Werlinich Asset Management, LLC
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Valhalla, NY 10595
Email: greg
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November 5, 2010

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

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 now.

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%.

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. 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





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

Statistics To Watch

  • 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 slight improvement.
  • 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 sales.
  • 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 business.
  • 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 mortgage crisis.

Trends To Watch

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 equities.

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 opportunity.

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 look good.

  • 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 you.

    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 prices.

    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 Doing

    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 go.

    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 April.

    Personal News and Notes

    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 LinkedIn, 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.

    Best regards,

    Greg Werlinich

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