2. Barring
unexpectedly bad economic or political news, or very bad Q4
pre-announcements in the next two months, I would expect the VIX to
remain relatively quiescent for the rest of the year as the market
drifts modestly higher.
What I'm Thinking and
Investors who did not panic and
sell during the spring sell off or the two summer swoons are now
being rewarded by the move back into equities. Those who had the
courage to buy during those pullbacks are being doubly rewarded.
Remember, corrections and consolidations are part of the
normal stock market cycle. I wrote last time that "the
technicals right now look better. Corporate profits, by and large,
are growing and companies are increasing their dividends. We could
be in for a very nice rally. And while we will certainly have
another correction along the way, I think the market is poised to go
higher." And higher it has gone and higher still it will
I recently sent a note to all of
my clients. Please indulge for me a moment as I share part of what I
wrote. "I think I last [wrote to you] in May shortly after the
“Flash Crash”. I told you all at the time to remain calm, that
markets go up and they go down, and that I believed that better
times lay ahead of us. To back that up, I started buying some stocks
on your behalf. Indeed, I’ve put a lot of your money to work this
year at a few key times. I was a big buyer in March after the
February correction. Then I stepped up again and bought after the
May correction and “Flash Crash”. I held firm, not selling a thing
during the June swoon, then stepped up once again in October and
bought in a big way. WAM had a cash holding of about $4.3M at the
end of February. At the end of October, that was down to about
$1.5M. Only time will tell if my timing has been good, but the short
term results so far are in our favor."
In addition to my buying, I have
used this rally to sell a couple of my weaker holdings in order
to redirect those funds to stronger positions. I've also been
culling some of my losses in order to offset any capital
gains so that my clients will pay little to no taxes come next
Personal News and
Not only is summer over,
but I think Indian summer is just about done too. Peak foliage has
passed, Halloween is over and Thanksgiving is just around the
corner. Fall is in full swing and winter seems to be beckoning
already. I am so NOT ready for the cold weather. And don't forget,
this weekend we must set our clocks back one hour to mark the end of
daylight savings time.
The kids have each settled into a
comfortable groove with school. Nola is getting better and better at
fencing, Lily just finished up a fall program of softball and Ezra
continues to hone his tennis skills. In addition, Lily is headed
into the teeth of the bat-mitzvah circuit. For the next eight months
she'll have a few parties every month. In fact, I have to take her
dress shopping this weekend. Yikes!
As for me, I'm back in the water,
training full time again. I've increased the amount and duration of
my practices. I'm up to between 15,000 - 20,000 yards per week. I'd
like to see what kind of shape I can whip my 46 year old body into.
My plan is to enter a few local and regional meets before heading
off to Arizona in early May to compete in the Masters National
Championships. My goal is to finish in the top 20 in all
my events, and maybe slip into the Top 10 once or twice. That's six
months from now, so we'll see what happens.
Don't forget that you can friend
me on Facebook, connect with me on
or follow me on Twitter.
I try to "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 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 look
for 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.
"News and Views", Copyright©, Werlinich Asset Management,
LLC and www.waminvest.com. All